Ann: Industry-wide recall of Coffin Bay-produced oysters, page-9

Howdy Holders,

I was researching Angel Seafood for a little while, and was about to buy in.. and then wow, I couldn't believe my luck, a gastro outbreak of the highest order! PIRSA even suspended all oysters from Coffin Bay being sold! I was salivating at the thought of the 100 cases of vibrio parahaemolyticus.

The impact on Angel will be relatively minor - assuming this is short lived, which I suspect it will be as my understanding of vibrio is that it is more related to the food safety and handling than growing. Back of the envelope, they could have 7-10 days of working inventory, which may be around $250-400k of revenue. Sounds like a lot, but the market cap has been reduced by $4.5m. And the company has around $4m of liquidity, so doubtful this will lead to any sort of cap raise or cash crisis. Timing to entry Angel may be limited, because PIRSA is expected to reopen the industry on November 29th and then I think the price will trend back to where it was.

My investment thesis for Angel is based around the industry economics. East33 may have the flash, but Angel has the unit economics. I'd rather own the lower cost producer that can appeal to a broader market. Sydney rock oysters take up to 4 years to grow, so the amount of working capital held up in inventory is ridiculous in comparison to pacific oysters' 18-24months. Also, with retail distribution opening up to oysters (Coles, Woolworths), it can dramatically change the fundamentals of a business. Look at what happened with salmon and Tassal/Huon when it got mainstreamed into retail channels.

I am also a big fan of their roll-up strategy. There are 351 licenses for Oyster in South Australia - such a fragmented industry. Compare that to mussels (34) or tuna (11). Same issue in NSW with the Sydney rock oysters, there are 248 licenses and East33 is planning to roll-up a fair few of them by paying overs. I think Angel's management may be slower and less aggressive, but that may be the way to deliver a better outcome for shareholders. Long runway of improved unit economics here.

Finally, I think the inflection point of profitability and cash flow has certainly been reached. Profitability seems to have started in 2019 when you remove the CAPEX. So they can now use some of that to reinvest in themselves. The cash flow still is showing negative, but with the biomass reaching where it has and the foundations in place for 20m target, should start seeing Angel become cash flow positive ex growth CAPEX. I like to think of it as buying shares in a company where the previous shareholders paid for my growth CAPEX. So thankyou to whoever sold me your shares at these prices.

Looking forward to following this one. Any advice always welcome. I like to share all my research notes, so feel free to reach out - you can see my posts on twitter, and happy to chat there. GLTAH.