Sea Harvest Group Ltd (JSE: SHG) Investment case

Are we seeing a recovery narrative play out? Let's investigate.

We're diving into the deep blue sea to take a closer look at Sea Harvest Group Ltd, a vertically integrated South African fishing company that has been a solid player in the seafood industry. The stock has been taking a beating over the past few years, trading at all-time lows and suffering a 30.62% stock price decline over the past year.  

Fishy business or a real catch?

About

Sea Harvest, established in Saldanha Bay in 1964 by Pescanova, Southern Sea Fishing Company and Imperial Cold Storage. Through the 1960s and 1970s, Sea Harvest expanded their horizons and set sight on international markets. Today, Sea Harvest supplies a diverse range of fish and fish products to both domestic and international markets.

In terms of revenue, Sea Harvest's domestic market accounts for 61% of their total revenue, while the remaining 39% comes from their international business. In the past year, both segments saw an increase in revenue. The domestic segment experienced a 39% increase, while the international segment gained a 15% increase.

Group Structure

SA Fishing segment (53% of revenue)

Harvesting wild-caught seafood and processing it into a variety of frozen seafood products. Sold in 30 countries.

• 36 Vessels
• Focus area: Hake, prawn, anchovy, pilchard, horse mackerel.
• 3700 Employees

Cape Harvest Foods segment (Ladysmith Cheese) (35% of revenue)

Diary processing that sources and processes milk into a variety of products.

• 16 Factory shops
• Focus area: Cheese, butter, powders, convenience foods.
• 1100 Employees

Sea Harvest International (Australian segment) (10% of revenue)

Harvesting wild-caught seafood and processing it into a variety of frozen seafood products. Sold in 30 countries.

• 14 Vessels
• Focus area: Prawn, crab, Spanish mackerel, scallop.
• 110 Employees

Sea Harvest Aquaculture segment (2% of revenue)

Catching and farming a variety of shellfish species and fish domestically and internationally.

• 8 Aquaculture operations
• Focus area: Abalone, oysters.
• 360 Employees

Key Financials

• Ticker: JSE: SHG
• Share Price: 990c.
• Market cap: R2.96B
• Div Yield: 10.2%
• P/E: 6.42
• 52 Week Low: 960c
• 52 Week High: 1580c

Latest results (Interim results 30 June 22)

• Revenue: + 29% 
• Operating profit: -14%
• EBIT (Earnings before Interest & Tax): -10%
• HEPS (Headline Earnings Per Share): - 10% 
• NAV (Net Asset Value) per share: +10% (1021c to 1125c)
• ROE: 14% (as of 31 Dec 22)

2022 was a difficult year for the company reflected by the decrease in EBIT and HEPS due to increase in input costs, supply chain issues and fishing quota driven losses.

Revenue

Revenue generation for the group occurs through five main product channels:

• Wild-caught fish
• Shellfish (Wild-caught & farmed)
• Diary
• Traded
• Convenience foods

The group has shown consistent revenue growth over the past five years, resulting in a CAGR of 21% from 2016 to 2022. Additionally, the operating profit has also steadily increased at a CAGR of 24% for the same period. In the past year, all four main segments saw an increase in revenue, with Cape harvest displaying an 85% increase and Aquaculture a 55% increase. However, the gross profit margin declined by 7%, resulting in a 14% decline in operating profit.

Bullish arguments

China and Hong-Kong: With China and Hong-Kong slowly opening their economies and easing on their covid restrictions, it will lead to the strengthening and recovery of the abalone sector.

Doubling Australian Business: The acquisition of MG Kallis in May 2022, an Australia-based fishing business with licences stretching into perpetuity and fishing rights for high value prawn, will provide further revenue streams, security of supply and management depth to the Group. 

Firm export markets: Focus will be to leverage price and currency through exports. The group export to 30 countries.

Complete value chain: Sea harvests operations span over the complete value chain. From harvesting to sales, enabling it to perform proper quality control and achieve economies of scale. 

Bearish arguments

Supply chain issues: Continuing disruptions in supply chains globally and domestically will further cause damage to the companys bottom line.

Inflation & fuel: Possibility of increased material input cost and higher fuel prices. Negative impact on oil price by the Russian-Ukraine war.

Regulation: Regulation by government regarding catching quotas. E.g., 10% decrease in available hake quota volume in beginning of 2022.

Final thoughts

Sea Harvest had a challenging year, experiencing a 10% loss in catch and facing the impact of inflation and the Russian-Ukraine war. However, there is a glimmer of hope for the company. Premier Fishing, one of Sea Harvest's competitors, received a cash offer to buy out minorities from investment holding company AEEI. Additionally, Oceana, another competitor, has been in the news due to an internal audit investigation, while its Australian segment has been picking up pace in 2023. These developments present an opportunity for Sea Harvest to establish itself as the leading fishing company and recover to even greater heights.

Currently, Sea Harvest is finalizing its financial results for the year ending on December 31, 2022, which it plans to release on or about March 7, 2023. However, the company anticipates a further decrease in EBIT and HEPS compared to the financial year ending in 2021.