Capilano Honey Limited’s Restructuring Works, But the Stock Remains Cheap – CZZ:ASX

I have always taken a special interest in companies that operate in obscure or unusual industries, especially those with few or no publicly-traded competitors. So far as I can find, Australia’s Capilano Honey is the world’s only listed pure-play honey producer. Honey is one of humanity’s oldest and most widely-enjoyed foods. Man has braved bee stings to collect the sweet substance for at least 8,000 years, with paintings of honey collectors appearing in cave paintings in Spain.

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Famous for its resistance to spoilage and a better health alternative to processed sugars, I expect humans to continue consuming honey for thousands of years. It will always have a place in my own cupboard.

Capilano Honey has been in the honey business since 1953, and now distributes honey produced by over 500 different beekeepers to dozens of countries around the world. The name “Capilano,” meaning “rushing water,” comes from a Native American language that the founder encountered while stationed in Canada during World War II. Capilano began as a bee-keeper co-operative, became a public company in 1970, and listed on the Australian Exchange in 2012.

Capilano enjoys a strong brand position, with its honey occupying the number one market position in Australia. The company is healthily profitable and has reasonable levels of debt and leverage, as well as expanding margins. However, Capilano was not always so strong. As recently as 2011, Capilano struggled with excess debt and weak operating margins, which lead the company to post large losses in 2009 and 2011. To overcome its weak financial and operating position, Capilano undertook a few key initiatives (note: all figures in this post are Australian Dollar figures).

  • Deleveraging – Beginning in 2010, Capilano took a serious approach to debt reduction. From the end of fiscal 2009 to the present, the company reduced its net debt by $20 million. The company also conducted a rights issue in 2010 that raised $2 million.
  • Shedding Loss-Making Activities – Capilano was once saddled with unprofitable segments and initiatives. Capilano responded by shutting down its struggling Canadian operations, taking a large write-off in the process. Capilano also divested holdings in a New Zealand bee product company and ceased exporting to certain low-margin markets.
  • Improved Product Mix – Capilano has worked to increase its sales of higher-margin products like specialty honeys and honey products. The company has introduced new offerings like single-serve honey packets and honey-infused syrups, which have been embraced by consumers. Capilano has also established a distribution agreement with New Zealand Manuka, a premium honey producer.
  • Improved Operational Scale – Capilano acquired Wescobee in early 2013, adding access to Western Australia’s unique floral honeys and to markets where the company previously had no presence. Wescobee’s honey packaging assets have improved Capilano’s operating margins.

As a result of these initiatives, Capilano’s operating margins expanded from 3.65% in 2010 to 8.36% for the trailing twelve months. Reported profits for the twelve trailing months rose to $4.79 million, nearly double 2012’s result. These results do not yet include a full year’s contribution from Wescobee. Trailing earnings also fail to fully reflect reduced interest expenses from declining debt.

Capilano trades at 9.8x trailing earnings, a considerable discount to typical consumer staples valuations. In my view, any single-digit multiple represents a good entry point for a financially healthy company consumer-oriented business that deals in products with durable demand. Capilano’s products also enjoy a degree of differentiation, with growth opportunities in specialty honey produced in specific regions from specific blossoms. However cheap Capilano may appear now, I also expect Capilano’s earnings to rise significantly in the next year due to the continuation of the restructuring process outlined above. If the second half of fiscal 2014’s results continue the first half’s revenue growth and margin expansion, as well as reduced interest expenses, fiscal 2014 earnings could be much higher than the trailing twelve months’ figures.

It’s a simple thesis, to be sure, but also one that does not require any financial engineering or management heroics to play out. At the current price, Capilano offers the opportunity to invest in a rejuvenated franchise with a strong market position and good prospects at a modest price.

As a final note, I hope readers will appreciate the complete absence of bee and/or honey-related puns throughout the entire post. I was tempted. So tempted.

Alluvial Capital Managment, LLC does not hold shares of Capilano Honey  for client accounts.

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

12 Comments

  1. Thanks for posting. This sure is a sweet idea. Assuming the company continues to expand its margins to the point where they are fairly high and sustainable, what’s to stop new entrants from smelling the honey and running towards the bee hive? It would bee great to hear your thoughts.

    • Ha! Very clever.

