Fishing companies: Hitting the high-water mark
Two strong players are emerging to challenge Oceana’s dominance over the local fishing sector
The JSE’s net of fishing stocks is certainly not causing punters to bait their hooks with increased vigour.
While food sector stocks have proved popular with investors over the longer term, the fishing sector has traditionally been regarded as a higher-risk option. High operating costs (especially fuel), regulatory challenges, inclement weather and fickle fishing patterns can mess with catch rates. And then there’s the effect of inevitable currency swings on the revenue line.
Only market leader Oceana — a highly diversified fishing company — has enjoyed the operational balance needed to sail through choppy waters.
But recently listed fishing groups Premier Fishing & Brands (PremFish) and Sea Harvest have also acquitted themselves well in the face of these industry vagaries. Both have delivered in line with prelisting profit promises, but the real X-factor lies in their ability to hook into fishing opportunities as the tides in the SA fishing industry change.
PremFish and Sea Harvest are strongly empowered via their respective controlling shareholders, African Equity Empowerment Investments and Brimstone Investment Corp.
Empowerment is a key issue in local fishing, where government has set about transforming the sector by spreading ownership into black hands and community enterprises.
The 2020 allocation of long-term fishing rights will likely result in white-owned fishing giants like Oceana and AVI’s I&J losing some of their key quotas. PremFish and Sea Harvest — which have the potential to become black-owned SA fishing sector champions — will probably be beneficiaries of the 2020 process, allowing each to enter new sectors of the fishing segment.
Both companies, which raised substantial fresh capital on listing in early 2017, recently made pre-emptive strikes in local waters, snagging a family-owned fishing enterprise each.
The terms of the two deals make for intriguing reading, and could open the eyes of investors who have persistently looked past smaller fishing companies.
The bigger of the two deals is Sea Harvest — best known as a hake specialist — leading an empowerment consortium to acquire Viking Fishing. Viking operates a fleet of 30 vessels from Cape Town, Hout Bay, Mossel Bay, Durban and Maputo. The company catches, processes and markets hake, horse mackerel, pilchards and anchovy, as well as west coast rock lobster, prawns and tuna.
The deal also secures Sea Harvest a 50.1% stake in Viking Aquaculture — one of the largest and most diversified aquaculture producers, with ventures in abalone, mussels, oysters and trout.
The value of the Viking Fishing portion of the deal is put at R885m, of which R565m will be settled with an upfront cash payment of R315m and the issue of 19.2m new Sea Harvest shares worth R250m. Sea Harvest will also pay a maximum R198.8m as an upward adjustment to the initial price — depending on the after-tax profit generated by Viking for the two financial years ending December 2018 and December 2019.
If the profit warranties are met, Sea Harvest will pay a maximum of R44.4m in cash after the 2018 financial year-end audit and a maximum of R44.4m in cash after the 2019 financial year-end audit. A final maximum payment of R110m will then be made in January 2022.
Sea Harvest’s portion of the acquisition price is a maximum of R763m plus a loan of R124m to consortium members SeaVuna, Nalitha and SA Fishing Empowerment Corp to provide the means with which to fund their shares in Viking.
What is startling is the disclosure that the assets acquired in the Viking transaction generated net after-tax profits of R192m. This means the Viking deal — already comfortably staggered to take in profit warranties — was struck on a multiple of just 4.6.
PremFish’s recently concluded deal for a controlling stake in Port Elizabeth-based squid fishing enterprise Talhado was struck on a similarly modest multiple.
PremFish paid R85m for 53.35% of Talhado, the biggest squid company in SA. In the year to end-August 2017, Talhado managed after-tax profits of R50.7m, meaning PremFish acquired the business on a trailing multiple of just more than three.
Things appear to have gone swimmingly since the August year-end, with PremFish reporting recently that Talhado’s revenue for the first half of the new financial year was R98m with net profit coming in at R46m.
Both deals reflect the new reality of the local fishing industry, and it seems highly likely that other sizeable ventures — in the absence of wide-scale black investment in the fishing sector — could wend their way towards the well-capitalised PremFish and Sea Harvest.
While the respective vendors have had to adopt a pragmatic approach to pricing their assets, it is important to note that both family owners have stayed aboard for the ride.
The Viking vendors have accepted a large parcel of Sea Harvest shares in part settlement, while the Talhado vendors opted to retain a minority stake in the squid business.
This underlines the vendors’ ongoing faith in fishing assets that, in truth, might not have been sold were it not for regulatory pressures.