Norne: Sooner or later Chinese importers will look to Norway salmon M&A
Comments Off on Norne: Sooner or later Chinese importers will look to Norway salmon M&A

Norne: Sooner or later Chinese importers will look to Norway salmon M&A

Posted by | June 30, 2017 |

With the Chinese market now open once again to Norwegian salmon sales, investment bank Norne Securities believes it is only a matter of time before importers start looking at mergers and acquisitions to secure supply.

One hundred Norwegian seafood exporters recently met with 300 importers in China, to mark the opening of seafood imports from Norway again. The Norway’s Seafood Council is targeting 156,000 metric tons of salmon exports to China by 2025; one of every seven salmon farmed in Norway now, Norne notes.

“Sooner or later some of China’s seafood importers are likely to differentiate from competitors at home to go beyond contracts to secure supplies,” said analysts Karl Johan Molnes and Rytis Mikelionis.

Chinese firms may do this either with a full acquisition, or via a 50/50 joint venture; there is precedent for both, set by Japan when it too wished to secure supply.

In 2014 Mitsubishi Corporation took over Cermaq, for approximately NOK 8.880 billion ($1.4bn). More recently, Norne noted, Japan’s Yokohama Reito and Norway’s Hofseth International paired up to buy a trout farmer, Fjordlaks Aqua.

“China has money, but it does not have Japan’s experience that has been active along the Norwegian coast sourcing seafood, teaching Norwegians how to treat and package shrimps, mackerel and salmon since the early 1980s,” Norne suggested.

Bakkafrost’s CEO, according to Norne, believes that only Norway can build a market in China.

From an investment point of view, Norne suggested holding onto shares in those companies the shareholder believes could be acquired; the rest, it said, should be sold.

“Strip away the biomass adjustment and focus on the estimated adjusted earnings per share from abnormal high prices and high costs,” the bank wrote.

“The valuation of the sector has been around PER [price-earnings ratio] 10 on adjusted consensus numbers since after the companies starting making significant profits in 2014. Value investors recognize that there is now more downside than upside in the earnings level, and have thus already sold their shares.”

The table below shows how certain listed companies are expected to perform regarding enterprise value/ earning before interest and tax, and dividend yield.

“Because of the high correlation between salmon prices and salmon stocks the sector is a ‘trading sell’ until salmon prices are lifted above NOK 60 [per kilogram] per week around the start of 4Q17.”

China market has bounced share prices back.

The market has, so far in Q1 2017, been worried about the salmon sector, shown by falling share prices in the listed Norwegian salmon farmers.

This has mainly been caused by an early downward readjustment of forward prices.

However, falling share prices was halted by the announcement in early April that China would open to Norwegian seafood imports. “Both salmon prices and salmon stocks have rebounded sharply on the news in April and May,” Norne added.

The bank descried the recent meeting between Norwegian exporters and Chinese importers as impressive, but suggested “short term progress indicated might be slower than needed to lend much support to salmon prices this year”.

“The bullish view: if the salmon prices rapidly rebound from the low 50’s and stay above NOK 60/kg before the end of 3Q17, we are likely to upgrade our recommendations yet again to ‘trading buy’ into 2018.”

“The bearish view: the longer time it takes for salmon prices to get back up to NOK 60/kg in 2H17 the more earnings per share estimates will have to come down, and stocks will fall even more than our target prices.”

Source: Date: 2017-06-29