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.

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