Lethargic, but a good haul is possible soon

ea Harvest is an enigma. A glance at the share price chart highlights the range-bound trading of the stock, which has hovered between R13.00 and R14.00 since its listing.

Part of this listlessness is illiquidity, as stalwart empowerment firm Brimstone owns 54% of Sea Harvest. This anchors the fishing stock’s empowerment credentials, which are critical to gain and secure fishing rights, but has led to tight trading volumes since listing.

The drawn-out saga of Frap (fishing rights allocation process) over the past two years has led to Frap fatigue among the fishing counters and the sector’s investors.

Frap is important, as it involves 15-year fishing rights in various species to the licence holder, guaranteeing stability and revenues.

The big total allowable catch (TAC) rights holders, such as Sea Harvest, Oceana Holdings and I&J (held within food grouping AVI), have all been affected by Frap.

The biggest and most lucrative TAC relates to hake and horse mackerel. Hake is important to Sea Harvest, which ranks as the market leader in frozen hake products.

Frap was supposed to be concluded by the end of 2020 but it has been mired in controversy and misadministration by a succession of ministers.

Minister Barbara Creecy has restarted the process, and the fishing sector has commended her transparency and ethical dealings with the sector.

The delay in Frap process is now two years, and there is a

Stight timeline to get the process finalised by the end of 2021. The industry believes it may happen only in 2022, adding further uncertainty over the sector.

This Frap limbo, allied to tight liquidity, will remain the main impediment to Sea Harvest’s share price. But it could ease in 2022 when Frap is concluded.

Despite respectable earnings since listing and diversification into a broader food strategy via Cape Harvest Foods, Sea Harvest might remain in the doldrums for the short term.

IM has recommended the counter, both in 2020 and in 2021, but the share price has been lethargic.

In the year to date, despite good interim results, the counter is down 13%. The halfyear numbers were generally ahead of market expectations. Overall group revenue rose 5% to R2.1bn, with fishing ahead 2% and foods by 10%.

The real push to profits was stronger pricing in the fishing segment, where profits rose 25% to R316m. Export markets were buoyant.

Ongoing Covid-related issues within aquaculture brought about losses of R37m. Endeavours are under way to exit the main loss-making segments of mussels and salmon.

At the end of the 2020 financial year management seemed confident that aquaculture’s losses would abate and a break-even would occur in the 2021 financial year. That is now unlikely, which dampens the mood on earnings growth.

Fortunately, apart from aquaculture there are other earnings growth drivers within Sea Harvest for the second half of 2021.

Cape Harvest Foods, which has the Ladismith cheese operations as its main business, had a flat period despite fair revenue growth. Profits were R39m. They should have been 10% higher. Management states that timing issues, product mix and an inability to meet market demand hit the unit. But a strong rebound is expected in the second half.

Sea Harvest has announced it has acquired butter and cheese business Mooivallei for R45m.

This will cause cheese capacity to rise by 40% and milk uptake by 15% — alleviating supply issues at Ladismith. The deal will optimise the Ladismith

powder plant, which was recently expanded, and provide more butter to the market.

IM expects further bolt-on deals to be announced, but the bigger deals will most likely only be concluded after Frap has been concluded.

Management says the good fishing results reported in the first half should be repeated in the second half.

Demand for the product is strong, as is pricing. Sea Harvest has again judiciously hedged its fishing main cost of diesel and much of the currency to mid- to late 2022.

Sea Harvest is on a solid trajectory. Should Frap be concluded with minimal loss of TAC, IM believes the market will begin to look favourably again on the fishing sector.

On a consensus earnings for the 2021 financial year, the Sea Harvest p:e is roughly eight.

IM continues to recommend the stock and the fishing counters as preferred plays in the food sector.

At around R13, IM maintains a buy recommendation, with a R20 target price. ●

“There are other earnings growth drivers for the second half of 2021