29-Jan-2021: Taylor Collison: HRL Holdings Limited (HRL): Delivering Resilience Again
Our View
Resilience again shown as HRL’s predominantly NZ exposures bounce back from April’s COVID lockdown. We very modestly increase our FY21 forecasts despite top end EBITDA guidance achievement, conscious of the seasonal H2 vagaries within key parts of food testing. Our broader positive thesis on HRL however remains, as does our Outperform recommendation and new $0.18 price target (equal weighted PE & EV/EBITDA valuation methodology). We like:
- More specialties to be carved out through disciplined innovation
- A clear emphasis on stable markets, customer intimacy and share gains
- Acquisition optionality again front of mind (and balance sheet supported)
- Returning credibility after navigating meth contract loss & COVID disruption
Key Points Top end guidance met – A resilient 1H21 with sales held flat and 270bps of EBITDA margin expansion – partly JobKeeper attributable – despite cycling a prepandemic pcp. EBITDA guidance of $3.2-3.5m was met at the top end ($3.535m). Crucially, the core lab testing business – equating to c.80% of group earnings – delivered 13% top line growth and 28% EBITDA margins (vs. TC 26.8% forecast). The essential nature of much of HRL’s food testing and the tight management of overheads by a nimble and innovative executive team was clearly on show.
Seasonal variances to dictate where FY21 falls – HRL’s typical 1H:2H split is 40:60 to 45:55, suggesting an FY21 EBITDA closing in around $8m. Some conservatism is however needed in using this broad-brush approach, noting:
- JobKeeper artificially boosted HRL’s H1 geotech business by $0.635m
- The remnants of FY20’s bumper honey season spilt over into 1H21
- The risk of wetter La Nina weather patterns may impact beehive yields
Given the above, and despite achieving top end H1 guidance, we only modestly upgrade our FY21 EBITDA forecast by 2.1% to $7.4m. At this early stage, the milk season is tracking normally, but the honey season start has been more muted.
Honey unlikely to repeat FY20’s stellar performance – FY20 was a bumper year for NZ honey. Beehive yields were high, with HRL only finishing last season’s testing this November. We understand recent volumes have been more akin to normal levels – significantly down on pcp – although more glyphosate and AFB testing (a type of bee disease) supports a solid outcome even in more normal FY21 settings. Not placing the usual weighting to 2H21 earnings seems sensible.
Strong cash flow and net cash – 1H21’s $0.6m net cash was achieved one result ahead of forecast. Operating cash flow of $3.2m (excl. $0.6m of wage subsidies) was driven by strong debtor collection and the extra earnings HRL was able to derive on a disciplined cost base. WC management was tight but did not change meaningfully. With $7m of available funding – cash and undrawn debt – and a credibility rebuild well underway, M&A optionality takes on more credence. Smaller bolt-ons are accessible but engaging with larger family-owned (Aus beachhead) targets remains more protracted.
Food Lab JV blue-sky – HRL’s Food Lab JV now expects commercial sales in 2H21 with profitability 2-3 years away. HRL has already proven itself capable of innovatively capturing market share in honey and raw milk markets. Should it become a recognised player in NZ’s broader $40m milk product market, achieving even low 30% margins, then over $2m of EBITDA could be delivered. That is equivalent to 30% of our FY21 base. Still in its infancy, but now more than just a blue-sky opportunity, the market may start placing a value on it over the mid-term.
- Recommendation: Outperform
- Market Capitalisation: $71.6M
- Share price: $0.145 ($0.14 on 05-Feb-2021)
- Price Target: $0.18
- 52 week low: $0.07
- 52 week high: $0.18
--- click on the link at the top for the full TC report on HRL --- [I do not hold HRL shares.]
