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Grieg Seafood – Analysis

Summary:

  • High return on assets
  • Low debt
  • Well suited for a future of increased food scarcity and a larger world population
  • The growing middle class in Asia will eat more fish and meat as their wealth increases in the future
  • Strong owners
  • High Cash flow generation and growth rates
  • Inflation and negative interest rates will benefit producers of farmed food in the coming years
  • Low valuation

Grieg Seafood is the fifth largest producer of farmed salmon in the world, with operations in Norway, the Shetlands and in Canada. The company specialise in trout- and salmon farming. And their headquarters are located in the city of Bergen, in Norway.

The price of farmed salmon has been going higher for the last couple of years and is now at its highest for the last 30 years. Because of the ravages of El Nino, toxic algae blooms and salmon-lice hitting the chilean and norwegian producers, supply has been shrinking and is expected to be low for the next couple of years.

Chile is the second largest producer of salmon in the world, after Norway, and its production was hit hard by El Nino last year. The norwegian producers have been forced to slaughter a lot of salmon that has been plagued by salmon-lice and disease, which has led them to temporarily increased costs and investments in prevention. This has driven up the price of farmed salmon.

Operations for fish farmers are effected by several factors, where profits can change quite dramatically from year to year. But in the long run the trend is good for commodities and some of the listed companies have gotten down to low valuations. Grieg Seafood is my favourite in the space.

The valuation have gotten down substantially. EV/EBIT is now at 5,5 and their return on equity is around 30. That is very good from a fundamental perspective compared to industry peers and on an historic basis. Operating cash flow is increasing at a rate of 25% yearly for the last seven years, and will probably do so for the coming years as well, because of underlying trends and the fact that heavy investments have already been made. Regarding its debt it meets Benjamin Graham’s demand that cash plus inventory should be able to pay off the entire debt, of the company, which is very stringent. With a P/E-ratio of 8 and a book value of 28 the stock is undervalued at these prices, hovering around 65 norwegian kroner, or 8,5 dollars.

The main owners of the company is the wealthy Grieg family who owns one of Norway’s largest shipping companies, Grieg star. The Grieg family has a long history of Know how in business, especially in shipping, that dates back to the 19th century. They have traditionally aimed at long time frames in their investment horizons, which brings stablity and continuity in the long term. If we were to see a new financial crisis, like in 2008, they might very well go in and contribute new capital to the business, which they have done before.

The norwegian fish farming industry is quite new in its current form. After many consolidations and fusions of old localities it emerged in its current form, about two decades ago. The producers get their quotas from the government and the crucial part is to keep as much biomass in the ocean at all times as possible, to fill their quotas.

Grieg has not been able to grow their localities to meet their quota, given by the norwegian state as fast as some of their competitors. This is because of geography, regulations and because of how this sector has emerged. But that is also the reason why they have the best growth potential in the sector. The company has been able to expand their localities, and because of heavy investments in increased productivity, they now have lots of growth ahead of them. Because of better localities and increased productivity, they will be better suited to meet their quota.

Since 2007, the company has made heavy investments into strategies for recycling the fresh water, in their indoor faciclities, which contain their smolt, which is the name for juvenile fish. These investments are now beginning to bear fruit. This has cut down costs substantially, by saving energy that was previously needed to heat up fresh water in their fish tanks. The electricity costs have been cut substantially and they are now able to keep the smolt longer in tanks before exposing them to the sea.

Compared to peers the company earlier had a smaller supply of smolt, which meant they were unable to meet their quota. But after heavy investments in modern technologies, and more localities, the company is now growing and is hoping to increase their production by ten percent annually in the years to come. The many localities also mean they are well diversified in the case of disease, or other bad events happening to their farming locations.

One of the biggest challenges for fish farmers has historically been to keep their farming localities filled up with fish-biomass at all times. After slaughter, their farm tanks are emptied for a little while and the company then needs to replace the slaughtered fish, with new fish, to be able to slaughter as quickly as possible again, and again. After the investments in better recycling systems, and indoor tanks for fresh water, Grieg is now able to keep their smolt for longer periods inside, which means they can replace their slaughtered fish faster with more grown up fish and thereby reduce the time between slaughters. The fact that the company can keep their fish longer in the tanks before releasing them on their ocean sites reduces the risc of disease and bad events striking the fish. The smolt also becomes more robust and healthy by keeping them longer in tanks made up of fresh water.

The company is no longer as dependent on large fresh water supplies for their production and the sustaining of smolt. Especially in the cold norwegian winters they have had to heat up large amounts of fresh water in previous years. But the new sites only need 0,1-1% of fresh water supplies that a classic flow through system needs. This makes it possible to keep the salmon on land for a significantly longer time period of its life cycle, even after its juvenile years. This gives a lot of flexibility and insulates Grieg from catastrophes like something happening to their saltwater sites. All of their production locations now have sustaining post-smolt sites.

Promising future for farming

The trend is clear. Farming is likely to be a prosperous sector in the future. The reasons for that is the growing chinese middle class, increasing inflation, negative interest rates, and governments possibly going back to quantitative easing again. Also, a financial crisis that forces governments to deleverage could be very bullish for farming. In that environment farming would be one of the few sectors booming because people always need to eat.

Very few people are becoming farmers today. At some point the old existing farmers are likely to die off or stop working, which will decrease supplies of food. At the same time demand for fish and meat are rising, as emerging market-populations are becoming wealthier. Around two thirds of all seafood eaten will probably be farm-raised around the year 2030, according to the report “Fish to 2030: Prospects for Fisheries and Aquaculture,” which states that as wild fisheries approaches their maximum fishing strain, aquaculture, or fish farming, is going to help satisfy the increased demand for seafood. Over 300 million new people will have joined the chinese middle class by 2030. The total will reach nearly 900 million chinese in the urban areas by then. And with increasing wealth comes increased demand for fish and meat.

An advantage that fish farming has over landbased farming is the fact that production can keep up better with demand, since harvesting can be done more often. This makes the fish-producers more independent and flexible. Fish farming also has greater potential, for increased growth into the future, than regular landbased faming does, because of the growth potential of the open sea. In the future deregulations might make it possible to farm fish longer out in the open ocean which would present a lot of new growth opportunities for existing fish farmers.

Another bullish aspect, for aquaculture, is that all of the world’s major Central banks are printing money and keeping interest rates very low at the moment. This could be very bullish for food in the long run. At some time in the future all the money printed and negative interest rates will manifest itself in higher prices in the greater economy, for example food prices, which would rise, since consumption of food is not likely to decline.

People always need to eat and are not likely to cut down on their eating habits. So if we see a bubble in food prices, fish farmers are likely to benefit. Norway is also a commodity producing country, the major export product being North sea oil, and have historically been quite well insulated from financial crises. The norwegian fish farmers, in total, produce more than half of the world’s farmed salmon. Norwegian aquaculture is the most advanced high technologic production in the world and the companies are well suited to profit from these coming trends.

Conclusion

If the growth continues I calculate the intrinsic value of Grieg Seafood at between 130-190 NOK, or 15-22 dollars. When I write this the stock is trading at around 65 nok, or 8,5 dollars. I currently hold no position in Grieg Seafood but am curious to buy some. The company is listed on the Oslo stock exchange Mid cap section.

Disclaimer: I do not hold any stock in Grieg Seafood at the moment. All information found on this site, ideas, opinions, predictions, commentaries are my own views that are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies. I will not and cannot be held accountable for any actions you take as a result of what you read in here. I am not your investment adviser. Consult a licensed financial advisor before making any investment decisions.

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