Small Caps | Dec 02 2015
This story features SEAFARMS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SFG
-Positive consumer trends
-Well positioned for China exports
-Increasing scale provides upside risk
By Eva Brocklehurst
Australian consumption of a once luxury item, salmon, is increasing, owing to the farming of stocks, the health appeal of such fish and use in takeaways such as sushi, as well as marketing in lifestyle and cooking shows on TV.
Small cap stock Huon Aquaculture ((HUO)) is Australia's second largest, vertically integrated producer of salmon and growth in its operations is being driven by these factors as well as a favourable trend in local agricultural exports to Asia. Fish as a portion of total animal protein consumption is most highly represented in Asia, at 26%.
Moelis believes Huon Aquaculture is well positioned to take advantage of the growing wealth in China, which boosts demand for global protein sources, of which fish is a strong preference.
There is no suitable climate in China for salmon aquaculture, which means all produce is imported. Australian salmon is produced in Tasmania – salmon mortality increases in warm water – and has historically commanded a significant global price premium given its remote location and high quality.
Huon Aquaculture deployed the funds raised when it listed on ASX last year to expand the business, with the intention of delivering high production volumes with increased efficiency. Moelis initiates coverage of the stock with a Buy rating and $4.91 target.
The broker's valuation reflects a conservative approach to key operational metrics, but upside risk is identified as the company's controlled growth strategy is proven successful.
The broker expects domestic consumption per capita will increase as the convenience aspects of salmon products are expanded, such as pre-packed portions and ready-to-cook packs, with modern cookware contributing to faster and easier preparation. Prices are also now more consistent, given the increasing scale of aquaculture.
Moelis has factored in increases in harvest volumes that reflect management's outlook for the industry and the company's ability to scale up operations to meet demand.
Credit Suisse also has faith in the long-term outlook and has a Neutral rating and $3.30 target. Weaker pricing in the wholesale market troubled the broker recently.
The largest cost for Huon relates to feed, with disruptions caused by drought or other factors affecting feed products and having the potential to increase costs. Fuel costs are also significant, given the need for boats, barges and tankers in the operations.
Risks which cannot be completely controlled largely emanate from environmental factors, such as algal blooms, pollution from natural disasters and spills, as well as diseases. Food safety is also a higher risk in seafood farming, with incidents having potential to damage customer confidence in a brand.
Huon Aquaculture competes with the main listed farmer of salmon, Tassal Group ((TGR)). Seafarms ((SFG)), largely a prawn farmer, and Clean Seas Tuna ((CSS)) are also smaller listed aquaculture entities.
Huon Aquaculture has seven hatcheries and 14 farm sites at four locations, with sales representation in all states of Australia. The company's “Fortress Pens” reduce losses caused by predators and it employs full-time veterinarian services.
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