Ag Alert, which is the weekly newspaper of the California Farm Bureau Federation, recently published an article on a number of different aspects of the Stevia industry and its growing importance in California.
Stevia is a member of the sunflower family. The plant is originally native to Paraguay and has been used as a natural sweetener in its raw unprocessed form for many years. The plant's leaves contain compounds that can be up to 400 times sweeter than sugar. Stevia has zero calories, and tests have shown that the principal sweetener, extract Reb A, has no effect on blood glucose or insulin levels. Japan has been using Stevia extracts for more than three decades, and both the FDA and the European Food Safety Agency have approved the use of Reb A.
Today, stevia is grown primarily in China, which has 50,000 acres under production, but many experts believe that California has the potential to become the stevia growing capital of the world. Food economists believe that the global stevia market could grow from about $1 billion to about $10 billion by 201 while also gaining market share in the global sweetener market, which is estimated at around $60 billion. The World Health Organization also believes that stevia could eventually account for 20% to 30% of all dietary sweeteners used. One of the companies that is featured in Ag Alert's article is Stevia First (STVF.OB).
In order to take full advantage of the coming explosion in stevia demand, Stevia First intends to create a "first of its kind" vertically integrated stevia business in North America. The company has placed itself in California's Central Valley, one of the most productive and innovative agricultural regions in the world. Stevia First intends to draw on the expertise of researchers and growers there. The company will utilize fermentation-based production as well as advanced plant breeding and harvesting techniques to control the quality of production from start to finish. In doing this, Stevia First will establish a huge source of affordable stevia products for customers. Research and development will focus on high-value objectives, including fermentation-based stevia production methods, which could reduce the need for stevia leaf production. The company also aims to develop advanced varieties of the stevia plant, whose leaves can provide safe, natural, zero-calorie extracts to be used as sweeteners.
As far as the product focus is concerned, Stevia First initially plans to produce stevia leaves and extracts for processors and refiners who will then further process the extract for use by consumers and beverage makers. The company has identified sources such as OEM suppliers and food technologists who will create their own branded product lines (tabletop sweeteners and nutritional enhancers).The best tasting steviol glycloside formula is Reb A, which can be 200 to 400 times sweeter than sugar. Reb A contains zero calories and does not elicit a glycemic response, which makes it safe for diabetics to use. It is also non-cariogenic, which means that teeth will not be damaged. It is heat and pH stable, and can be used in place of sugar in most instances.
Stevia First has taken concrete steps to implement its business plan by leasing 1,000 acres of land in California's Central Valley. The strategy of leasing rather than buying will help to control capital expenditure. Research and manufacturing facilities are also being developed. Stevia First is researching different methods of stevia production, including both farm-based stevia production and fermentation-based stevia production. The company expects to develop proprietary stevia plants over the next two or three years by which time it will be ready to commence commercial scale production. The company has signed an agreement to license intellectual property from Vineland Research and Innovation Centre, which is a leading Canadian-based company. The license includes compositions and methods for preparing steviol glycosides and steviol through fermentation based processes. A separate consulting contract will enable the two companies to work jointly on developing stevia.
The company's financials for the second quarter of 2012 show no revenue and a loss attributable to common stockholders of $430,000. Cash and cash equivalents as of June 30th, 2012 stood at $920,000, and equity stood at $370,000, after accounting for accrued losses. Net cash generation for the quarter stood at $360,000, after accounting for cash from financing activities of $890,000. However, these figures are typical for this kind of early stage company. Stevia First has an impressive business model, and it has made the right moves so far in implementing its business plan. Stevia First is currently trading around $0.55, between a 52-week range of $0.23 and $3.58. If you believe in the enormous market potential of stevia, you should consider investing in Stevia First today.
S&W Seed (SANW) was established in 1980 and is also headquartered in California's Central Valley. S&W Seed Company is an established producer of warm climate, high yield alfalfa seed varieties, including seeds that can flourish in poor, saline soils. The company's products have been established over years of university-sponsored trials. The company also offers seed cleaning and processing at its 40-acre facility in Five Points, California, and has recently launched a business expansion focused on mass producing stevia leaves in the U.S. This is in response to growing global demand for the natural zero calorie sweetener from the food and beverage industry.
For the fiscal year ended June 30th, 2012, S&W Seed reported an increase in revenues of 289% to $14.1 million, up from $3.6 million in 2011. Seed and crop revenues increased 398% to $13.3 million, compared to $2.7 million on a year-on-year basis. EBITDA was $868,000 for the year, an improvement of $2.1 million, compared to a loss in the previous year. Basic and diluted earnings per share (EPS) were $0.06, versus a loss of ($0.14) per share in 2011. A write down of $277,000, related to lower than anticipated yields on the company's non-core and non-recurring wheat and triticale crops, was included in the results for the fourth quarter and fiscal year 2012. This was primarily used for land reclamation to prepare for alfalfa seed production. Excluding the effect of this one-time loss, net income for fiscal year 2012 would have been $556,000, or EPS of $0.09 per basic and diluted share. Dedicated alfalfa seed acreage for the harvest in the fall of 2012 increased by 94% to over 4,600 acres, while dedicated stevia acreage expanded to more than 250 acres, compared to 114 acres in 2011.
S&W Seed successfully completed a $5.5 million public offering in May 2012 to generate funding in order to acquire additional farmland to expand alfalfa seed production. S&W Seed has also raised $3.5 million in a private placement transaction, in which it sold 600,000 shares of restricted common stock at $5.85 per share. Additionally, S&W Seed was able to achieve an increase in a line of credit with Wells Fargo to $7.5 million, which remains untapped, to help facilitate its growth plans. The company is currently in a comfortable financial position.
