Aquaculture Magazine

5 ASX Stocks to Benefit from the Growth in Aquaculture Production

At the end of January of this year struggling junior gold and copper miner Timpetra Resources faded into history following the acquisition of three complementary aquaculture companies to create a vertically integrated publicly traded company, Murray Cod Australia (MCA).

The initial response from Aussie investors was high but waned as the company’s combined Half Year FY 2016 Financial Results showed a profit loss rising to $775k from the previous year’s loss of $184k.  Here is MCA’s share price performance since listing on the ASX.

Aquaculture, or farm fishing, has an impressive future as overfishing and declining species populations coupled with high operating costs challenge traditional “wild fishery” operations.

The following chart from the Global Aquaculture Alliance (GAA) makes a strong case for investing in quality aquaculture stocks – rising population coupled with rising demand for farmed fish over wild fisheries.

One of the lessons some share market investors learn the hard way is that operating in a sector with strong tailwinds is no guarantee of success.  Murray Cod Australia’s “vertically integrated” business model, controlling farming from hatching to maturing to marketing may remind some of the “Hatch to Dispatch” business model dubbed as the EcoCell System hyped to the market from a one-time up and coming ASX stock, Cell Aquaculture (CAQ).

Cell Aquaculture came on the ASX in 2005, shooting up to an all-time high of $3.50 in a matter of months. Then followed a seemingly never-ending series of disappointments culminating in the company entering voluntary administration, emerging with a “new and improved” business plan.  Here is a ten-year price movement chart for CAQ. 

The new and improved business plan saw the company exiting the aquaculture sector and moving into property development.

Given the appeal of Australia’s freshwater species of Murray Cod, MCA may deserve a spot on your watch list.  In a recent interview with the Finance News Network (FNN) the Executive Chairman of the company highlighted the fact the IPO Prospectus forecasted productive capacity of 90,000 kilos and the company has already reached 300,000. Murray Cod Australia expects to exceed 1 million kilos by 2021 and approach 10 million by 203o.

Whether Murray Cod succeeds or succumbs to the fortunes that befell Cell Aquaculture remains to be seen. There are other aquacultural stocks from which to choose with track records to analyse. 

Tassal Group (TGR) has the best historical performance record while competitor Huon Aquaculture (HUO) has a decided advantage in the near future, according to the analyst community.  Both are primarily in the salmon business, with Huon a relative newcomer to the ASX (2014) while Tassal has been around since 2003.

Tassal’s aquaculture operations are based in Tasmania where the process of creating the company’s fresh, smoked, canned and frozen Atlantic salmon begins.  During the 2000’s the company exported about 15% of its production while struggling to keep up with exploding domestic demand.  About 5 years ago, Tassal management consciously chose to concentrate on the domestic market, a move applauded by the market. Here is how the share price has performed since that decision.

In July of 2015 Tassal expanded its product line through the acquisition of De Costi Seafoods, a purveyor of a wide variety of seafood from prawns to whiting to squid to calamari, as well as salmon now supplied by Tassal.   

Tassal is at present the only aquaculture stock to pay a dividend, with a current yield of 3.8%, fully franked, and a 2-year dividend growth forecast of 15.9%.  Revenue increased from $260 million in FY 2014 to $425 million in FY 2016, while net profit increased from $41 million to $49 million with a slight year over year drop ($1 million) between 205 and 2016.

While Tassal’s domestic market focuses primarily on retailers like Coles and Woolworth’s, its principal rival in the salmon sector – Huon Aquaculture (HUO) – focuses more on the wholesale sector, largely restaurants. Like Tassal, Huon prefers to concentrate on the higher margin, less volatile, domestic market. Huon also farms Ocean Trout.

Huon listed on the ASX in 2014 and reported solid results in its first year as a publicly traded company -- $192 million in revenue with $7 million in net profit. While revenues increased in FY 2016, profit dropped to $3.4 million, a decline of 79% from FY 2015.  Both Tassal and Huon suffered from less than stellar growing conditions and falling prices.  Huon has rebounded strongly, reporting Half Year 2017 Financial Results with profit at $31.4 million, largely due to better weather and higher salmon prices, besting Half Year 2016 results that came in with a loss of $1.3 million.  In addition, the outlook for 2017 stated by management is very strong, with EBITDA (Earnings Before Interest Taxes Depreciation and Amortisation) expected to increase 156%.

