Has the tide already turned?
The tide of investor sentiment has been going out for Oceana Group — by far the biggest trawler among the JSE’s fishing counters.
Fast recovering chicken counters, notably Astral Foods, have recently got the market in a flap, so it might be time to consider whether Oceana can make a convincing comeback.
The share is not far off its 12-month low, and the market appears to be only nibbling at the bait dangled in the form of a solid interim trading update assessing the group’s latest trading statement for the six months to end-March.
Oceana finished the second half of the year to end-September in slightly better form — but earnings plummeted from the previous year as the US fish meal and fish oil subsidiary struggled with lower prices.
Most disappointing, arguably, was the decision to skip the final dividend payout.
At the time CEO Francois Kuttel — who has since stepped down to head US associate Westbank Fishing — explained that the weaker profit performance relative to the level of gearing in the company prompted a decision to conserve cash by forgoing the final dividend payment.
But Oceana did set a target of resuming dividends in the 2018 financial year.
For the record, Oceana’s cash generated from operations in the year to end-September increased to R1.7bn (2016: R1.6bn) — helped enormously by a R656m improvement in working capital utilisation that offset lower operating profit.
At the end of September Oceana was still swimming in cash balances of over R1.2bn with almost R750m held in dollar denominated accounts. In addition, Oceana’s balance sheet showed net debt stood at R2.9bn (2016: R3.4bn) with roughly R949m denominated in dollars. The net debt to Ebitda ratio was 2.4 compared with 1.7 the previous financial year.
With the well reinforced balance sheet and cash flow attributes in mind, the recent trading statement should give
“IM suspects that Oceana is on the lookout for offshore acquisitions and aquaculture opportunities
some comfort that Oceana is heading for less choppy waters this financial year.
Oceana has indicated basic headline earnings for the six months ended March will increase by 55%-65% to between 300c and 320c/share. If we add that to the roughly 200c/share earned in the second half of the past financial year we can place Oceana on a forward earnings multiple of around 16 — which is a fairly modest rating for a business with a superb long-term profit track record.
Oceana indicated the increase in interim earnings was attributable mainly to the release of $13m deferred taxation in Daybrook following the reduction in the federal corporate tax rate in the US from 35% to 21%.
Oceana said the operating profit before associate and joint venture income and fair value adjustments was expected to increase between 5% and 12%.
This increase, Oceana, said, was attributable largely to improvements in the canned fish (Lucky Star) and horse mackerel and hake segments — offset by a decline in US fishmeal and fish oil earnings.
Encouragingly, the solid performance of the Lucky Star canned fish segment was driven by increased sales volumes and improved margins owing to lower raw material and logistics costs.
Horse mackerel and hake earnings benefited from increased volumes due to improved vessel utilisation and good catch rates.
The Daybrook operating results were hampered by the lag effect of lower pricing contracted during the latter part of 2017 and lower fish oil sales volumes due to a reduced oil yield in the 2017 fishing season.
Daybrook’s performance in the second half of the financial year, IM suspects, could be more convincing — and put to rest worries that Oceana overpaid for this international niche.
IM also suspects the skipped final dividend may indicate that Oceana — which is trying to lessen the impact of the vagaries of the long-term fishing quota awards — is seriously on the lookout for offshore acquisitions and aquaculture opportunities.
In terms of aquaculture — which is not subject to the same quota award system as the mainstream fishing sector — there are plenty of opportunities for Oceana.
As regards further global ambitions, it could be argued that with former CEO Kuttel now based in the US, Oceana has a scout who is capable of navigating international waters in search of new deals.
For the investor willing to look past a couple of shortterm squalls, it might be the right time to start hooking Oceana shares.