First NZ begins coverage of top kiwifruit grower with ‘neutral’ rating
AUCKLAND: Broking firm First NZ Capital began coverage of Seeka, New Zealand’s top grower of kiwifruit, with a ‘‘neutral’’ recommendation, as a positive earnings outlook offsets key risks.
Risks include the company’s high debt, horticultural factors such as weather, pests and disease as well as performance by the nation’s sole kiwifruit exporter Zespri Group and access to key export markets.
The stock fell 2.3% to $6.50 in Friday morning trading, cutting its gain for the past year to 32%.
First NZ research analysts Jack Crowley and Greg Main put a 12month target price of $7.25 on the Te Puke company, they said in a July 6 note.
The analysts pointed to Zespri’s plans to double production over the next decade by rolling out additional licences to grow its gold kiwifruit varieties.
‘‘As a toll processor, Seeka’s postharvest business, which accounts for about twothirds of earnings before interest, taxes, depreciation and amortisation, stands to be a beneficiary,’’ Crowley and Main wrote.
While the analysts are upbeat about the outlook for kiwifruit volume, they said the outlook for returns was less certain given the combination of demand growth in an underdeveloped fruit category particularly in Asia, Zespri’s growth ambitions, and intensifying international competition from other gold varieties.
To be sure, ‘‘Seeka has leveraged its business to volumes with reduced dependence on fruit returns through a focus on orchard management [cost recovery] and postharvest process ing [tollfee]’’, Crowley and Main said.
‘‘While the margin upside from these activities is limited, in our view, the need for significant postharvest capacity [Zespri estimate up to $1 billion over the next 10 years] and trends towards rationalisation in packhouse numbers and consolidation in the postharvest sector [following Psa] are likely to support a solid earnings growth profile.’’
Pseudomonas syringae pv actinidiae, better known as Psa, infected 80% of kiwifruit orchards nationwide and is estimated to have cost the industry up to $1 billion in lost exports.
Among concerns, the analysts said Seeka was highly geared, at about 4.8 times forecast fiscal 2018 net debt to ebitda, following the significant investment in postharvest capacity and recent acquisitions in Australia and Northland.