The art of an­gling

Can in­vestors make at­trac­tive re­turns from the fish­ing sec­tor?

Financial Mail - Investors Monthly - - Front Page -

The fish­ing in­dus­try could well be a re­ward­ing line in the next five years, for in­vestors able to cast aside prej­u­dices around op­er­a­tional risk.

The prob­lem, of course, is that the JSE no longer hosts a lot of fish­ing op­por­tu­ni­ties.

In the dis­tant past the JSE floated a good num­ber of fish­ing boats — in­clud­ing, be­lieve it or not, a Dur­ban-based whal­ing com­pany (which might be a con­tentious in­vest­ment th­ese days). The most re­cent at­tempt at any­thing re­motely re­sem­bling a fish­ing busi­ness was (cur­rently sus­pended) pref­er­ence share based in­vest­ment com­pany BK, which held in­ter­ests in trout farm­ing ven­tures and a seafood whole­sal­ing en­ter­prise.

Th­ese days the JSE is left with one dedicated fish­ing list­ing in form of the well di­ver­si­fied Oceana Group. This could change, de­pend­ing on what a hand­ful of coun­ters with fish­ing ex­po­sure de­cide to do with their re­spec­tive in­ter­ests.

Cur­rently the JSE of­fers three in­di­rect en­try points to the fish­ing sec­tor, via em­pow­er­ment coun­ters African Em­pow­er­ment Eq­uity In­vest­ment (AEEI) and Brim­stone In­vest­ment Corp, as well as consumer brands con­glom­er­ate AVI.

There are a num­ber of size­able un­listed fish­ing con­cerns, most no­tably Vik­ing Fish­ing, the Sal­danha Group and Pi­o­neer Fish­ing.

Whether th­ese en­ti­ties will be hooked into cor­po­rate ac­tion re­mains to be seen. But each com­pany has as­sets that would be at­trac­tive to listed coun­ters.

Pi­o­neer Fish­ing op­er­ates a fleet of mod­ern pelagic, de­m­er­sal and squid ves­sels from the St He­lena Bay, Port El­iz­a­beth and Ta­ble Bay har­bours. (Th­ese are equipped to fish in dif­fer­ent depths of the ocean.)

The com­pany holds the Sea Pride canned fish brand and op­er­ates fish can­ning, pro­cess­ing and freez­ing fac­to­ries in St He­lena Bay and Port El­iz­a­beth.

Vik­ing Fish­ing has in­ter­ests in the hake, pelagic (sar­dine and an­chovy) and west coast rock lob­ster sec­tors as well as in prawns (in SA and Mozam­bique) and aqua­cul­ture.

The Sal­danha Group has sub­stan­tial op­er­a­tions in tuna, pilchards, sar­dines and mid­dle­cut can­ning.

So far, cor­po­rate ac­tion in the fish­ing sec­tor has been largely spurred by growth-hun­gry Oceana. In re­cent years Oceana has ac­quired parts of the Lusi­ta­nia Group and parts of the old Food­corp fish­ing op­er­a­tions. This added diversity to op­er­a­tions which in re­cent years grew mostly through the best-sell­ing canned pilchard brand Lucky Star and en­deav­ours in the horse mack­erel seg­ment.

Lucky Star, which now ex­tends to sar­dines and tuna, is one of the best known and most af­ford­able pro­tein brands in SA. In its re­cent in­terim re­sults Oceana re­ported that lo­cal sales vol­umes for Lucky Star were up a sprightly 13% on over­all vol­ume growth of 10%.

Most en­cour­ag­ing was that Lucky Star’s al­ready dom­i­nant mar­ket share im­proved fur­ther, es­pe­cially in key re­gions.

Both the Lusi­ta­nia and Food­corp deals ran into reg­u­la­tory head­winds, and Oceana needed to re­sort to long le­gal bat­tles to even­tu­ally land the as­sets it cov­eted.

Oceana — by CEO Fran­cois Kut­tel’s own ad­mis­sion — is now lim­ited by its size and op­er­a­tional reach (which spans pilchards, sar­dines, hake, squid, horse mack­erel and west coast lob­ster).

