WEEKLY STOCK COMMENT: SCALES
Roy Davidson, 11 January 2018
Scales is a market leading agribusiness that has been operating in New Zealand for over 100 years. Based in Christchurch, SCL grows apples for export, provides storage and logistics services to third parties across a range of perishable food products, and operates a food ingredients business. SCL’s main brand, Mr Apple, is New Zealand’s largest integrated grower and packer of apples, and the second largest exporter.
Mr Apple makes up over half of SCL’s earnings, making it a critical component of the business. Despite overall apple exports falling over the last decade, Mr Apple’s performance has been strong with export volumes increasing by 107% compared to the industry average which fell 10%. It also has strong market share with 25% of apples exported from New Zealand being exported by Mr Apple. Mr Apple’s varieties are increasingly suited to the tastes of the Asian and Middle East markets, with around half of all exports now being sent to these markets. It also benefits from its close proximity to these markets and a price premium for higher quality New Zealand apples.
SCL’s storage and logistics business (25% of earnings) provides services to exporters of perishable goods, including exporters of fish, fruit and vegetables. The storage and logistics business is more insulated from individual events that may afflict a certain export crop due to its revenue being sourced from multiple industries. It therefore provides a more robust cash flow. SCL’s food ingredients business (11% of earnings) comprises Meateor, a pet food ingredients manufacturer, and a 50% stake in Profruit, which processes apples and kiwifruit into fruit concentrate.
SCL’s 1H17 result was impacted by an 11% fall in Horticulture earnings (the company’s biggest segment by some way). While volumes and in-market prices were relatively flat, higher on-orchard costs (spraying, thinning, storage, and increased rounds of picking) were the primary driver of the fall in earnings – the majority of these extra costs were the result of unfavourable weather.
SCL provides an opportunity for investors to gain exposure to New Zealand’s growing primary sector, with the company poised to benefit from growing Asian demand, and we have a positive long-term view. SCL is also a key beneficiary of a weaker New Zealand dollar. We do, however, note the risks of industry specific events (such as hail or disease) that may impact earnings in any given year.
Risks to SCL include: 1) Adverse weather, 2) biosecurity event, 3) increased competition.