      I think Capilano is somewhat sheltered from competition by barriers to entry that honey suppliers face. First, adding honey-making capacity is a lot more complicated than, say, increasing corn or wheat acreage. A field can be planted with whatever crop offers the best prospective return at the moment, but increasing honey output requires building infrastructure that can only be used to produce honey. For bee-keepers to justify adding capacity, they must be confident that higher prices will last. Essentially, the honey price cycle moves much more slowly than those of easier to produce agricultural products. The ranks of bee-keepers are also limited, as apiarists require years of training in skills that are not transferable to other products.

      Finally, Capilano enjoys a somewhat “captive” supply due to its roots as a co-operative. Capilano’s various honey suppliers own 36% of the company’s shares, giving them incentive to continue supplying Capilano exclusively. (Until recently, Capilano suppliers were required to hold 16 company shares for every hive in operation. This requirement was recently eliminated, likely due to the large price increase the shares have recently enjoyed.)

  2. Hi people!
    It truly is terrific what you guys find out there in the big bad money world! I did a quick check of the company and found out something horrific. Their money producing assets are literally dying, I’m talking about the bees here.

    I became aware of that in 2012 trough this article: http://www.vicbeekeepers.com.au/what-is-wrong-with-our-bees-.html
    This article talks about other problems still present in Australian bees.
    http://www.dw.de/bees-and-humans-need-each-other/a-17391639

    How ever, it can present an opportunity, for example bees as an export product, yes the bees, not honey or something else. Of course this goes into the basics of value investing, since it’s pure speculation, the exporting of the bees. Besides that, isn’t the stability op the company to short in terms of years?

    -Rens

  3. Have you looked at all at the post-BK equity of School Specialty (Pink Sheets: SCOO)? It’s a pretty straightforward emergence story, with headwinds of potential migration away from the physical in the classroom (slight, in my opinion) and strained relations with its suppliers after the bankruptcy (bigger issue, though they claim they’ve mostly put it behind them) and tailwind (beside the obvious of a fixed capital structure) of slightly more open purse strings in classrooms across the country. I also mentioned this over at Red Corner a few weeks ago; up ~25% since then on minimal volume, but still seems cheapish at ~5ish EV/EBITDA with, I’m guessing, pretty good operating leverage.

      • Agreed re: SCOO. I just trade in a PA so less of an issue; am happy with shares dribbling in, as they did when there was a relative flurry of liquidity in February. Recently-emerged smaller-cap equities are the epitome of the value investment which requires patience and faith. Am keeping an eye out for when the warrants for emerged entities (HMHC, NEWM, etc.) start trading, too.

  4. Hello,

    Thank you for giving ideas of companies to analyze.

    About Capilano, I started jutting some numbers on the paper and I got a bit scared. Not because I am afraid of bees but because I didn’t find the numbers appealing so far:

    – sales grew 6,46% from 2012 to 2013 -> I would expect that receivables to grow at a similar rate but they didn’t. receivables grew 44,26% n the same period

    – inventories grew 41,28%…. don’t know what to say about this one but some cash is tied up here

    – accounts payable increased 35,6%: an increase amount of 2.919.516,00 compared to a receivables of increase of 4.678.891,00…not an offsetting amount of cash.

    positive numbers

    current ratio is above my comfort number: 2,73

    I don’t know if I am seeing something wrong but the first numbers- inventories and receivables / payables – worry me

    I have no position on this company.

    – josé

    • Hello Jose,
      You bring up some interesting points about Capilano. Too few investors monitor trends in working capital. One can often spot business trends before they show up on the income statement by monitoring working capital flows.

      One important thing to remember is Capilano completed a significant transaction in early 2013, adding Wescobee’s assets, but not a full year of Wescobee’s sales. This will make the sales/working capital ratio appear worse. Also, some of Capilano’s net investment in working capital reversed during the first six months of fiscal 2014, creating significant free cash flow.

  5. ok.

    thank you

    the most reliable way to get a picture should be then to markup the sales, integrating the contribution from Wescobee. and after check out the intrinsic value

    from where I write, mediterranean europe, honey is also a big important parcel of the food industry. but not enough so that a company is quoted in the stock market or even represented in the business and news

    thank you.

    I will keep reading your writings

    -josé

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