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Has Select Harvests Gone Nuts?
BY ANDREAS LUNDBERG - 13/10/2017 | VIEW MORE ARTICLES BY THE MONTGOMERY TEAM

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SHV - SELECT HARVESTS LIMITED


Just as we start to believe we have seen everything, all of a sudden a company takes us by surprise.  Take the recent decisions by Select Harvests, for example.

Select Harvests (ASX: SHV) is a $370 million grower of almonds listed on ASX. The company has had a tough time recently with the share price falling from $13.50 in mid-2015 to just under $4 last week, thanks to a bad growing season in Australia and falling world almond prices as California’s drought ends and US supply expands.

Last week Select Harvests applied for a voluntary trading halt, and on Monday this week they made the following announcements:

  1. That on the 19th of September Select Harvests received a takeover offer from Mubadala (the sovereign wealth fund of Abu Dhabi) for $5.85/share or a 45 per cent premium to the $4.03 price that Select Harvests were trading at that day.

Importantly, Select Harvests also announced that they thought the price significantly undervalued the company and were not prepared to enter into further discussions, nor offer Mubadala an opportunity to conduct further due diligence.

While this may have been a surprise to shareholders, the following announcement may have surprised them even more:

  1. Select Harvests announced they had raised an additional $45 million in equity capital through an Institutional Placement at a price of $4.20/share.

An Institutional placement is basically a targeted issuance of shares to a select group of investors and although the announcement states that offer was made to existing investors, there might very well be existing shareholders that were not invited. Finally:

  1. A share purchase plan, with the aim to raise a further 20 million, at the same share price as the institutional placement, with smaller investors invited to acquire up to $15,000 in new shares.

Of course the share price reacted positively to the announcement that someone is interested in acquiring the business at a significant premium to the current share price so both the investors invited to participate in the placement and those participating in the share purchase plan will be better off than they were previously, but we would be asking the company a couple of questions:

  1. Why have you issued shares at a price 28 per cent lower than that which was offered a week earlier and which the company had said undervalued it.
  2. Is the company confident that there will be a significant improvement in underlying trading conditions and profitability?
  3. Does the company believe that Mubadala or another party will pay a higher price than $5.85/share (even though the theoretical value is now lower thanks to the new equity issued at a discount to the offer price)?
  4. When such large discounts are involved, does the placement treat existing shareholders fairly and equally?

Montgomery does not own any shares in Select Harvests but, IF we did, and were not approached to participate in the institutional placement, we would be mightily annoyed.

We wonder whether other shareholders feel the same, especially if a higher bid fails to emerge or continued tough trading conditions put more pressure on the company and its profits.



View More Articles By The Montgomery Team

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com.

Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.



 

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