S&W Seed Company has commenced the commercial harvest of stevia in August 2012, and expects to complete at least one more harvest by the end of this year. This is the second year in which the company has produced stevia leaves from its 114 acre field in Chowchilla, California. After the harvest, the stevia leaf will be dried and prepared for shipment at the company's processing facility in Five Points, California. The company has recently planted a second generation field of approximately 150 additional acres, utilizing plant varieties that it believes may be superior to those of the first generation planting on the Chowchilla field.
In 2010, S&W Seed entered into a five-year agreement with PureCircle (PCRTF.PK) to sell the stevia that it grows for further processing and refining. PureCircle, which is based in Malaysia, is one of the world's leading producers of high purity stevia ingredients for the global food and beverage industry. As the driving force behind moving stevia from niche to mainstream global acceptance, S&W Seed is advancing sweeteners for manufacturers as well as consumers. S&W Seed has a substantial market share (90% by some estimates) in the supply of stevia to the U.S., excluding tabletop sweeteners. S&W Seed has demonstrated that it is possible to grow stevia successfully in the U.S. and California in particular, but it is clear that strong market demand for stevia will require large production capacity in the U.S.
Though S&W Seed generates revenues and has made a profit in the last fiscal year, there are several key points potential investors should keep in mind. Stevia cultivation has successfully commenced, but the company still has to establish itself as a reliable and consistent stevia producer. The company will probably require more acreage in order to be commercially viable. The company's acquisition of Imperial Valley Seeds for $6 million is somewhat troubling. This is a big risk for such a small company, and it is going to have a big job on its hands of digesting the acquisition and harnessing the synergies. Moreover, Imperial is a producer of alfalfa seeds, and brings nothing to the table when it comes to the stevia business. S&W Seed is currently trading around $7.91 per share, between a 52-week range of $3.95 and $8. I believe investors should watch S&W Seed closely as more information about the Imperial acquisition comes out.
Ingredion (INGR) is a new name for Corn Products International. The name was changed to better reflect the ingredients that the company supplies and the markets that it serves. In its sweetener range of products, Ingredion sells stevia-based sweeteners under the brand name Enliten, though this is not a major product for the company. Based in the Chicago suburb of Westchester, Illinois, Ingredion is a leading provider of ingredient solutions. The company turns raw materials like corn, tapioca and wheat into a number of ingredients catering to the food and beverages industry. The company's products also supply the brewing and pharmaceuticals industries. Ingredion has more than 10,000 employees serving customers in 60 different markets in 40 countries. The company's starches, sweeteners, texturants and nutritionals are used by its clients as sweeteners and adhesives.
Ingredion reported strong results for the second quarter of 2012. Second quarter diluted EPS grew by 39% to $1.40 per share, compared to $1.01 per share year-on-year. This included a $0.16 per share benefit from the release of a Korean deferred tax valuation allowance, which was partially offset by $0.08 of restructuring and impairment charges and $0.01 of business integration costs. The second quarter of 2011 had included $0.07 of integration costs and $0.02 of restructuring charges. When these items are excluded, adjusted EPS grew 21% from $1.10 in the same quarter of the previous year to $1.33 this quarter. The estimated factors driving the increase in 2012 adjusted EPS were $0.25 from margin improvements, $0.03 from higher volumes, and $0.03 of normal operating items partially offset by $0.08 from adverse currency translation.
Diluted EPS for the first six months fell by 12% to $2.61 per share, compared to $2.97 per share in the previous year. The first half of 2012 included a $0.16 per share benefit from the release of a Korean deferred tax valuation allowance that was substantially offset by $0.11 per share of restructuring and impairment charges and $0.03 of business integration costs. The first six months of 2011 had included a $0.75 gain per share from a NAFTA settlement with the Mexican government, partially offset by $0.13 of integration costs and $0.02 of restructuring charges. When these items are excluded, adjusted EPS increased by 9% from $2.37 per share to $2.59 per share in the first six months of 2012.
As of June 30th, 2012, total debt reached $1.84 billion and cash and cash equivalents were $440 million, respectively, compared to $1.95 billion and $401 million, respectively, as of December 31st, 2011. In the first six months of 2012, cash flow from operations amounted to $318 million, compared to $102 million in the same period of the previous year. Capital expenditures, net of disposals, were $128 million in the first six months of 2012, compared to $89 million for the first six months of 2011.
Fitch has reaffirmed its BBB rating on the company's debt, and upgraded the rating outlook from Stable to Positive. The rating agency attributes the upgrade to the company's progress in integrating the $1.4 billion acquisition of the National Starch business of Akzo Nobel N.V. (National Starch) as well as the earnings outperformance since the acquisition. The upgrade also reflects the larger size and the broader product portfolio as well as the fit and synergy between National Starch's expertise and leadership in specialty and modified starches for the processed foods industry and Ingredion's core competency in corn refining.
Ingredion maintains a competitive position in corn refining and starch-based ingredients, and has global operations as well as a well diversified customer base. It follows clear and conservative financial policies and is financially strong. The recent rise in corn prices due to the effects of the severe summer drought on the U.S. crop is bound to affect the company. It remains to be seen whether the higher costs can be passed on to customers. The uncertain global economic situation also raises questions about starch demand. Investors should watch these headwinds closely.