Oceana | Go fish

The volatility in fishing cycles and global fishmeal dynamics are negatively affecting the Oceana Group's (OCE) earnings. Although OCE offers diversification by species and geography, the Group's fishmeal and fish oil business accounts for c.30% of Group revenue. China's pig herds are material consumers of global fishmeal, where swine fever led to a 40% cull of stock and a c.10% decline in global fishmeal prices. The weak fishing season in the US due to adverse weather conditions will continue to affect fishing volumes in the Group's Daybrook business H1 '20. OCE plans to add an additional vessel in the Daybrook operation and will pursue fishing on weekends, which should help normalise fishing volumes in FY '20.

The Group's canned fish business is experiencing robust price and volume growth as the demand for the protein source in SA increases. The global demand for white fish is robust and the biomass is healthy. We expect allowable catch of hake and horse mackerel to remain flat up until the resolution of the fishing rights allocation process in SA. The timeline of the fishing rights process is unknown following the announcement of a further delay in Aug '19. Higher vessel utilisation should support fishmeal profitability and narrow potential losses in the near-term.

Notwithstanding a low base, we estimate near-term earnings growth will remain low. We forecast that normalised diluted HEPS will recover by 12.2% in FY '20 to 562cps due to fishmeal and fish oil dynamics and a poor FY '19 fishing season. We forecast a normalised diluted HEPS CAGR of 15.9% to FY '23 to 902cps. We believe that our exit multiple of c.10x appropriately captures the risks of a volatile business and the fishing rights allocation process. We maintain that the share is undervalued on abnormal earnings. We calculate a R77/share 12m target price and maintain an OUTPERFORM recommendation.