About
CZZ is Australia’s largest packer of honey and has been in
operation since 1953. Packer is key here as they access their honey from
approximately 500 apiarists around Australia whom they have entered into supply
agreements. The Capilano brand is the company’s core product and is sourced
entirely from Australian honey suppliers. Retaining the brand as 100% Australian
honey is a key objective for Capilano. This has been achieved despite poor
honey supply in recent years. Additional brands owned by CZZ include Wescobee,
Beevital, Smiths and Allowrie.
To offset some of the decline in local honey supply, CZZ
import honey from suppliers, largely from Argentina. The honey is then blended
with local supply and used in the less premium products such as Allowrie.
CZZ has three production facilities: Richlands, Brisbane;
Maryborough, Victoria; and Perth, Western Australia. Richlands is the largest
facility, having capacity for around 40,000 tonnes. The Maryborough facility
has been suspended, however will be reopened following the recent acquisition
of Chandler Honey. They have significant
excess capacity available to them.
Investment Case
CZZ is the largest and most recognised honey packer in
Australia. Its market leading position is protected by barriers to entry that
exist in the honey industry. Despite a lack of honey supply, being one such
barriers to entry, CZZ have alliances overseas which means they can import
supply during lean years. They have also successfully been able to negotiate
increases in their wholesale price which has meant margins have been maintained
and will ultimately benefit them as retail honey prices stabilise in the
future. The company has a strong balance sheet, high free cashflow and limited
capex requirements. A lower earnings multiple is probably fair given the risk
of honey supply, however CZZ seems to be trading well below fair value. Earnings
for FY15 should come in around $7m which at the time of purchase places them on
a PER of 10x (based on a share price of $8.25). The share price has since risen
sharply to $11.60 or the equivalent of a PER of 14x. I think this represents a
much fairer price however there could be further upside if weather conditions
become more favourable, higher margin products such as Manuka are increased and
as cost initiatives continue.
The Basics
|
Cash
|
CZZ
|
|
Share Price
|
$11.5
|
|
Shares Outstanding
|
8,520,198
|
|
Market Cap
|
$97,982,277
|
|
Cash
|
$3,449,657
|
|
Debt
|
$7,739,664
|
|
Enterprise Value
|
$102,272,284
|
|
Dividend Yield
|
1.7%
|
|
Underlying Gross Profit Margin (FY14)
|
43.9%
|
|
Underlying Net Profit Margin (FY14)
|
4.4%
|
|
Valuation
Metrics
|
Current
|
At
Purchase Price
|
|
NPAT (FY15E)
|
$7,000,000
|
$7,000,000
|
|
PER
|
14.0
|
10.0
|
|
EV/EBITDA (FY15E)
|
7.9
|
5.7
|
|
FCF Yield (FY14A)
|
9.9%
|
13.9%
|
Note that I’ve calculated underlying figures to strip out insurance proceeds and damage caused by fire.
Brief Overview of Industry
CZZ is the leader in the market, with around 70% market
share, the bulk of which (50%) comes from the premium Capilano brand. The
number of large scale honey packers continues to consolidate with CZZ
purchasing both Wescobee and Chandler Honey in recent times. Their main
competitors are Beechworth Honey, Ancient Distributors, Byron Bay Honey and
private label. Private label has been a significant threat to various retail products,
however given the limited retail honey supply, private label sales have been
reducing over the past 12 months. Additionally, the major supermarket chains make
higher margins from CZZ’s branded products than they do from private label.
CZZ’s market share and leadership position is protected by
the high barriers to entry that exist. The greatest challenge to competitors is
accessing the dwindling supply. Significant capex and scale would also be
required to be competitive against CZZ. These features make it unlikely that
their competitive position could be threatened.
1H2015 Result
1 – CZZ were able to increase the wholesale price at which
they sell to their customers (i.e. Woolworths, Coles). This resulted in top
line growth and meant margins could be maintained. On a higher revenue base,
earnings were magnified.
