Smooth sailing with this fishing counter

Empowered fishing and foods stock Sea Harvest, 54% owned by Brimstone, has been favoured by IM for some time, and recently reported excellent results.

Much of the success of Sea Harvest was laid down in 2018 when it acquired two businesses that would enhance its standing and earnings.

In June 2018, Sea Harvest acquired, for R885m, Viking Fishing alongside a stake in Viking Aquaculture. In August 2018 it added dairy products business Ladismith Cheese for R527m to augment and expand the new Cape Harvest Foods division. With a market value of R4.2bn, Sea Harvest is a midcap foods stock and has performed remarkably well on a relative basis over one year.

The JSE mid-cap index has declined 9.3% on a one-year view and the JSE food producers index has fallen 17.4%. Sea Harvest has given a positive 2.2% return.

Much of this has to do with the benefit to earnings expectations of Viking and Ladismith and the low liquidity and tightly held nature of the counter.

Recent year-end results to December 2019 saw a healthy increase year on year in all reporting metrics as the full inclusion of Viking Fishing and Ladismith allied to a 10% increase in the total allowable catch of hake.

Revenue rose 54% to near R4bn with a similar percentage rise in operating profit to R600m. Margin was constant at 15%. Higher numbers of shares in issue and a jump in finance cost saw headline earnings rise 48% to R410m, leading to headline EPS of 148.5c, an increase of 33%. A 45c final dividend with a 5c special took the total dividend for the year to 100c a share.

The increase in the hake allocation, where Sea Harvest is a major player, and the annualised effect of Viking Fishing saw overall fishing revenue rise 23% to R2.47bn and a 45% rise in operating profit to R527m as the increased hake quota and superior margins of Viking blended into significant uplift in the fishing division.

There were pockets of weakness which cost Sea Harvest the equivalent of 11c per share in earnings: Viking Aquaculture slipped into losses and there were lower catch rates of prawns in the softened Australian unit.

The full-year inclusion of Ladismith bought R990m of additional revenue to Sea Harvest and a R96m operating profit. Good sector and volume gains in its key categories of cheese and butter were seen in FY2019 and expansion and the addiction of complementary products are under way for 2020.

On these results Sea Harvest, based on the share price at the time of writing of R14.10, is on a historic p:e of 9.5 times and a dividend yield of 7%.

Fishing still dominates, with the various divisions and product categories contributing 75% of revenue, and dairy and other products the remaining 25%.

Key issues of interest for investors in the coming year or two will be a continued reduction in acquisitive debt, now below R1bn. The resultant finance cost savings and the stabilisation of shares in issue alongside confidence from management that Sea Harvest can continue to benefit from good growth in fisheries and foods should lead to another pleasing set of results.

The big whale in the room for all fishing stocks is the delay and extension in the long-term fishing rights allocation. There’s some uncertainty.

Sea Harvest remains well placed with a superior empowerment score. This is paramount to retain total allowable catch allocation post the rollover of the current “under review” allocation.

Until the rights allocation issue is settled I cannot see Sea Harvest undertaking any material deals in the foods sector.

Sea Harvest is IM’s preferred fishing sector play and one of our top counters in the mid-cap food sector given its attractive p:e, quality strategy and earnings growth trajectory. At R14.10 we place a buy on the counter with a fair value of R18 in the medium term. ●