Oceana: Tiny player takes on the big fish
The JSE will see a second fishing company docking when Premier Fishing – which is being spun out of African Empowerment Equity Investments (AEEI) – lists in February.
At the time of writing, PremFish had just embarked on a road show to introduce the company to institutional investors. But more importantly, perhaps, is that PremFish’s listing initiative coincided with the release of year-end results from giant fishing conglomerate Oceana, which has Tiger Brands and empowerment company Brimstone Investment Corp as anchor shareholders.
Oceana put out a stunning set of results, with all divisions – particularly the Lucky Star canned pilchards and the recently acquired Louisiana-based Daybrook fishmeal and fish oil operations – driving the bottom line. The well-reinforced margins and surging cash flows prompted Oceana’s directors to hike the full-year dividend payment by an enviable 28% to 469c/share.
Based purely on fundamentals, Oceana’s results would be ranked as the most nutritious for investors in what has largely been an unappetising JSE food sector of late.
The market, however, has not rushed to stock up on Oceana. The share – at R116 at the time of writing – is midway between the 12-month high and low, reflecting a trailing multiple of around 16.5 times. The earnings multiple is slightly lower than what the market tags onto the three beefy food sector stalwarts, Tiger Brands, AVI and Pioneer, but well below the multiples accorded to "growth-by-acquisition" counter Rhodes Food Group.
The muted market reaction to Oceana’s year to end-September results might have AEEI fretting about its plans to cast off PremFish — particularly since guidance provided by Oceana CEO Francois Kuttel around financial 2017 was essentially a prediction of more of the same in terms of earnings growth.
Then again, the issues that might be hampering sentiment at Oceana might very well highlight the strategic strengths that AEEI has been highlighting at PremFish.
Crunching the numbers presented in PremFish’s road show document is a fascinating exercise — especially remembering that the Financial Mail recently argued that the R1.6bn valuation that AEEI directors inferred for PremFish might be on the high side.
Based on growth assumptions for the year to end-August 2017, AEEI is pencilling in a listing price of 500c/share after raising R635m in a prelisting share issue.
PremFish is expected to post profit after tax of R77m and R117m in the next two financial years: earnings of 35.5c/share and 41.2c/share respectively. That means PremFish’s inferred 500c/share listing price is based on forward earnings multiples of 14 times and 12 times. The market capitalisation would stand at R1.4bn.
That would seem reasonable for a cash-generative and lowly geared counter in the food sector. But PremFish is tiny by food sector standards, and less than a 10th of the size of Oceana, which generates revenues of more than R8bn/year. Unlike Oceana — which owns best-selling Lucky Star canned pilchards and a spread of operations based on species and geography — PremFish has no iconic food brands and a significantly smaller scale of operations revolving around South Coast and West Coast lobster, farmed abalone, and slivers of the hake, pelagic fish and squid sectors. There are plans to build a presence in the fishmeal and pilchard canning segments, which could be game changers in the longer term.
Initial feedback from the investment community around PremFish’s listing — generally speaking — shows a level of intrigue with proceedings, but an overriding contention that the listing might lack the critical mass to attract serious market players.
Still, strong attributes might encourage some investors to favour PremFish as a niche investment. These would include a niche, rand hedge product offering with high margins (abalone and lobster — both exported), consistent profits and high cash generation as well as operations running around 60% capacity without further capital expenditure requirements.
There is an underlying hint that if a more attractive price is dangled over PremFish scrip there could be takers among the boutique asset managers.
Aside from its consistent historic financial performance over the past five years, PremFish is understandably bandying about its empowerment credentials as a big factor in securing high(er) allocations in various fish species as well as its ability to acquire other less-empowered fishing entities.
There’s little doubt that when catch allocations are reviewed in 2020 there could be large changes — possibly involving spreading catches to smaller community-based fishing companies. Oceana, though making commendable efforts in terms of involving its workforce in a lucrative empowerment scheme, may be a little vulnerable in the 2020 allocations if Tiger Brands remains its largest shareholder.
Recently, Oceana lost a chunk of its horse mackerel allocation, with PremFish being one of the beneficiaries. It seems Oceana — which endured long battles to finally land deals with Lusitania and Foodcorp – might concentrate its future corporate action on offshore opportunities, particularly since the acquisition of Daybrook has worked out better than expected. Kuttel confirmed that acquisition activity by Oceana would not be "constrained by any geography".
On the other hand, ongoing rumours suggest PremFish could hook a significant acquisition shortly after listing — with the Saldanha Group (controlled by the Silverman family) being cited as the possible target.
A portion of the cash raised at listing will be earmarked for a marked expansion of PremFish’s abalone farms, but the bulk of the fresh capital can be mobilised for acquisitions.
The bottom line is that PremFish will need to convince the market that it offers an alternative to Oceana, which will be difficult to displace as the default order for seafood-inclined punters.
Oceana has also made certain to talk down the perceived risks of losing slabs of its fishing rights allocations. Kuttel told investors last week that Oceana was reassuringly diversified, with one third of its business coming from Lucky Star canned pilchards and its cold storage business and another third from the US-based Daybrook, where long-term fishing rights are in place. Of the remaining third — the fishing operations in Africa — only around 20% of this segment was affected by fishing rights in SA.
All things considered, AEEI — if it does not want to founder in Oceana’s large wake — might have to temper its price expectations for Premier Fishing, and perhaps bait the market with more upside by listing on a forward earnings multiple of closer to 10 times.