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Is this the best food business on the ASX?

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Earlier in the week Select Harvests Limited (ASX: SHV) reported its annual result for the 12 months to 30 June 2018.

The almond producer reported that revenue was down 13.2% to $210.2 million due to lower branded food division volumes. However, 2018 almond crop volumes increased by 11% to 15,700MT. The almond price increased by 8% to $8.05 per kilo. Increased demand for almonds outstripped supply, causing the almond price to rise.

Earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 62% to $51.7 million.

Net profit after tax (NPAT) increased by 120% to $20.4 million and earnings per share (EPS) increased by 84% to 23.2 cents.

The full year dividend was increased by 20% to 12 cents per share, up from 10 cents in FY17. Operating cash flow increased by $13.6 million to $18.3 million.

The company was targeting orchard cost reductions of $6 million, pleasingly it achieved savings of more than $7 million – an 8.6% reduction in the cost of production.

In regards to the drought, Select Harvest said that the dry conditions are ideal for growing almonds, but the rise in water prices is a concern. That’s partly why the company appointed an executive to manage and develop its water portfolio.

The food division saw earnings before interest and tax (EBIT) fall by 38% to $5 million, with Lucky suffering from private label sales. However, Sunsol experienced export sales growth of 107% – this could be one to watch over the next few years. China is a good opportunity.

Select Harvest gained direct distribution for Sunsol through JD.com, the giant e-commerce platform. It’s also expanding into bricks and mortar grocery outlets with the help of a distributor.

The company has also separately signed a trademark licence and distribution agreement with PepsiCo China for the lucky brand.

Select Harvest also announced it is changing is financial year from June to September to better align the company’s reporting to the almond crop cycle, so there will be a three-month transition period. It will likely report a loss for this quarterly period.

The company will do everything it can do improve efficiencies in FY19, but its performance will be quite dependent on what the almond price does during the year.

Foolish takeaway

This was a good turnaround for Select Harvest. If the almond price stays the same (or goes up) and Select Harvest keeps growing its total produce then it should be on course for growing profits in the years to come.

However, it is too dependent on a fluctuating almond price for me, so I’m not going to buy shares.

Instead, I prefer shares that can keep growing in any economic environment, like this top growth share.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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