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Views Article – Sharenet Wealth

Share Picks, South Africa

Sea Harvest IPO: Do You Want To Buy In?

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Sharenet Securities invites you to participate in the private placement of shares in Sea Harvest Group Limited.

March 2017 sees the launch of another big IPO in the fisheries industry. Sea Harvest Group Limited is due to list on the 23rd of this month. Sea Harvest will join Oceana and Premier Food Fishing (listed last month) as the companies offering the most direct exposure to the fisheries industry.

Investing in in AVI or Brimstone Investment Corporation offers exposure to I&J and Sea Harvest respectively, but you would be buying into diversified portfolios and would gain exposure to several companies within the food and beverage sector as well as the healthcare and insurance sectors.

Brief overview of Sea Harvest:

The Sea Harvest Group was established in 1964 and is a market-leading, vertically integrated fishing business with operations in South Africa and Australia. The group operates in Saldanha Bay and Mossel Bay, and the company acquired a controlling stake in Mareterram in Australia.

The principal business of the Group is fishing of MSC-certified Cape hake and Shark Bay tiger and king prawns, processing of the catch into frozen and chilled seafood, and the marketing of these products, locally and internationally. Sea Harvest is the leading frozen fish brand in South Africa in both retail (with a 36.7% market share) and food service, with strong consumer loyalty and brand equity.

The Group is one of the largest fishing rights holders in the South African Cape hake industry, with 28% of the hake TAC (total allowable catch) equating to 41,676 tons, and 56% of the prawn licences in Shark Bay, Western Australia.

What’s the reason for the IPO?

Management have given several reasons for the listing:

  1. Support management’s strategy of continuing to invest in the business, improve margins and grow organically
  2. Support the group’s vision of becoming a diversified global fishing company through value-creating acquisitions
  3. Clean up the balance sheet by repaying bank debt, preference shares, shareholder loans and creating a ’war-chest’ for growth
  4. Provide ongoing access to capital markets and the ability to use scrip as currency to support Sea Harvest’s growth strategy, both in South Africa and Australia
  5. Allows a mechanism for management and staff retention

Is it a profitable business?

It is worth noting that the fishing industry has very high barriers of entry due to the large capital costs, BEE requirements and government regulations. Sea Harvest has invested in 29 vessels (a mix of frozen and fresh) as well as three factories (which have an insurance value in excess of R1bn). It is very difficult for smaller players to compete with the bigger established companies, and therefore one could argue that profits are somewhat protected.

Furthermore, BEE is a critical part of the rights allocation process in South Africa, and Sea Harvest is one of the most empowered fishing companies. In a recent conversation, CIO Muhammad Brey was quite upbeat at the prospect of at least securing a similar quota during the 2020 allocation process given the company’s BEE credentials.

Furthermore, there has been an increased demand for seafood as we see a growing wellness trend and switch to healthy proteins with lower fat. This bodes well for the industry.

As a company, Sea Harvest has seen a steady growth rate in profitability. EBITDA increased 14%,15% and 19% respectively for 2014,2015 and 2016. Return on equity over the same period was 18%, 27% and 33%. The most profitable divisions are the export market (hence a rand hedge) and also local retail and food service. The diversified local and international customer base (no customer accounts for more than 10%) reduces the concentration risk as it is not overly dependent on one client.

Buying Sea Harvest shares will give you ownership of a company with a strong track record, established brand, solid assets and experienced management team. I believe the share would suit an investor who is relatively risk averse and looking for a company that will generate reliable earnings. Risks include the negative impact of a strong ZAR on exports, and the quota allocation.

Participating in the private placement:

If you would like to participate in the private placement, please do get in touch with the Sharenet stockbroking team. Orders need to be in by 14:00 on Wednesday 15th of March 2017, and successful applicants will be advised of allocations on Friday 17th of March 2017.

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cheyne

Cheyne Anderson
Portfolio Manager and Securities Trader

Cheyne has spent the last 10 years working in London, holding numerous positions within Equity and Equity Derivatives at various Investment Banks. His main focus has been on South African and Emerging Markets and also gained good exposure to global equity markets and products. He completed both his BCom degree in Economics and his BCom. Honours in Financial Analysis and Portfolio Management at the University of Cape Town. After completing each of the rigorous exams, Cheyne became a CFA Charterholder in 2014.


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