Sea Harvest will be listing on the JSE on 23 March 2017 . It intends to list up to 236.7m shares at an indicative price of between R12.00 and R14.50, implying a market cap range of between R2.8bn and R3.4bn.
Salient dates for the listing are:
- 6 March 2017: Offer opens
- 16 March 2017: Offer closes
- 17 March 2017: Publication of results of offer
- 23 March 2017: Listing date
The offer is being made to South African investors only. The offer is made to offerees at a minimum aggregate subscription price of R1m per single addressee.
We see Sea Harvest as a stable, well-managed, cash-generative, rand hedge staple food producer with the potential to show significant growth over the medium term as management delivers on its growth strategies. Although the proposed pricing range for Sea Harvest is not cheap, we believe the listing will be well received in a narrow investment market that is hungry for new high-quality listings. We are comfortable recommending that long-term investors participate in this offer as we see limited downside for the share given industry and market dynamics. However, we caution that the stock is likely to be relatively illiquid and this raises investment risk for larger investors and may contribute to share price volatility.
Post the new issue, Sea Harvest will remain a subsidiary of Brimstone, whose shareholding will reduce from 92.9% to 58.3%.
Using the high and low price proposed by Sea Harvests in its pre-listing statement, we show below comparative metrics for Sea Harvest versus a SA listed peer group.
Source: Reuters, Consilium Capital estimates
Sea Harvest’s proposed pricing indicates a market cap well below this peer group and given that it is likely to be relatively illiquid, this alone would warrant some discount to this peer group. At the top end of Sea Harvest’s proposed pricing range, it would trade at a small discount to SA peers on virtually all key metrics. This obviously widens at prices lower down the range and, as indicated in the table, is relatively attractive at the bottom end of the range.
The table below summarises some key operating metrics for Sea Harvest.
Source: Sea Harvest presentation
Key attractions of the offer include the following:
- The offer range appears fairly priced and relatively compelling towards the bottom end of the pricing range.
- Sea Harvest operates in a market where we see stable supply and growing demand – we believe margins are sustainable and could expand as management delivers on operational efficiencies and demand outstrips supply.
- The company has a track record of solid financial performance with high cash conversion ratios (61%) and returns on equity (33%) coupled to healthy growth (20% CAGR in revenue since 2014).
- We see barriers to enter its industry as fairly high as entry requires strong BEE credentials, a strong capital base (initial capital requirements are quite high – ships and factories) and it takes many years to build a reputation and brand that can readily access offshore and local markets.
- Sea Harvest’s increasing exposure to offshore markets through its Australian expansion and its export orientation give it attractive rand hedge attributes. This puts it an advantage to other SA food producers that are considerably more vulnerable to rand exchange rate weakness.
- We see the business as well managed and management’s plans appear to us to be strategically sound. Management’s organic and acquisitive growth plans offer the prospect of real earnings growth over the medium to long term.
- Sea Harvest’s empowerment credentials, commitment to transformation and importance to the communities in which it operates puts it at an advantage in securing fishing quotas in South Africa.
According to Sea Harvest’s pre-listing statement, the proceeds of the offer will be used to:
- Settle the Third Party Debt
- Settle the Preference Share Redemption Loan
- Repay the Shareholder Loan
- Repay the Management Loans
- Settle the Staff Trust Repurchase Consideration
- Fund investment by the Group in land-based and vessel efficiency gains, leading to market optimisation which will support organic growth and margin
- Enhancement projects
- Raise funds to pursue its acquisitive growth strategy, both in South Africa and in Australia
- Provide the Company with greater balance sheet flexibility and a listed currency to accelerate its strategic growth plans.
Outside of general equity market risks and the liquidity risk we referred to above, we see key investment risks as:
- A potential decrease in the Total Allowable Catch (TAC). The Sea Harvest Group currently holds 25.2% of the TAC (equating to 37 183 tons in 2016), and has access to a further 3.1% of the TAC (equating to a further 4 493 tons in 2016) though the Vuna Exclusive Supply Agreement. In addition, the Group currently holds 5.9% of the horse mackerel TAC, the total TAC of which was 41 500 tons in 2016. Upon termination of the hake deep see trawl (HDST) rights on 31 December 2020 and the horse mackerel (HM) and hake inshore trawl (HIT) rights in 2031, the Group will re-apply for the rights under the respective fishing rights allocation process (FRAP).
- A sustained period of ZAR strength would result in a decrease in Sea Harvest’s revenues.
- As Sea Harvest follows through on its acquisition strategy it risks overpaying for an asset, a risk which is somewhat mitigated by the experience of the management team and the team’s concerted focus on ensuring acquisitions are return enhancing.
In the near term management maintains that local price increases of CPI plus 2-3% are intact. The export price target is similar. Management sees incremental margin improvement related to tight cost control and continued investment in its operations, while maintenance capex is set to be in line with historical levels. The repayment of debt will materially reduce finance costs (mainly preference dividend).
On balance, excluding acquisitive earnings growth, we see c8-10% as an achievable base level for EPS growth.
Details of Sea Harvest’s operations and industry are detailed in its pre-listing statement, which is accessible via the following address:
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