The Select Harvests Limited (ASX: SHV) share price got crunched over 13% on Thursday after the almond producer provided a disappointing trading update to the market. Although Select Harvests' share price staged a modest recovery during Friday trade, Thursday's fall takes Select Harvests' share price decline to over 35% for the year.
Despite this, I believe the investment thesis for Select Harvests remains intact, making this pullback an opportune time to consider buying. Here's why.
About Select Harvests
Select Harvests is one of Australia's largest almond producers, owning orchards across various states in Australia.
It is a vertically integrated business which grows, harvests, processes and distributes almonds for sale under various private label and company owned brands both domestically and overseas.
Earnings update
On Thursday, Select Harvests' management provided an earnings update for the 2017 full-year.
Following the company's annual hulling and shelling program, it was revealed that the 2017 crop yielded 14,100 metric tonnes of almonds. This was above the company's earlier (downgraded) estimate of 13,500 – 14,000 metric tonnes for the year.
Pleasingly, the company announced it has commitments for 72% (or approximately 10,152 metric tonnes) of harvested almonds at A$7.91/kg. However, the final 28% of crop remains to be sold. As such, whilst management expects to yield an average pool price of A$7.40 – A$7.50/kg on the final crop, full-year revenue is likely to be substantially lower than prior year in placing headline revenue pressures on the bottom line.
Adding to Select Harvests' share price woes is the fact that management also flagged higher costs in its earnings update. Due to adverse currency movements, higher orchard lease costs, increased electricity and gas prices and one-off acquisition costs, management believes full-year net profit after tax will be between A$7.5 million to A$8.5 million.
This is a whopping 75% to 73% lower than full-year 2016 statutory NPAT.
Growth story
Whilst the full-year NPAT forecast is disappointing, the silver lining for Select Harvests is that its growth story remains on track.
The company is in the process of cutting costs and improving productivity so that it can prosper when almond prices recover. Furthermore, management has clearly laid out plans to enable the company to increase production over the years to come and ride the tailwinds of a booming food export industry.
This makes me think Select Harvests has a bright future ahead of it.
Foolish takeaway
In the same way that miners Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) are reliant on the price of their minerals, Select Harvests' fortunes are captive to the market price of its underlying commodity – almonds.
For this very reason, Select Harvests' share price will be subject to volatility from time-to-time, as price fluctuations in the price of almonds and seasonal factors affects profitability.
Whilst this may deter some investors, those that are brave enough to weather the storm could see Select Harvests become a bountiful investment over the long-term.
