Oceana undervalued – analysts

The group’s share price has fallen 15% over two years and 5% in the past year. But it has picked up in the past three months, gaining 4.2% to R56.49, and the experts say there’s more recovery to come. By

Simply Wall Street says Oceana shares are trading at more than 20% below the fair value estimate of R73.31. Analyst Anthony Clarke of Small Talk Daily Research agrees, although he notes there was some disquiet in the market over the valuation of Daybrook Fisheries, bearing in mind what was paid for it many moons ago.

Chief financial officer Ralph Buddle says the company reverted to an equity accounting treatment of Westbank, after a “rigorous process” with independent accounting experts Kim Bromfield and Garth Coppin.

“Mazars have evaluated this and issued an unmodified review opinion, so we are back to the Deloitte position we had in 2020. The bottom line is that it has no impact on net profit or net asset value, but we believe it is a fairer and better reflection of the way in which we account for our associate,” Buddle told analysts and shareholders in a results webcast this week.

Clarke is dismissive of the overall effect of the change.

“If you strip out Daybrook at present value, the remainder of Oceana is in the books for less than R2-billion, which is crazy cheap. But that’s academic because there are no plans to unbundle Daybrook,” he says.

He indicates that Oceana plans further fishmeal acquisitions internationally.

Though Lucky Star had a tough second half, it was doing well, with extensions into canned meats and other value products.

“I think the share price has reacted favourably. I had a buy on the stock at R46 to R48 because the stock had been beaten down on the back of the scandals (earlier this year). I looked through all of that because the inherent nature of the business remains strong.

“The total allowable catch (TAC) is set in stone for 15 years. Oceana didn’t lose TAC in the last allocation, earlier this year, and the new TAC allocation for 2023 in hake should increase by 5%.

“So, unlike Sea Harvest and I&J, Oceana will be a netnet beneficiary of the changes in long-term fishing allocations, which adds to the inherent value of the company,” says Clarke.

“To me, Oceana remains incredibly cheap at R56. I have a R72 valuation. Once the market starts looking past noise, refocusing of the business and a few results, the ‘sins of the past’, if I can put it that way, will be forgotten by the market and they will look at inherent valuation and business prospects.

“Oceana remains one of my top picks in the food producer sector. Fishing is a fairly resilient business and internationally the product is in demand. There are constraints to the catch. It may take another one or two reporting seasons for the market to wake up and smell the sardines. Then the share price will start to move,” he says.

The optimism might be a result of renewed confidence since the appointment of chief executive Neville Brink in June, after corporate drama.

In the space of a few months, the company’s chief financial officer was suspended and dismissed, the CEO resigned citing personal reasons, publication of financials was delayed, and the external auditor, PwC, resigned, saying communication with the board was not objective or transparent.

Shareholders have taken a hit with a 3% drop in total dividend to 346 cents a share.

However, Brink told shareholders the company had delivered credible results, with three key pillars being Daybrook Fisheries in the US, Lucky Star canned pilchards and the fishmeal business in South Africa.

For the year to September 2022, group revenue from continuing operations grew 12% to R8.1-billion on the back of positive pricing, higher fishmeal and fish oil sales and the benefit of a weaker exchange rate on export and US-dollar-translated revenue. This saw gross margin from continued operations inch up to 30.8% from 30%.

Revenue from operations increased 11% to R8.4-billion, but this includes Commercial Cold Storage, which has been treated as a discontinued operation as Oceana is in the process of selling it for R760-million.

Looking ahead, Brink says higher opening inventory levels of canned fish, fishmeal and oil will benefit performance in 2023.

“A continued weaker rand will support the export and US-dollar-denominated businesses, while higher fuel costs will negatively affect the performance of the deep-sea and midwater trawling units. Demand for low-cost protein is expected to continue to drive sales volumes of canned fish despite constrained consumer environment.”

Brink added that growing the Lucky Star brand into new canned-food categories is a key focus. In the US, projects to enhance raw fish storage capacity and fish oil production technology will be undertaken during the closed season, which commenced on 1 November.