patersons target price of $1.33, page-4

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CLEAN SEAS TUNA (CSS)
THE FISH THAT RAWED
Maybe investors should be wary of any analyst overly passionate about
fi sh but we believe that CSS offers access to a break-out industry, namely
full-cycle, sustainable ‘premium’ tuna. With Southern Bluefi n Tuna (SBT)
having sold in the past at ¥3,000+/kg in the critical Japanese market, we
see CSS as a high-value, high-margin, high-growth business.
What is a full-cycle industry? CSS has invested over a decade of time
and capital learning how to propagate SBT in land-based tanks with the
intention to grow them out in off-shore marine cages. CSS intends to
spawn a new fi ngerling batch next month for a fi rst-time transfer to the
sea in January, essentially completing its R&D phase.
Why is success for this full-cycle business so important? Global tuna
stocks are depleted. Increasingly strict quotas are being imposed and
potentially a ban on commercial fi shing for the Atlantic Bluefi n could
be introduced next March. This would also impact the catch-and-ranch
industry, leading to a dramatic drop in supplies.
Wouldn’t consumers just go elsewhere? Yes in terms that top-grade
sashimi tuna may become prohibitively expensive for some (to the benefi t
of CSS’s Kingfi sh product). No in that there is no alternative to the highfat,
marbled Bluefi n in the sashimi world.
Funding need to FY15 not a concern. While we expect success in the
pending sea-trials (the related Stehr Group has ranched SBT since the
90s), building stock levels is capital-hungry. We believe that a further
$110m will be needed to FY14, however, interest cover would be a
comfortable 4.5x in that year of peak funding.
Entry level price attractive. The recent surprise $42m funding round
(Rabobank/Ridley Feed pulling credit lines) so soon after raising $23m in
May has hit the shares hard. However, with clear catalysts pending and
given our DCF valuation of $1.33, we see the current share price (and the
pending $12m SPP) as attractive entry points. Accordingly we initiate with
a BUY recommendation.
Patersons Securities Limited was invited to participate in the Clean Seas Tuna
capital raising (October 2009) designed to raise a total of $42m at $0.25/
share (pre-SPP). PSL raised $12.25m and received fees for these services
Please Note that the record date for the SPP is 24th November (Tuesday next).