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Norway Royal Salmon (Hold, TP: NOK235.00) - Set to face some headwinds

Q2 operating EBIT was NOK120m, 64–61% above our estimate and consensus, mainly due to a higher harvested volume and lower production costs than expected. Favourable fish sizes and harvest timing had a positive impact on prices achieved. ISA is guided to have a negative impact on costs in Q3, and the 2020 harvest guidance was cut to 35kt (37kt). We have lowered our 2020–2022e EPS by 9.0–1.4%. We reiterate our HOLD and NOK235 target price. Strong Q2 beat, but soft outlook. Reflecting favourable timing and large sizes of fish harvested, prices achieved in Q2 helped group EBIT/kg to beat our NOK9.3 estimate by 64%. The company was unhappy with the NOK40/kg production costs in the quarter, despite being well below the guidance given with the Q1 results of “in line with Q1 cost of NOK44/kg”. Costs are guided to increase again in Q3, due to harvesting of higher-cost 18G fish as well as ISA-affected sites. Associated companies in Norway reported strong EBIT/kg of NOK14.5, while Arctic Fish in Iceland reported NOK3.4. The Iceland 2020harvest guidance remains 8.3kt, up 150% YOY. Biological issues still affecting costs. In recent quarters, NRS has been among the hardest hit of the Norwegian operators by ISA and winter ulcers. The new facility being built in the north should improve smolt quality and reduce biological issues. Capex guidance up but harvest guidance down. The company said it sees short-term price uncertainty due to Covid-19, but maintained its positive view on the salmon market post-pandemic. Farming operations are running as normal, but delays to the construction of the Arctic Offshore unit have added NOK205m to costs and delayed its first scheduled smolt release from this autumn to next spring. HOLD and NOK235 target price reiterated. We have lowered our 2020e EPS by 9.0% on higher costs in Q3e and a lower harvest volume. We have also trimmed our 2021–2022e EPS on higher interest costs. Our target price values the stock at a 2021e P/E of 14.7x and EV/EBITDA of 11.2x.