But IM reck­ons a big­ger snag is that its anchor share­holder is food con­glom­er­ate Tiger Brands. The cur­rent work­ing against deal-mak­ing in South African waters is the de­cree from gov­ern­ment on sus­tain­ing and in­creas­ing em­pow­er­ment lev­els in the fish­ing sec­tor.

In short, a fish­ing com­pany that is 49.5% black-owned may not take over a fish­ing com­pany that is 75% black-owned. Oceana has long ar­gued that its ef­forts to em­power its staff should be taken into ac­count in as­sess­ing its black em­pow­er­ment sta­tus, aside from hav­ing Brim­stone as a ma­jor share­holder.

Be that as it may, Oceana now seems re­signed to seek growth op­por­tu­ni­ties in­ter­na­tion­ally and last year landed Day­brook Fisheries, a size­able (and highly prof­itable) spe­cial­ist fish­meal and fish oil com­pany based in Louisiana in the US.

Oceana may, by de­fault, still play a key role in fu­ture cor­po­rate ac­tion in SA. In 2020, new long-term fish­ing rights will be awarded, and it stands to reason that strongly em­pow­ered fish­ing com­pa­nies will gain at the ex­pense of larger, par­tially em­pow­ered cor­po­rate fish­ing en­ti­ties or fam­ily-con­trolled busi­nesses.

Oceana has al­ready started re­fo­cus­ing on core op­er­a­tions by sell­ing off its French fries op­er­a­tions in Lam­berts Bay to food con­glom­er­ate Fa­mous Brands. Whether Oceana’s prof­itable cold stor­age fa­cil­i­ties will be next re­mains to be seen, but it does seem likely that none of its fish­ing op­er­a­tions will be re­leased into the mar­ket.

The most per­sis­tent mar­ket talk ahead of the award­ing of fish­ing rights in 2020 is around the fu­ture of hake fish­ing spe­cial­ist I&J, which is con­trolled

Cor­po­rate ac­tion in the fish­ing sec­tor has been largely spurred by growth-hun­gry Oceana

by AVI. There have been per­sis­tent ru­mours that this fish­ing busi­ness does not fit com­fort­ably with AVI’s ur­bane consumer brands.

But AVI CEO Si­mon Crutch­ley has con­sis­tently played down talk that I&J is up for sale, and re­cent per­for­mances by the sub­sidiary prob­a­bly more than jus­tify hang­ing on to the fish­ing in­ter­ests.

The half year to end December saw its profit mar­gin fat­ten­ing to over 20% with op­er­at­ing profit in­creas­ing markedly to R160m. This is a far cry from 10 years ago, when I&J was trad­ing on a skin­nier 10% mar­gin. What’s more sur­pris­ing is that AVI es­ti­mates there’s been a rather nifty 16.6% com­pound growth rate from I&J since 2005. AVI has also put its money where its mouth is by in­vest­ing an­other R258m in new ves­sels for I&J.

But the bil­lion-rand ques­tion is whether I&J will re­main in a favourable po­si­tion when new fish­ing rights (in­clud­ing its hake quota) are awarded.

To be hon­est, a suit­ably em­pow­ered fish­ing part­ner might be tough to find at present.

Brim­stone is in the throes of up­ping its stake in hake fish­ing busi­ness Sea Har­vest from 58% to 85%. It clearly can’t ad­vance on I&J with­out the competition author­i­ties cast­ing a net over the deal.

In ad­di­tion, Brim­stone seems keen to build a global fish­ing plat­form, and is back­ing Sea Har­vest in its ef­forts to build a stake of as much as 56% in Aus­tralian Stock Ex­change listed fish­ing busi­ness Mareter­ram. Through its stakes in Oceana — now earn­ing a fair chunk of bot­tom line from its newly ac­quired US busi­ness — and via Sea Har­vest’s size­able hake ex­port busi­ness and re­cent Aus­tralian thrust, Brim­stone al­ready has a strong in­ter­na­tional flavour to its seafood in­ter­ests.

AEEI, which owns Premier Fish­ing, would cer­tainly ben­e­fit by help­ing its sub­sidiary to add hake to its mainly south coast lob­ster, west coast lob­ster, abalone and pelagic catches.