2 – A lack of domestic supply and CZZ’s ability to import
supply, in some cases where other competitors do not, led to a large increase
in market share. FY15 will see the level
of imported honey increase significantly.
From speaking with CZZ, it seems likely this wholesale price
will be maintained even if there is a drop in the retail price. Where domestic
supply improves there will be a two-fold effect on Capilano.
1 – Retail prices will come down
and with a steady wholesale price, margins will rise.
2 – Increased supply will reduce
the reliance on importing and allow CZZ to focus on export markets. CZZ have
production capacity for around 45,000 tonnes of honey compared to the supply in
recent years of around 10,000 tonnes.
There is a risk that domestic supply will continue to drop
which will ultimately lead to further increases in the retail price. To
maintain margins CZZ will need to pass on additional costs which may not be
possible, however they have been successful in achieving wholesale price rises
in the past. They are in a better position to negotiate given their market
share.
Supply/Demand and Price
As can be seen below, supply for CZZ has dropped off over
the past 10 or so years. The honey supply is contingent upon favourable
environmental conditions and can be volatile from year to year. With recent acquisitions,
such as Wescobee and Chandler Honey, CZZ has diversified its honey supply
across Australia and is less susceptible to localised poor weather conditions.
CZZ has historically had a requirement that beekeepers must
also own a specific number of shares per bee hive. This has recently been
removed likely as it was prohibitive in attracting new supply. It also however
raises the question of how loyal beekeepers will be to CZZ. With limited supply
there may be increased competition between packers to attract new supply
sources.
With the decrease in supply, the retail price of honey per
kg has continued to rise, currently around $5 per kg. As I mentioned earlier,
CZZ have been able to pass on these recent increased costs to their customers. Any
further increases in the honey cost could hurt margins if these cost increases
can’t be passed on. It is worth noting that recent years, in particular FY 14 have
been among the worst in recent times. CZZ management have noted that conditions
have started to improve, however it remains early days. If supply does increase,
prices will likely fall somewhere towards the $3 range and there will be an
immediate benefit to margins. If prices remain where they are, CZZ still looks
attractive – the investment case is not dependent on supply increasing and
prices moderating.
There is no danger in demand dropping off – Australian
demand currently outweighs supply and there is also strong demand
internationally particularly from Asia. Demand for honey has also increased as
consumers become more health focussed and honey is used as a substitute for
sugar and in various health products. Certain varieties of honey produced
(Jarrah, Manuka, Jellybush) also have antibacterial qualities and are used for
medical purposes. CZZ currently produce both Jarrah and Manuka products, which
are higher margin products.
Upside
- A re-rating based on valuation alone given metrics.
- Favourable environmental conditions would result in higher supply.
- Increased supply would have the following flow on effects:
- Retail honey prices would likely decline and lead to higher margins
- Fixed costs remain stable which also assist margins
- The reliance on imported honey is reduced
- It allows the company to target high value export markets
- Reduction in imports and increasing exports is beneficial with the reduction in the value of the AUD vs peers
- There is significant excess capacity so no additional capex is required
- Targeting the higher margin markets of Jarrah and Manuka. The issue here is accessing supply to these markets.
- Continued acquisitions as have been the case with Wescobee and Chandler Honey. Both transactions were done at favourable valuations for CZZ shareholders.
Risks
- Continued decreases in the supply of honey would result in lower revenues. Margins would also be eroded as the price of retail honey would likely increase and fixed costs remain.
- Beekeepers supplying honey to a competitor rather than CZZ.
- Increased competition from competitors including private label brands. This remains unlikely given the shortage of honey, CZZ’s market share and export opportunities.
- Threats to bee colonies from pests diseases such as the Varroa Mite.
- The risk that imported honey is of poor quality or contaminated.
- Pricing power taken away from CZZ by major supermarkets.
