The art of angling
Can investors make attractive returns from the fishing sector?
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.