In a refreshing side note in an investing environment with high concern over the actions and machinations of some corporate leaders, Huon is a true “Mom and Pop Shop”, run by Peter Bender, his wife Frances, and their son James.  Peter and Frances began the company back in 1986.

Tassal and Huon find themselves at opposite ends of a dispute with the Tasmanian Environmental Protection Agency over environmental conditions and overstocking in Tasmania’s Macquarie Harbor, where both companies have operations.  Huon has filed suit against the EPA with Tassal joining in to support EPA regulations opposed by Huon.

Seafarms Group (SFG) farms prawns.  Unlike its larger salmon-producing rivals in the aquaculture sector, this company is in active pursuit of export markets.  In July of 2016 Seafarms announced the initial shipments of its flagship Crystal Bay Tiger Prawns to approximately 200 seafood outlets in Europe.  Within days of the announcement the stock price soared 80%.  Here is the chart.

Seafarms began its existence as Western Australian Resources Limited, focused on mineral and water resources exploration.  Seeking a new direction in 2011, the company morphed into the current aquaculture producer, Seafarms Group, in 2013 and has interest in a Carbon Services company, CO2 Australia.  CO2’s activities include a variety of services such as reforestation, revegetation, and ecological surveying and monitoring.  The company has revenue generating contracts with the Federal Government.

Seafarms has generated revenues over the past three fiscal years ranging between $23 and $26 million but is still operating at a loss.  However, the company has big plans for the future with its $1.5 billion Project Sea Dragon.  The project is in the very early stages, having received the first round of regulatory approvals. 

The plan is to develop a completely land-based operation, with ponds replacing the pens maintained in harbors and coastal areas by other producers.  In theory, this should ensure consistent, year-round production. Management projects export revenues from the project of $1.7 billion within ten years.  Upon completion Seafarms expects to produce 100,000 tonnes of its other offering, Black Tiger Prawns.  This would be an enormous jump from current production of Crystal Bay Prawns of 1,500 tonnes.

Clean Seas Seafood (CSS) entered the market as Clean Seas Tuna back in 2005 expecting to strike in rich by farming the prized Southern Bluefin Tuna, a gourmet delight used in sushi and sashimi.  Given the demand and the dwindling supply of wild Southern Bluefin Tuna, the massive investment the company made in the early stages of development seemed justified.  Investors flocked to the stock in anticipation of a successful breeding program.  Here is a ten-year chart for Clean Seas.

Despite spending millions, the company was unable to bring its Bluefin Tuna juveniles to maturity.  In late December 2012, the company put its aggressive development efforts towards propagation of Southern Bluefin Tuna on hold in favor of Yellowtail Kingfish propagation.  Initially, the move paid off as shareholders returned to the stock before going cold again.  Here is a five-year price movement chart.

Considering that he company sold no tuna, it is somewhat surprising it was not until a new CEO arrived that the company changed its name to Clean Seas Seafood, from Clean Seas Tuna.  However, the propagation program for Southern Blue Fin Tuna remains, with broodstock in place and plans to attempt another production wave once the company’s newly aggressive marketing of Yellowtail Kingship returns Clean Seas to consistent profitability.  The company lost $9 million in FY 2016.  However, revenues have been steadily increasing, rising from $10 million in FY2014 to $30 million in FY 2016.  

In July of 2016 investors were buoyed by the news Clean Seas had signed a contract with Beston Global Food Company Ltd (BFC) for Kingfish to be distributed in China, Hong Kong, and South Korea, only to be disappointed when the agreement failed.  

On 8 June of this year the company released the welcome news it anticipates doubling its net profit for the second half of FY 2017, from $1.83 million in the second half of 2016 to between $3.5 and $4.5 million.  In addition, the company is looking for new distribution options in Asia. Currently, Clean Seas serves the Australian, European, and US markets.

The final piece of good news was the announcement the company will no longer outsource Kingfish processing, opening its own facility, adding about $1 million in profit, according to the company.

Source: http://www.thebull.com.au/premium/a/67818-5-asx-stocks-to-benefit-from-the-growth-in-aquaculture-production.html

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