I won’t go over the financials in great detail here. The fire
that occurred in the 2013 FY has somewhat distorted the income statement and
ratios for FY13 and FY14. The company benefited from insurance proceeds which
exceeded the extent of the fire damage that was expensed. The raw materials and
consumables are primarily associated with the cost of honey. On an underlying
basis the gross profit for FY14 was 44%, decreasing from 46% in FY13. I’d
expect the gross margin to remain reasonably consistent with FY14, perhaps declining
slightly, as rising input costs and increases to the wholesale price
counteract. This has the potential to expand should the honey price reduce.
There are also several fixed costs and margins would rise further as the top
line grows.
The balance sheet remains strong:
- Net debt is low at around $4m
- CZZ is a fairly capital light business with capex of around $1-2m per year. Meaning more FCF can be either returned to shareholders or used to expand the business organically or via acqusitions
- There is value in the working capital of the business
|
Income
Statement
|
FY 2008
|
FY 2009
|
FY 2010
|
FY 2011
|
FY 2012
|
FY 2013
|
FY 2014
|
1H 2015
|
|
Sales
|
63,805,608
|
78,387,396
|
72,037,247
|
63,014,149
|
67,705,182
|
71,963,218
|
85,893,265
|
57,871,333
|
|
Other Income
|
371,211
|
105,232
|
118,269
|
177,093
|
73,522
|
197,178
|
110,226
|
261,930
|
|
Insurance Proceeds
|
0
|
0
|
0
|
0
|
0
|
4,694,337
|
2,296,993
|
0
|
|
Raw materials and consumables
|
-70,831,570
|
-77,028,387
|
-68,392,104
|
-56,632,333
|
-37,052,760
|
-38,753,436
|
-48,144,663
|
-52,662,880
|
|
Gross Income
|
-6,654,751
|
1,464,241
|
3,763,412
|
6,558,909
|
30,725,944
|
38,101,297
|
40,155,821
|
5,470,383
|
|
EBITDA
|
-6,654,751
|
1,464,241
|
-1,345,011
|
6,558,909
|
6,652,988
|
7,945,305
|
9,267,506
|
6,400,000
|
|
Depreciation
|
0
|
-1,400,000
|
-1,650,000
|
-1,660,000
|
-1,732,767
|
-1,820,051
|
-1,873,956
|
-929,617
|
|
Amortisation of Intangibles
|
0
|
0
|
0
|
0
|
-38,535
|
-38,430
|
-40,357
|
|
|
EBIT
|
-6,654,751
|
64,241
|
-2,995,011
|
4,898,909
|
4,881,686
|
6,086,824
|
7,353,193
|
5,470,383
|
|
Finance Costs
|
-2,440,408
|
-2,071,291
|
-1,942,695
|
-1,194,967
|
-1,207,142
|
-1,092,014
|
-863,070
|
-352,004
|
|
Income Tax Expense
|
1,646,745
|
-85,699
|
-1,041,289
|
766,487
|
-1,121,722
|
-1,548,206
|
-1,871,112
|
-1,520,637
|
|
NPAT
|
-7,448,414
|
-2,092,749
|
-5,978,995
|
4,470,429
|
2,552,822
|
3,446,604
|
4,619,011
|
3,597,742
|
|
Income
Statement
|
FY 2012
|
FY 2013
|
FY 2014
|
|
Underlying EBITDA
|
6,592,951
|
7,138,573
|
8,051,682
|
|
Underlying EBT
|
3,614,507
|
4,188,078
|
5,274,299
|
|
Underlying NPAT
|
2,511,112
|
2,889,929
|
3,753,711
|
|
Underlying NPAT Margin
