How food groups fared in the dairy sector
Sea Harvest’s foray into dairy hasn’t had investors licking their lips. But they may be missing a trick
Seafood, these days, can command a premium price on most restaurant menus.
But the same cannot be said for prices that investors are willing to fork out for fishing companies on the JSE.
Last week Sea Harvest — which has scaled up its traditional hake offering and diversified into aquaculture and dairy — landed a very decent set of interim numbers to end-June. One highlight was an 86% jump in turnover to R1.87bn following the acquisitions of Viking Fishing and Ladismith Cheese. Profit after tax was up 44% to R161m, with the earnings before interest, taxation, depreciation and amortisation margin holding steady at 20% (previously 21%).
Reassuringly, net operating cash flows came in at R385m — which is equivalent to 138c a share and underlines the quality of the roughly 60c a share in earnings.
The market remains wary, though. Sea Harvest trades on a forward multiple of around 10 times compared with markedly higher ratings accorded to most of the other JSE food counters. Libstar, which also has a significant chunk of dairy operations, is on a historic multiple of 13 times, while AVI — which has a sizeable hake business in I&J — is accorded a 16 times trailing multiple.
Sea Harvest CEO Felix Ratheb stresses that hake fishing prospects remain solid. He says the species is abundant and global demand for wild-caught hake is still rising, with China slowly coming into the mix as well. "The beauty of hake is that our operating costs are in rands, but we earn a large chunk of our earnings in hard currencies."
Sea Harvest’s divisional breakdown showed the core SA fishing operations hiking revenue 7% to R1.27bn, with earnings before interest and tax (ebit) coming in 55% higher at R255m.
Two factors appear to be depressing sentiment for Sea Harvest. The first is the fishing rights allocation process (Frap), which — though delayed possibly until 2021 — could see Sea Harvest lose valuable hake quotas.
The second issue is the diversification into dairy, which some investors think introduces risk as Sea Harvest looks to assemble nonseafood operations under the recently created Harvest Foods banner.
Though the Frap does muddy the waters, common sense should prevail in the allocation of rights under the new minister of forestry, fisheries & environmental affairs, Barbara Creecy. Sea Harvest is strongly empowered (with Brimstone Investment Corp being the anchor shareholder), has invested heavily in recent years in fishing vessels, and is a major employer on the economically depressed Cape west coast. It would be surprising, then, if Sea Harvest’s hake quotas were reduced to levels that threatened the viability of the processing plants and the fishing fleet.
The dairy issue is interesting from the perspective that the market seems to have an appetite for Libstar’s dairy push but is less inclined to back Sea Harvest’s efforts to milk the consumer shift into natural fats.
Sea Harvest’s interim numbers showed Ladismith chipped in R400m and R75m to top-line and operating profits respectively.
Ebit was R38.7m, which should help dispel notions that the R527m price tag for Ladismith was rich.
Sea Harvest reported a seamless integration of Ladismith, with improved volumes across all categories and margins maintained at 10%.
There should be further gains in volumes with construction of a third dairy powder plant under way. This new facility should be operational by the second quarter of 2020.
While still relatively small, Sea Harvest’s dairy push might be more favourably assessed when scanning Libstar’s recent successes in building a serious cash cow in its Lancewood dairy business.
In the half-year to end-June, revenue from Libstar’s core perishables segment increased 1.5% despite a 3.2% decline in volumes. The standout factor was that Libstar saw a "significant improvement" in the sales mix of dairy products following the launch of a range of yoghurts in the third quarter of 2018 — which was cited as the main contributor to the improvement in perishable category gross profit margins from 17.9% to 20.9%.
Underlining the vibrancy in the dairy segment was Libstar’s disclosure that its Lancewood yoghurts had already captured a 3% market share, and that longer-term ambitions were to snag 5% of this R4bn market.
Libstar CEO Andries van Rensburg said bolt-on opportunities were being investigated in the dairy segment. Ratheb is playing his cards closer to the chest, stressing that the broader food platform will be grown slowly.
On the face of it, it seems reasonable to assume that other dairy opportunities could be sought out, aside from expansion at Ladismith.
Ratheb points out that fishing and dairy have common elements — they use the same distribution channels and serve the same customer base. "We had looked at diversifying into other nonseafood categories, like chicken, vegetables and nonmeat products. Dairy was certainly the best option for us."
Under prevailing jittery market conditions, it seems likely that investors would want more clarity about the Frap and more time to assess the dairy diversification before angling aggressively for Sea Harvest. But the FM reckons investors willing to endure some choppy waters in the short term might do well to snap up Sea Harvest at current prices — keeping in mind the profound effect a weak rand will have on the performance of the key fishing operations and its fledgling aquaculture hub.