CZZ - Capilano Honey

[burglar]

Impressive!

 

[springhill]

Can you not see a difference in risk profile between a Bee keeper who relies on the 200 hives he managers and a honey packer who just buys barrels of honey on the open market?

The Bee keeper would take a huge hit if he lost 50% of his hives, However the honey packer who buys honey from all over Australia faces no such risk. As I said if there was a supply shortage on the east coast they would just bring in more from the west coast, where there is a chronic over supply and is part of the reason Capilano have bought a packing shed and label over there, or as I said they can import honey from over seas.

This is an overly simplistic view.

If Varroa mite has no trouble infecting countries across oceanic borders, what hope do you think that state borders would have?
There would have to be some serious quarantine protocols put in place and then there are no guarantees.

To say this is a 'doomsday scenario' is ignoring the clear risk.

This pest has made its way across all borders to effect the world's bee populations.

You mention thriving honey production businesses overseas, this is in large part due to Australia being a mammoth exporter of healthy thriving bees to countries whose populations have been decimated.

You are the one hedging your bets and making assumptions on Varroa NOT making it to Australia, when all evidence points to the fact that it WILL.

Markets are forward looking and any mention of Varroa establishing a foothold in Australia will create uncertainty and uncertainty generally leads to SP price falls, not price rises.

CZZ is entirely reliant on the production of external sources, production falls - CZZ will suffer.

To say you can simply 'import it' puts CZZ at the mercy of world markets, inferior product, plus the fact that CZZ exports to over 50 countries worldwide - you are talking a major fall in export income if Australian supply falters.
Around 90% of CZZ's product is said to be exported, so whilst domestic supply would probably be guaranteed, at a price premium for the consumer, the export market would suffer.
Domestically, consumables are very price sensitive so any price premium would invariably see demand fall as honey could transition from affordable commodity to a luxury product.

There are some serious issues here that you need to consider in a clearer light, to write Varroa off as a worst case scenario is naive, it should be considered an unavoidable reality as the agenda is for free trade to take precedence over all other matters, including quarantine.

Australia's quarantine policy now reflects risk minimisation rather than risk protection.

 

[So_Cynical]

So, would the risk of that happening be a factor in purchasing PFL today? Given that there is no mad cow in Australia currently, But it is possible that one day, somewhere in Australia there might be a break out, is that something that should factor heavily in todays analysis?

And, would it affect patties long term outlook? I mean I have no doubt such news would cause volatility for a while, but what would be the long term impact?.

Yes absolutely, and is factored in the current SP.

The point I am trying to make is that the comments that the mites (which are not even in Australia yet) should be some sort of determining factor in an investment decision in capilano is false.

Capilano don't own bee hives, They own Zero bees, They buy barrels of honey and pack them into handy packs for resale.

The point im trying to make is that the impact of ANY outbreak of any negative event will impact the SP..simple.

 

[Value Collector]

Yes absolutely, and is factored in the current SP.



The point im trying to make is that the impact of ANY outbreak of any negative event will impact the SP..simple.

Ok, that might be the key difference in our opinions here, I am factoring in the risk from the perspective of what impact it would have on the companies operations, over time.

Where as your key issue seems to be the risk of short term fluctuations of the SP, To me that is hard to predict, because you can find long shot odds of disasters that can affect any industry, and cause massive share price movements as the herd gets spooked.

 

[Valued]

This stock has a large spread. It's not illiquid but if you wanted to sell quickly you have to take a hefty loss on the spread. It's clearly for the long term. You have to be pretty into honey.

 

[Value Collector]

This stock has a large spread. It's not illiquid but if you wanted to sell quickly you have to take a hefty loss on the spread. It's clearly for the long term. You have to be pretty into honey.

It is a very small company, You will find most small companies are like that. It has a pretty stable share register. It took me a few months to build up my position without causing the price to rise to quickly, I had to wait for it to drop a few times, I got in at between $2.20 and $2.60 with a total of 9 trades.

I am currently in the 20 largest shareholders list, and I consider it a very long term hold, I am not "Pretty into honey" as you put it, I am into any business that my little monkey brain can understand that has a good future and I can get for a lot less than what it is worth.

As I stated, based on my valuation, it could be worth over $5 a share, so buying in at $2.20 - $2.60 was a no brainer for me, so far so good.

 

[Ves]

I'm curious. For a company with such a strong market share, why has return on invested capital never really exceeded their cost of capital by any great margin in the past? For instance, ROIC in 2012 and 2013 was around 12.5%. I briefly looked at the annual reports for the years prior to their ASX listing and it appears much the same. My knowledge of the honey industry (in particular the packing and marketing segment) is fairly vague, but it would appear that this is a capital intensive business with no competitive advantage.