|
3.71%
|
4.02%
|
4.37%
|
|
Balance
Sheet
|
FY 2008
|
FY 2009
|
FY 2010
|
FY 2011
|
FY 2012
|
FY 2013
|
FY 2014
|
1H2015
|
|
|
Assets
|
|||||||||
|
Cash & Equivalents
|
1,312,700
|
239,535
|
472,375
|
637,197
|
675,555
|
239,902
|
1,103,559
|
3,449,657
|
|
|
Receivables
|
11,458,695
|
10,962,893
|
10,628,939
|
11,807,346
|
10,571,276
|
15,205,167
|
14,922,176
|
18,305,538
|
|
|
Inventories
|
17,421,285
|
17,808,187
|
12,160,225
|
9,194,261
|
12,973,235
|
18,328,709
|
13,736,111
|
16,615,755
|
|
|
Other Current Assets
|
342,844
|
299,665
|
163,552
|
164,083
|
235,005
|
266,677
|
262,519
|
612,718
|
|
|
Total Current Assets
|
30,535,524
|
29,310,280
|
23,425,091
|
21,802,887
|
24,455,071
|
34,040,455
|
30,024,365
|
38,983,668
|
|
|
Net Property, Plant & Equipment
|
19,591,561
|
19,911,271
|
19,697,479
|
18,984,627
|
19,566,144
|
19,744,122
|
19,634,969
|
20,551,168
|
|
|
Intangible Assets
|
5,480,247
|
5,354,976
|
180,324
|
141,789
|
103,253
|
64,823
|
24,467
|
4,067
|
|
|
Deferred Tax Assets
|
3,758,213
|
3,726,444
|
2,708,380
|
3,474,867
|
2,353,145
|
804,939
|
0
|
142,321
|
|
|
Other Financial Assets
|
1,858,351
|
897,195
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
Total Non-Current Assets
|
30,688,372
|
29,889,886
|
22,586,183
|
22,601,283
|
22,022,542
|
20,613,884
|
19,659,436
|
20,697,556
|
|
|
Total Assets
|
61,223,896
|
59,200,166
|
46,011,274
|
44,404,170
|
46,477,613
|
54,654,339
|
49,683,801
|
59,681,224
|
|
|
Liabilities & Shareholders' Equity
|
|||||||||
|
Payables
|
7,581,995
|
7,631,886
|
8,093,727
|
9,357,960
|
8,200,448
|
11,119,964
|
9,394,986
|
16,952,836
|
|
|
Short term borrowings
|
2,128,837
|
11,090,656
|
3,518,947
|
1,565,928
|
2,070,188
|
1,355,887
|
1,291,904
|
1,273,930
|
|
|
Provision for dividends
|
0
|
0
|
0
|
1,278,030
|
426,010
|
0
|
1,704,285
|
0
|
|
|
Deferred tax liabilities
|
0
|
0
|
0
|
0
|
0
|
0
|
891,972
|
2,491,689
|
|
|
Total Current Liabilities
|
9,710,832
|
18,722,542
|
11,612,674
|
12,201,918
|
10,696,646
|
12,475,851
|
13,283,147
|
20,718,455
|
|
|
Long term borrowings
|
28,928,670
|
18,207,358
|
15,389,460
|
9,526,648
|
12,030,045
|
14,937,644
|
7,404,958
|
6,465,734
|
|
|
Long term provisions
|
408,299
|
316,033
|
309,224
|
270,026
|
250,652
|
338,870
|
303,128
|
315,378
|
|
|
Provision for income tax
|
0
|
0
|
0
|
0
|
0
|
0
|
108,653
|
0
|
|
|
Total Non-Current Liabilities
|
29,336,969
|
18,523,391
|
15,698,684
|
9,796,674
|
12,280,697
|
15,276,514
|
7,816,739
|
6,781,112
|
|
|
Total Liabilities
|
39,047,801
|
37,245,933
|
27,311,358
|
21,998,592
|
22,977,343
|
27,752,365
|
21,099,886
|
27,499,567
|
|
|
Net Assets
|
22,176,095
|
21,954,233
|
18,699,916
|
22,405,578
|
23,500,270
|
26,901,974
|
28,583,915
|
32,181,657
|
|