But PremFish, which has not an­gled ag­gres­sively for ac­qui­si­tions, might pre­fer to bide its time. The com­pany has in the past been linked to a deal with the Sal­danha Group.

AEEI has hinted strongly that PremFish is a can­di­date for a sep­a­rate list­ing on the JSE. Fish­ing in­dus­try sources, though, have ar­gued that PremFish is far too small to war­rant se­ri­ous mar­ket at­ten­tion.

AEEI CEO Khalid Ab­dul­lah has mooted a sep­a­rate list­ing for the fish­ing busi­ness af­ter it has

PremFish con­trols 60% of the lo­cal south coast rock lob­ster mar­ket and sig­nif­i­cant ca­pac­ity in its abalone farm­ing fa­cil­i­ties

achieved R500m in rev­enue or R80m at op­er­at­ing profit level. At the Au­gust 2015 fi­nan­cial year-end PremFish man­aged rev­enue of around R350m with op­er­at­ing prof­its com­ing in at a stout R68m — sig­nalling an en­vi­able op­er­at­ing mar­gin.

Re­cent in­terim re­sults, which cover the “slower” six months to end Fe­bru­ary, re­flected rev­enue of R178m and op­er­at­ing prof­its of R22.5m. Cash flow from op­er­a­tions was a re­as­sur­ing R24m.

PremFish con­trols 60% of the lo­cal south coast rock lob­ster mar­ket (mainly ex­ported to the US) and sig­nif­i­cant ca­pac­ity in its abalone farm­ing fa­cil­i­ties (up to 250 tons an­nu­ally). De­pend­ing on the fluc­tu­a­tions in the rand, it has at best an out­side chance of breach­ing its rev­enue and op­er­at­ing profit tar­gets.

But it seems rea­son­able to bank on a list­ing in late 2017 — an event that might co­in­cide with a PremFish hook­ing a few ac­qui­si­tions and bait­ing share­hold­ers with a prelist­ing cap­i­tal-rais­ing ex­er­cise.

PremFish might be able to reel in size­able fam­ily-owned and un­listed fish­ing busi­nesses like the Sal­danha Group or Vik­ing Fish­ing, deals that would not only add crit­i­cal mass but also di­ver­sify rev­enue lines. Ex­pan­sion of its abalone farm­ing ven­ture also looks like a log­i­cal ex­ten­sion.

But Oceana prob­a­bly re­mains the de­fault fish­ing com­pany for in­vestors keen on sump­tu­ous seafood re­turns. The world is Oceana’s oys­ter — the busi­ness now ranks as one of the top five big­gest fish­ing en­ter­prises in the world.

It seems rea­son­able to bet on more off­shore deals now that Day­brook is bed­ded down and de­liv­er­ing promised mar­gins and cash flows.

Per­haps the chances of Oceana clinch­ing one more big lo­cal deal should not be ruled out, how­ever. IM won­ders whether Oceana — which now has a de­cent-sized hake op­er­a­tion — might not be tempted to buy out Sea Har­vest.

The ad­van­tages of haul­ing in a value-added fish­ing op­er­a­tion with a best-sell­ing house­hold brand (to com­ple­ment Lucky Star) and mean­ing­ful off­shore sales are ob­vi­ous — as well as fur­ther di­rect off­shore ex­po­sure through Sea Har­vest’s Aus­tralian in­vest­ment in Mareter­ram. But such a deal could also po­ten­tially di­min­ish the in­flu­ence of Tiger Brands.

If Oceana of­fered scrip in ex­change for con­trol of Sea Har­vest then Brim­stone would bol­ster its al­ready sig­nif­i­cant mi­nor­ity stake in Oceana. In fact, Brim­stone might be will­ing to ac­quire ad­di­tional Oceana shares from Tiger Brands if the consumer brands gi­ant was will­ing to sell.

There can be no doubt that hav­ing an en­dur­ing em­pow­er­ment com­pany like Brim­stone as an anchor share­holder would serve Oceana far bet­ter as it trawls to­wards 2020.

Pic­tures: iSTOCK

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