Value Collector, my main interest is how you arrived at a valuation of over $5.00 (which seems to be a fairly high premium to book value)? Any growth in this business would not appear to have been profitable growth in the past (ie. there has been no profitability increase above the cost of capital). Why do you think this has been the case in the past and what do you think will change in this business for such a premium to book value to be justified?

I’m finding it hard to come up with a many reasons. A brief look at their presentations would seem to indicate that they have plenty of on-going supply and demand pressures to deal with, which is a steep curve for any business, let alone one without a sustainable competitive advantage.

Thanks for your posts so far. Very thoughtful.

 

[Value Collector]

I'm curious. For a company with such a strong market share, why has return on invested capital never really exceeded their cost of capital by any great margin in the past? For instance, ROIC in 2012 and 2013 was around 12.5%. I briefly looked at the annual reports for the years prior to their ASX listing and it appears much the same. My knowledge of the honey industry (in particular the packing and marketing segment) is fairly vague, but it would appear that this is a capital intensive business with no competitive advantage.

Value Collector, my main interest is how you arrived at a valuation of over $5.00 (which seems to be a fairly high premium to book value)? Any growth in this business would not appear to have been profitable growth in the past (ie. there has been no profitability increase above the cost of capital). Why do you think this has been the case in the past and what do you think will change in this business for such a premium to book value to be justified?

I’m finding it hard to come up with a many reasons. A brief look at their presentations would seem to indicate that they have plenty of on-going supply and demand pressures to deal with, which is a steep curve for any business, let alone one without a sustainable competitive advantage.

Thanks for your posts so far. Very thoughtful.

Well they had return on equity of 14.6% for the 2013, that's not bad for that style of business.

Their capital is split between their property and plant ( about $19,000,000 ) and their inventory ( about $18,000,000)

the property and plant includes,

- the main packing facility in Brisbane which includes a packing building and a warehouse sitting on a large block of industrial land which they freehold and all the associated packing equipment.

- A secondary packing facility in perth, which they own all the equipment but rent the building under a lease

- a mothballed backup packing facility in Melbourne which they freehold,


the inventory include

- about 12months supply of bulk honey

- about 1 months supply of packed honey


There is currently about $4million dollars of excess Bulk honey inventory related to the purchase of the perth honey facility and brand "westco bee", Westco was a bee keepers co-op, and so bought more honey from the beekeepers than they could sell into the perth market, capillano will be able to move this easily so there will be a reduction in capital tied to this which will improve the figures from next year on.

They could get a higher return on assets if they sold the Brisbane packing shed and then rented it back on a long lease (like a lot of companies do) because real estate returns are lower than business returns in general, However I actually like the idea of having some of the capital exposed to industrial land and I think long term it will provide more stability.

they could also sell the mothballed Melbourne facility, they only kept it as a back up, but now the perth facility is running may end up being sold, this would reduce capital and increase the return on capital.

As far as historical returns, until about 2 years ago, capilano was a co-op, so it was more interested in buying as much honey as its members could produce and dumping it on the market rather than looking to produce high company profits, so the historical returns reflect that.

I see the competitive advantage being their brand and distribution channels, their low cost production and probably most importantly their relationship with the supplier bee keepers.

in regards to valuation, there are a few metrics that lead me to a valuation of a little over $5, as I said though my entry price was between $2.20 and $2.60 though because I like to have a decent margin of safety, the equity is currently $3.16 / share, so that provides a decent safety margin for me.

 

[Value Collector]

Around 90% of CZZ's product is said to be exported, .

Where did you pull that number from

In regards to the rest of your statement, I think you are greatly over stating the risk, However only time will tell.

As I said,

1, the mite is not currently here
2, It may one day be here, But it also may never get here
3, If it did get here, it is not the end of the world for capilano, there would still be honey production, it would just be reduced.


and lets say I am completely wrong, and honey production completely goes to zero within 5 years, capilano could just run till the inventories are gone, then sell of the land and buildings and then return the cash to shareholders, returning my original investment to me.

 

[Ves]

Thanks Value Collector, another great summary. You have got a great knowledge of this business if your posts are anything to go by, and it's not one that I've really considered in any depth (although... I briefly read the prospectus at listing). I feel like I've learnt a few things in this thread.

It appears that the "capital invested" by just using the totals on the balance sheet is a little bloated if you do not take out some of the freehold land and the unused facility in Melbourne (and probably adjust for some of the excess inventory). That old chestnut of how to treat properties owned by the business - in which situations do you value the business & properties separately? There is a brief discussion here in another thread on ASF. It's a fairly grey area I've found and I haven't completely made up my own mind.

