Worth watching in un­cer­tain times

Financial Mail - Investors Monthly - - Analysis - An­thony Clark

Sea Har­vest, best known for its frozen seafood, seems to be mor­ph­ing into a gen­eral foods busi­ness.

Vis­its to the re­cently ac­quired Viking fish­ing and Ladi­smith Cheese sites high­lighted cost-con­scious, ef­fi­cient man­age­ment, busi­nesses on the brink of ex­pan­sion op­por

tu­ni­ties that will aid Sea Har­vest’s earn­ings. With fur­ther ac­qui­si­tions, the group could be repo­si­tioned as a mid-cap BEE-owned food counter.

Sea Har­vest listed in April 2017 at R12.50 a share, rais­ing R1.3bn. Since the list­ing, funds were used to ac­quire Viking Fish­ing, along­side a 51% stake in Viking aqua­cul­ture, for R885m in June 2017. In Au­gust 2018 Sea Har­vest paid R573m for Ladi­smith Cheese, an un­ex­pected shift away from its fish­ing heart­land. It is also ac­quir­ing the mi­nor­ity in­ter­est in its Aus­tralian fish­ing di­vi­sion, Mareter­ram, for R163m.

Rev­enue for 2018 financial rose 21% to R2.5bn with a rise of 16% in op­er­at­ing profit to R389m. Given the higher number of shares in issue, head­line earn­ings rose 4% to 112c a share and a 40c div­i­dend was de­clared.

On a one-year view Sea Har­vest has risen 14% in share price, re­flect­ing a his­toric price-earn­ings mul­ti­ple of 12.7.

A re­cent Viking site visit showed an en­trepreneur-op­er­ated busi­ness which runs on thrifty lines. It seems mar­gins in some ar­eas are dou­ble that of com­par­a­tive Sea Har­vest di­vi­sions. It op­er­ates 30 ves­sels and pro­cesses hake, horse mack­erel and other pelagic species. The promising Viking aqua­cul­ture farms abalone, oys­ters, mus­sels and trout.

The Viking fish­ing trans­ac­tion com­ple­ments Sea Har­vest, which is mainly in­volved in hake and frozen fish pro­cess­ing. What’s more, Sea Har­vest’s strong level 1 BBBEE cre­den­tials as­sist Viking and the greater group ahead of the new 15-year fish­ing rights al­lo­ca­tion process ex­pected in 2020. In this process the gov­ern­ment is seek­ing to bring greater em­pow­er­ment and trans­for­ma­tion to this sec­tor.

Viking aqua­cul­ture is in the throes of a ma­jor ex­pan­sion of its abalone di­vi­sion which, by the early 2020s, aims to pro­duce 1,000t a year — all for ex­port. This helps Sea Har­vest by ex­tend­ing ex­port rev­enues and di­ver­si­fy­ing group rev­enue, mov­ing out of the area of gov­ern­ment-reg­u­lated sea catches. In its most re­cent re­port­ing pe­riod the aqua­cul­ture busi­ness man­aged rev­enue of R54m and made R3m in profit. Man­age­ment is fore­cast­ing the J-curve will start to kick in prof­its in the com­ing years as the plants ramp up pro­duc­tion.

Sea Har­vest has been court­ing Ladi­smith Cheese for sev­eral years, with the dairy busi­ness ini­tially con­tact­ing Brim­stone as a BEE part­ner.

Ladi­smith’s main prod­ucts are cheese, milk pow­ders and but­ter with a high em­pha­sis on the bulk mar­ket. The branded re­tail side has a grow­ing mar­ket share in cheese and but­ter.

Ladi­smith (like Viking) is en­tre­pre­neur­ial with a firm grip on costs and ef­fi­cien­cies.

Both Ladi­smith and Viking will re­main stand­alone di­vi­sions where Sea Har­vest can aid their growth via strat­egy, ac­cess to cap­i­tal and ex­pan­sion of their prod­uct lines.

The non-seafood busi­ness has been housed in a new Sea Har­vest di­vi­sion called Cape Har­vest. Once the con­sol­i­da­tion pe­riod for the var­i­ous deals has set­tled, IM be­lieves fur­ther ac­qui­si­tions will be made in the foods space.

With an abil­ity to part­ner ma­jor­ity share­holder Brim­stone for deal flow and fund­ing, Sea Har­vest is a counter to watch in the con­sol­i­dat­ing do­mes­tic food sec­tor.

Sea Har­vest’s BBBEE sta­tus means it is well po­si­tioned to main­tain its to­tal al­low­able catch (TAC) li­cences after the new 2020 long-term fish­ing rights process. That eases some of the uncer­tainty dog­ging other fish­ing busi­nesses in the run-up to the 2020 fish­ing rights awards.

It might be worth mon­i­tor­ing the share price of Sea Har­vest. It is, at the time of writ­ing, about 11% off its re­cent highs. IM would rec­om­mend us­ing any weak­ness in the counter to buy stock for the growth path — which is clearly laid out and looks set to ex­pand markedly over time.

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