TRADE OF THE MONTH

Seas may be rough, but Sea Harvest looks resilient

“Both Oceana and Sea Harvest reported singledigit increases in revenue and profit, and headline EPS for the six months were flat like-forlike

IM has long favoured the fishing sector. When the seas are good and quotas are kind, good sector profits can be made.

But now the seas are choppy because of the government’s delays to the new 15year fishing rights allocation process. The allocation was due in 2020, but may now only be enacted in early 2022.

These quotas are crucial in the key money-making species such as hake, squid and horse mackerel.

The big three integrated fishing companies of Oceana, Sea Harvest and I&J (housed in AVI) are the leading players.

Any loss of material quota will affect each of them, which is why they all have diversified their interests and enacted sizable BEE transactions over the past years to try to protect their allocations in the renewal process.

There will be losers and the market seems to believe that the government wishes to support the most transformed entities and widen the sector net to bring more players into the mix.

The two main JSE-listed fishing entities are Oceana, with a R7.7bn market capitalisation, and Sea Harvest, worth R4.1bn. Both have empowerment provided by Brimstone, which controls 26% of Oceana and 55% of Sea Harvest.

Sea Harvest has outperformed Oceana on a relative share price basis for the past three, six and 12 months. IM expects that to continue for the near term, hence our long on Sea Harvest and short on Oceana.

Oceana is not a bad company, but on a relative call we prefer the business mix and combination of assets within Sea Harvest.

Oceana has its own problems with high offshore dollardenominated debt from its 2015 acquisition of US fishmeal business Daybrook, which has been problematic. Its core domestic fishing business, smaller now in the mix, is outshone by the stellar performance of its Lucky Star canned fish brands.

Sea Harvest has grown rapidly since its JSE listing in 2017, with sizable deals to bulk up its fishing interests via Viking and diversifying into good interests via Ladismith Cheese and latterly talking out 46% minorities in its Australian Mareterram unit.

Both counters have recently been through reporting season, with Oceana reporting interim results to March and Sea Harvest interim to June.

This is important, as Covid19 came into play in late March, which had an impact on the sector due the effect of the lockdown on logistics, supply chains and the economy. Oceana will have more of a Covid-19 impact in its second half than Sea Harvest, given that Sea Harvest was three months into the pandemic when its June interim results were released.

For their respective periods, the benefits of a weak rand aided, which will be a greater kicker in the second half allied to materially lower fuel costs due to the slump in the international oil price. Fuel is a significant cost component for both fishing entities.

Both Oceana and Sea Harvest reported single-digit increases in revenue and profit, and headline EPS for the six months were flat like-for-like. Not a bad performance.

Both counters had issues that affected recent results. The closure of certain international markets and borders created logistics issues that hampered Sea Harvest’s aquaculture business, leading to sizable losses. This was offset by a strong performance from fishing and the Ladismith food interests. As the borders reopen, especially in Asia, demand for abalone should resume, aiding Sea Harvest into its second half. The weaker rand will also help both counters.

Oceana has had a mixed half-year. Canned fish and cold storage performed well, while US fishmeal disappointed again. The weak rand is a double-edged sword for Oceana, given its debt load for Daybrook and material import of pilchards for Lucky Star, but this is somewhat offset by its large exports business.

Some Covid-19 effects will hit Oceana in parts of its second half. But not all is gloomy. Sales of affordable protein domestically during the pandemic will help Lucky Star, and international fishmeal prices have started to tick up after some weakness.

Though domestic fishing is smaller in Oceana’s business mix than in Sea Harvest’s, given its size any concerns over loss of quota will just affect sentiment. Oceana has underperformed and could rally, but IM remains observant to what will become of the Brimstone stake in Oceana after the fishing rights allocation process. Brimstone’s flag is probably more firmly nailed to the Sea Harvest mast than to Oceana’s.

IM prefers Sea Harvest because, despite the significant headwinds associated with the pandemic, the company reported resilient results, highlighting the strength of the business model and the benefit of the move into food via Ladismith.

With aquaculture recovery to come, benefits from cost rationalisation in the Australian unit and continued promise in the fishing interests from past deals, the counter remains our favoured long-term sector play. ●