Sea Harvest | A larger tackle box

Over the past three years, Sea Harvest has invested R592m to diversify itself from fishing regulation risk in SA. In our view, Ladismith Cheese is accretive to results and indicates that the company have paid appropriate prices for its acquisitions. The existing fishing business will deliver efficiency growth from higher catch rates and factory automation in FY ‘19. However, an acceleration of fishing profit growth depends on an increase in the allowable catch, which we do not expect until the rights renewal process is complete in 2021. Sea Harvest is one of the most efficient fishing operators in SA and its high BEE ownership (83%) safeguards it from undue impacts of right renewals.

We believe SHG's latest acquisitions will help the Group grow HEPS by c.21.8% in FY '19 to c.131cps. SHG's recent acquisitions are performing well. Viking Aquaculture has a maturing biomass and we expect its earnings to grow to R47m by FY '21 from an operating loss of R9m in H1 '19. With strong category growth in both cheese and powder in SA, we forecast a c.8.1% EBIT CAGR for Ladismith Cheese to c.R100m in FY ‘21. Although there is balance sheet capacity, we do not expect further significant acquisitions in the near-term.

We estimate the counter is trading at a 10x rolled forward PE in line with our calculation of a justifiable long-term exit multiple. We calculate a 12m TP of R16/share. We downgrade SHG to a MARKET PERFORM. An investor attraction is that SHG provides local investors with a ZAR hedge due to its c.45% export and international revenue contribution. A catalyst for re-rating would be the swift and fair resolution of the rights allocation process. We caution that the low free-float and hence liquidity of the counter is a detraction to the investment case. However, SHG is unlikely to see any corporate action until the fishing rights renewal is complete.