Sector financial performance:

This company, which primarily processes and distributes peanuts, pecans, cashews, walnuts, and almonds, has been grouped into nuts sector in snack food industry.

Our company data indicate that demand for nuts products both from consumers or industry has been strong and naturally growing in the past several years. The organic annual volume growth rate to retailers/wholesalers is 11%, 1%, 5% and 6% for 2018, 2017, 2016 and 2015 respectively. The growth in demands for nuts products seems to be independent with the selling prices, which present 8%, 0%,-8%, and 1.5% growth for 2015, 2016, 2017 and 2018 respectively. In fact, it may just be opposite since it seems that the demand for the processed nuts products has significantly influence the price of raw nuts, which in turn impact the processed nuts’ price under the intensive competition along the value chain in this nuts industry. We see, during the fiscal 2015 and the first quarter of 2016 when demands increased at a rate of 4-5%, companies had experienced increasing raw-materials price, primarily almonds. However, starting from second quarter of 2016 until 2017 when the demands slowed down, the raw almonds’ prices decreased significantly and then walnuts’ price followed almonds to fall as well.

It seems the changes in raw material nuts’ price can be reflected quickly to the market price of processed products no matter whether an individual company is ready or not in terms of its inventory costs of raw materials. However, the extent to which changes reflected in the processed products’ price is different. In this sector, it seems there is usually an increasing pressure on profit margin when raw-material nuts’ price increases. But it has also a favourable influence on companies’ margins when raw-material nuts’ price go down even though it will cause a decrease in processed products’ price in the market.

There is obviously a delay between changes in the company’s raw nuts costs that they are going to use to calculate their margins and the changes in the market price of those raw products. Therefore, when the book costs of raw nuts of companies reached the peak in 2016, the market price for those types of raw nuts has gone down and thus the market price for processed nuts products as well. This is why we see the lowest the gross margins (around 14%) from the performance of companies in 2016. We also see the highest gross margin in fiscal 2017, which is around 17%, due to the continued decrease of raw material nuts’ costs.

Correspondingly, the typical operating margins for companies in this sector are 5,5% and cash inflow margins are 3.3%.

According our analysis, a typical ratio of enterprise price/adjusted EBI sis around 25 with interest/EBI ratio of 11%.  

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Company performance:

It seems natural demand for nuts products had been strong and growing in the past several years as indicated by the increase in this company’s sale volume to retailers, which are 11%, 1.1%, 6.6%, and 5.4% in fiscal 2018, 2017, 2016, and 2015 respectively. Sales from commercial customer including ingredient and packaging companies have significantly declined due to losing contracts or takeover with them.

For the first quarter of fiscal 2019 compared with same period of 2018(ended 20180927)

Net sales decreased by 5% attributable mainly to decrease of 3.4% in sales volume.

For fiscal 2018 compared with 2017(ended 20180630)

Net sales increased by 5% attributable mainly to increase of 3.4% in sales volume and increase of 1.5% in unit price. It seems the loss from one of commercial ingredient customers has been offset by increase in retail sales.

Nets sales decreased by 11% in fiscal 2017 including a decrease of 3.7% in sales volume and a decrease of 7.6% in average selling price. The decrease in sales volume is mainly because of the lost industry customers. The sales volume to consumer retailers or distributors increased actually by 1.1%. The average selling price declined primarily because of the significant decrease in raw-materials price in almonds and walnuts in 2016.

Net sales increased by 7.3% in fiscal 2016 attributable mainly to increase of 6.6% in sales volume.

Net sales increased by 14% in fiscal 2015 including an increase of 5.4% in sales volume and an increase of 8% in price. Most of volume increase came from consumer distribution.

The average unit prices of this company’s final products, especially almonds and walnuts, varied (increased by 8% in fiscal 2015, decreased by 7.6% in fiscal 2017, and increased by 1.5% in 2018) as raw-materials nuts’ price changed. And, working together with company’s inventory management and changes in sales volume , fluctuations in raw material nuts’ price brought changes in this company’s gross margins, which increased from 14.4% of 2016 to 16.8% of 2017 and then down to about 15.5% in 2018. This company’s operating margins changes similarly with those in its gross margin during the same period of times. And we see its operating income increased by around 14% in fiscal 2017 and 2015 but decreased by 10% and 1.2% for fiscal 2018 and 2016.

Stock price

This stock currently has an enterprise price/EBI ratio of 25, which we think, is relatively fairly valued considering that demand may be picking up again.

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