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Seeka shares drop as First NZ begins coverage with 'neutral' rating

Friday 6th July 2018

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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 including 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 percent to $6.50 in Friday morning trading, cutting its gain for the past year to 32 percent. 

First NZ research analysts Jack Crowley and Greg Main put a 12-month target price of $7.25 on the Te Puke-based 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 post-harvest business, which accounts for about two-thirds 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 is 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 post-harvest processing (toll-fee),” Crowley and Main said. 

“While the margin upside from these activities is limited, in our view, the need for significant post-harvest capacity (Zespri estimate up to $1 billion over the next 10 years) and trends towards rationalisation in packhouse numbers and consolidation in the post-harvest sector (following Psa) are likely to support a solid earnings growth profile,” the analysts noted.

Pseudomonas syringae pv actinidiae, better known as Psa, infected 80 percent 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 is highly geared, at about 4.8 times forecast fiscal 2018 net debt to ebitda, following the significant investment in post-harvest capacity and recent acquisitions in Australia and Northland.


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