Here’s a catch worth waiting for

A weaker rand, strong demand and higher prices should benefit Sea Harvest

I’ve covered the fishing sector for decades. For years, only Oceana Holdings was listed; then, in 2017, there was an IPO flurry ahead of the long-term fishing rights allocation process, known as Frap 2020. Both Sea Harvest and Premier Fishing listed in the first quarter of 2017. Since listing, both have been seasick, with Sea Harvest declining 16% from its R12.50 listing price and Premier slumping 70% from its 450c offer price.

Sea Harvest’s market cap is R3.1bn and Premier’s R351m. I won’t spend too much time on Premier, as a cash offer to buy out minorities at 160c a share has been made by its majority shareholder, investment holding company African Equity Empowerment Investments (AEEI).

AEEI has been mired in controversy for some time, and while Premier has interesting assets in abalone, lobster and squid, its financial and managerial performance has been dire and the stock has been a pariah to the institutional market.

Sea Harvest looks tastier. The company had a torrid 2022, when it lost 5% in the Frap allocation and another 5% from a cut in the annual hake total allowable catch (TAC) amount. Losing 10% of your main business in one swoop is difficult to adjust to quickly. That was the start of

Sea Harvest’s choppy 2022.

Then, in February, the Russian war against Ukraine started and energy costs, a significant factor in fishing, soared. The war also resulted in Russian white fish exports being shunned, and it forced global prices higher some comfort to soaring operational costs.

The increased oil costs and 10% cut in the catch took their toll despite Sea Harvest’s diverse fisheries base in Australia and its South African food and dairy business.

The stock recently issued a profit warning stating that results to December 2022 would show headline earnings per share (HEPS) decline 32%-35% from the prior year’s 157c a share to a mid-range of 104c a share.

The counter has been on a slide for months as the market expected weak results. At R10.40, Sea Harvest is down 34% over 12 months and is bouncing off a historic low. Its current p:e of 6.6 will pop to 10 on indifferent FY2022 results. This may not sound exciting, but call me a sardine I see an opportunity in FY2023 and material HEPS recovery. I rate Sea Harvest as cheap as chips.

I’ve hooked some good gains in the past months from the fishing sector. When the market was preoccupied with the Oceana soap opera involving an internal audit and policies investigation alongside a revolving door of top management late in 2021 and into 2022, I saw an opportunity. It’s turned into my sector lucky star.

As I looked past the noise, Oceana was performing well, operationally. I issued a buy in Q3 2022 in a range of R48R56, with a target of R72. Oceana is trading at R71.20 and recently hit a 52-week high. With some good protein made on Oceana, I look at Sea Harvest, which has taken a battering. I see the stock as the new catch in the fishing sector. I still rate Oceana, but the easy money has been made. My target is R80.

I see a much better period ahead for Sea Harvest. Higher oil prices in FY2022 cost the company R240m, or 60c a share. Deal costs for MG

Kailis, acquired in Australia in May 2022 for R783m, were R30m, or 10c a share. These can be seen as one-off costs. Furthermore, a delay in China’s economic reopening hurt Sea Harvest’s abalone export business, but losses have abated on the restructuring of the aquaculture division.

With China reopening and the expected consumer pentup “let’s get out and live again” demand, abalone should swing into profit for FY2023. The 2023 hake TAC is expected to rise 5%, aiding

Sea Harvest alongside the overall sector. A materially weaker rand, firm overseas white fish demand and rising global prices all look favourable for the domestic fishing sector and Sea Harvest.

The company should also experience earnings benefits from the MG Kailis deal and the consolidation of its Australian assets. Profits of R60m could be in the net.

The domestic Cape Harvest Foods is back on form, with good consumer demand for dairy. Factor in lower operating costs from oil, likeon-like down from $115 to $75 a barrel, and Sea Harvest at R10.40 could just be the dish of the day for investors who look through the travails of FY2022.

I rate the stock a buy, with a target of R16.

Sea Harvest should also experience earnings benefits from the MG Kailis deal and the consolidation of its Australian assets. Profits of R60m could be in the net