CHOPPY WATERS
Oceana Group share price (c) Weekly
more consistent showing by
Oceana’s local operations, revolving around the bestselling Lucky Star canned fish brand. In its first year of operation, Daybrook produced a reassuring operating profit of R668m. But this sank to as low as
R237m in 2021.
Brey counters that Daybrook, which offered the group meaningful geographic and product diversity, has been earnings accretive despite weather-related challenges and Covid disruptions.
On paper, Brey might have a point. Since Oceana bought it, Daybrook has produced almost R2.5bn in operating profit which might justify the acquisition.
The catch is that Oceana raised debt alongside a rights issue when it acquired Daybrook. That debt has weighed heavily on returns in recent years, though it would be unfair not to credit Oceana’s executives for working to bring that down.
In 2016 Oceana managed after-interest profit of R283m, but this fell to R18m in 2017 and R45m in 2021 (when the interest bill hit R192m). The three years from 2018 to the end of 2020 were also modest, with operating profit collectively totalling R256m (after interest). In total, Oceana has paid close to R1.9bn in interest over six years.
Says Mayers: “It is also instructive to note that Oceana had incurred little or no interest costs up until the time of the Daybrook acquisition. It’s sad that this acquisition should have detracted from the company’s satisfactory local performance.”
Mayers points out that in 2016 Daybrook contributed a chunky 21% of group profits, but this had declined to just 4.5% in the year to end-September 2021.
“It is clear the seller knew a lot more about this business than the buyer. For one, was the weather in the Gulf of Mexico not taken into consideration when hurricanes are an ever-present threat during the fishing season?”
Oceana argues that Mayer’s analysis assumed that all interest paid by Oceana is attributed to the Daybrook acquisition.
“This is factually incorrect. Oceana also acquired Foodcorp in 2014 for an effective R315m. A portion of Oceana’s interest bill is attributable to funding its working capital, and in particular, the Lucky Star supply chain of frozen fish — which requires significant levels of stock to be built up and funded … Based on our calculation, at least R490m interest over the period analysed is attributable to these two factors.” Oceana estimates that Daybrook had contributed after-interest earnings over the period (including the 2015 earnings contribution of R180m) of R1.3bn.
Arguably, Oceana shareholders might have been better off without Daybrook — at least in terms of dividends, considering the cash-generative local operations and an ungeared balance sheet.
As for Kuttel’s involvement, Mayers asked: “Did Mr Kuttel persuade the board into believing that the offshore diversification was necessary and that a weakening rand would justify the acquisition, while it may have been in his personal best interests?”
Not so, said Oceana executives.
“The acquisition met the group’s strategic intent for geographic and product diversification. Mr Kuttel had no personal conflicts of interest at the time of the Daybrook acquisition. All related-party precautions were taken when Mr Kuttel obtained a 75% interest in fish vessel operating company Westbank in 2018.” Brey stressed that the investment case for Daybrook was based on historic catch rates — which included weather disruptions.
What may help soothe shareholder jitters is a more convincing profit performance from Daybrook
in the financial year ahead, a further culling of debt and evidence that further offshore excursions will be selective to not strain the balance sheet.
In terms of performance for the halfyear to end-March, due for publication shortly, Brey indicated that the new fishing season for Daybrook got off to a brisk start with catches above the five-, 10- and 20year average.
But he cautioned that weather remained a risk factor.
According to Brey, Daybrook’s plant can now process 900-million fish a year. Skilled Mexican workers have also returned to work after Covid disruptions. “The source [Gulf menhaden] is highly sustainable, while fish oil and fish meal prices remain strong and global demand continues to increase.”
Mayers admits to the FM that 2022 could be a good year for Daybrook. “The weather has looked close to perfect since the fishing season started and if the good weather continues, Daybrook could well be a game changer for Oceana this year.”
Oceana is trading at a high single-digit earnings multiple (on a trailing and forward basis), which not only lags the overall food sector on the JSE but also dismisses the group’s solid long-term track record.
It is difficult to shut out the recent noise. But investors able to hold a steady eye on the longer-term horizon might consider casting for Oceana scrip at current levels, last seen in 2013.