I will have a closer look at this business at some stage with a view to analysing the sustainability of the cash flow. Will post if I come across anything interesting.

Thanks again

 

[springhill]

Where did you pull that number from

In an article that I read, this could be rubbery or completely wrong.

If so, apologies - no harm was meant by it.

In regards to the rest of your statement, I think you are greatly over stating the risk, However only time will tell.

If you do any research into Europe & the US you will se that I am not and that you are being somewhat naive.

Their crops are largely propped up by exported bees, many of them Australian.

My livelihood relies on bees to pollinate most of my crops, so it is in my interests to know this.

Varroa is a disaster waiting to happen, especially with the Libs aggressively pushing for FTA's.

Anyways, it is your investment - none of my beeswax.

Best of luck.

 

[McLovin]

If this latest report is anything to go by, this is quite a little honeypot. I remember having a look at it (and seriously considering buying it) back when it was still listed on the Bendigo exchange and Mariner was low balling shareholders.

 

[skc]

If this latest report is anything to go by, this is quite a little honeypot. I remember having a look at it (and seriously considering buying it) back when it was still listed on the Bendigo exchange and Mariner was low balling shareholders.

I read the announcement today and was thinking about our chat about this back then. I still didn't buy today although it is looking quite sweet. The spread is just too wide. It's semi bearable on entry, but if you needed to make an exit (esp if there's negative news you'd run into pretty serious slippage). And that means position would have to be kept pretty small... unfortunately.

 

[McLovin]

I read the announcement today and was thinking about our chat about this back then. I still didn't buy today although it is looking quite sweet. The spread is just too wide. It's semi bearable on entry, but if you needed to make an exit (esp if there's negative news you'd run into pretty serious slippage). And that means position would have to be kept pretty small... unfortunately.

If I bought it I'd have to be in there for the long, long run because given my average position size, there's no way I could get out of it in a hurry. In the end that's what put me off.

That conversation was longer ago than I thought. I just checked they listed on the ASX back in July 2012.

And just to keep the bee theme going, CZZ is certainly causing a buzz.

 

[skc]

If I bought it I'd have to be in there for the long, long run because given my average position size, there's no way I could get out of it in a hurry. In the end that's what put me off.

That conversation was longer ago than I thought. I just checked they listed on the ASX back in July 2012.

And just to keep the bee theme going, CZZ is certainly causing a buzz.

Yes... any position in honey would definitely have to be pretty sticky. However, as the spread is so wide it there's any adverse new you'd toasted.

 

[burglar]

Yes... any position in honey would definitely have to be pretty sticky. However, as the spread is so wide it there's any adverse new you'd toasted.

I read what you wrote, ...
And I knew what you meant!!

 

[Value Collector]

If this latest report is anything to go by, this is quite a little honeypot. I remember having a look at it (and seriously considering buying it) back when it was still listed on the Bendigo exchange and Mariner was low balling shareholders.

I read the announcement today and was thinking about our chat about this back then. I still didn't buy today although it is looking quite sweet. The spread is just too wide. It's semi bearable on entry, but if you needed to make an exit (esp if there's negative news you'd run into pretty serious slippage). And that means position would have to be kept pretty small... unfortunately.

Yes, today's report was quite a good one profit up 184%. I looked at it when it was on the Bendigo too, but I waited until it listed on the asx.

It is a micro cap, so you can expect the spread to be wide, But the price I was able to accumulate them for was just far to low to avoid them for that reason, I generally invest for the very long term any way, so spread doesn't both me.

I am happy to hold this company, I think their out look is pretty good, stable operating business generating cash and reducing debt and room to bolt on further acquisitions. Also the synergies from the WA acquisition still have a bit further to go.

 

[Value Collector]

As I stated, based on my valuation, it could be worth over $5 a share, so buying in at $2.20 - $2.60 was a no brainer for me, so far so good.

.

Value Collector, my main interest is how you arrived at a valuation of over $5.00 (which seems to be a fairly high premium to book value)?

CZZ have hit a record high today, they just hit $5.05

The 12months has been pretty good for them, profits are up and the have bedded in the WA acquisition of westco bee's honey packing assets.

It will be interesting to see the full year report.

 

[Value Collector]

Capilano honey have continued their impressive share price performance, they are currently trading at $6.12 / share.

Earnings have also been strong, and the directors have announced a special dividend, increasing total dividend this year to 20cents / share.

In other news, Kerry Stokes's Seven group have become the biggest share holder, taking 12.5% stake.

 

[burglar]

Capilano honey have continued their impressive share price performance, they are currently trading at $6.12 / share ...

Because I am a visual person: