This could be the catch of the season
IM cannot review Oceana Group without acknowledging the soap opera at the company over the past nine months. This caused the share price to slide 23% to a low of 4,781c by March.
The delay in the FY2021 results to September, due to the investigation of a whistleblower’s claims regarding US fishmeal subsidiary Daybrook, morphed into a wider probe.
In February 2022 the CFO was suspended. Then, as preliminary results kept being delayed, weeks later the CEO resigned. The company secretary left in March.
The forensic investigation into Daybrook eventually detailed no fraud or monetary loss, but it did show an obscure $4.4m accounting charge, relating to the acquisition in 2015, that had to be put through. The market felt relieved there was no financial impropriety but many questions remained as to what was going on.
Then auditor PwC quit in May, days before the interim results. The suspended CFO’s services were terminated on the same day. Oceana wanted to put an end to events that had shaken the business.
A new CEO, Neville Brink, was hastily appointed ahead of delayed results. Brink, who had managed Oceana’s lobster and calamari fishing divisions as well as Blue Continent Products, is a 27-year fishing veteran. Ralph Buddle was appointed as CFO. An Oceana outsider, he brings a wealth of fast-moving consumer goods experience to the role. Both have been welcomed by the market, keen for someone to steady the ship.
Oceana chair Mustaq Brey bravely wrote an opinion piece in Business Day, seeking to clear up the tittletattle. From IM’s perspective, Brey lifted the fishy whiff that has hung over Oceana, by saying some miscreants had flouted internal policies and had left the company. He insisted that the businesses remains sound.
Operationally, Oceana had a tough FY2021 and a more challenging H1 2022.
FY2021 results saw an 8% drop in revenue to R7.63bn, operating profit fell 1% to R1.2bn and headline earnings per share (HEPS) fell 12% to 550c a share with a 9% cut in dividend to 358c a share.
Much of this decline was from Lucky Star canned fish, due to problems stemming from the civil unrest in 2021 and the inability to fully supply the market. Profit slipped 14%, with Lucky Star usually contributing 50% of revenue and profit. Daybrook also saw a slide of 44% on poor fishing conditions.
Oceana told the market that interim results to March 2022 would be dire, falling between 46% and 56%.
Recent H1 2022 results saw HEPS dive 51% to 126.4c a share, with all divisions slumping: canned fish (-18%), US fishmeal (-38%), fishing (-52%) and cold storage
(-47%). Overall operating profit slid 37% to R353m.
This was anticipated by the market and because much of the drama was seen as being in the past, and because interim results highlighted expectations of a much stronger second half, Oceana rallied 5.5% to 5,639c a share at the time of writing.
Not all has been sour for Oceana. In the long-term fishing rights process it did not lose material tonnage but gained 0.5% in hake, with a 2.9% trim in anchovy and a 2.9% improvement in lobster.
Both Sea Harvest and I&J saw a 4.3% trim in hake.
The production and supply problems at Lucky Star business have abated and there has been robust growth in sales, with consumers seeing canned fish as an affordable protein meal. Oceana now has the product to supply lost volumes and sales to date, IM believes, have exceeded expectations.
Lucky Star is a strong brand with excellent consumer recognition.
Oceana is considering brand extension and launching complementary products to capitalise on that.
Fishing in the US is under way. IM understands that catch rates are well ahead of the previous season. Oil yield has also improved and demand for fishmeal remains strong, especially from the US pet food segment. Daybrook, after two years of disappointing results, could surprise the market on the upside in the second half and into FY2023.
Prospects for global fishing are looking good. The sanctions on Russia have excluded the fifth-biggest white fish exporter and 2.8Mt have been withdrawn from global supply.
Prices of white fish are rising fast, with cod, for example, up 30% since sanctions were imposed. Oceana is enjoying higher export prices and demand for product from new markets, though the rand’s recent strength alongside the higher diesel price will take some sheen off sector results.
Strong global demand for fish, a rebound in demand for Lucky Star and a recovering Daybrook will offset some of the soaring diesel price. However, the outlook for fishing stocks and Oceana are far better than the general food producer sector, which has been battered by higher inflationary costs and an inability to fully recover margin squeeze.
With a better second half ahead, Oceana’s problems apparently drifting away on the breeze and a low share price, IM believes Oceana could be the “catch of the day” in the fishing sector. We place a buy on the stock at 5,639c with a target of 7,200c.