Worth watching in uncertain times

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.