Norwegian Valuations / Pricing

CleanSeas

I wanted to pen some thoughts

When they raised (see website and investor deck - then and now) the expectations(and as I understand it in the broker note) was that net cash would be end H1 2022 $1.2m. They reported $12m end q2. I understand that broker has yet to adjust this model - an oddity!! It’s a huge beat. Cash is king and they are $10m better than the broker! Fantastic

Why has the market not cottoned on? And How did they do it?

1. Farm Gate price are miles better than forecast. Q1 was circa $12. They exited the half close to $16. And on the call the inference was slightly better prices so far in Q3. There are a few reasons 1) Executing the business model - more later! 2) Salmon prices rallying (a lot) - source Google - due to poor harvests particularly from on land farms (hard to scale) and increasingly ESG putting pressure on consumers to move away from beef (methane / deforestation) - see JBA acquiring Huon Aquaculture 3) Japan kingfish producers supply constrained - source the company. Suspect limiting their (Japanese) ability to export to the US channel. Given the tragedy unfolding in Ukraine - massive world wheat provider I suspect protein sources are going to become scarcer. Stars feel aligned re supply and demand - should be very + for pricing (ongoing)
2. Business Model. The market does not seem to understand the importance of Hosfeth. Roger Hosfeth is a proven entrepreneur. He is a large Norwegian salmon farmer and a larger still processor of salmon. I believe he is the largest exporter into the US supermarket and wholesale channel of Norwegian salmon. It is he; who in effect led the capital raise (working capital to scale) and changed the board. The model is about return on capital. Have multiple channels and routes to markets. Fresh or Frozen. Wholesale or Retail. US, Europe and Australia. Higher return on capital. Better cash flow
3. ESG. I think the joint venture with CH4 Global and ongoing trial is hugely important. If Clean Seas can close the “loop” in that if they can grow enough seaweed, who grow by absorbing the effluent that fish produce, then the negative of nitrogen pollution from fish “poo” is negated. Huge ESG competitive advantage to Land base - who we must remember have intensive and increasing energy costs. Worthing Googling.
4. Model and Valuation. The opportunity is that despite the progress ($10m of free cash generation relative to the forecasts) the stock price is the same as at the raise! The company give you all the kpi’s. Farm gate prices, cost of production and overheads. Now, in the immediate future and with greater scale. You can approximate capex (needed to scale) and maintenance capex. There are $60m odd tax loss carry forwards so no tax for some time.

Model Production 3,700,000 kg June 2022. Assume net cash ends at $10m i.e. despite a full half (H2) of higher prices model more (a lot more!) capex as they ramp so no net cash flow. Feels very conservative.

Farm Gate price per kg - production costs per kg - overhead costs per kg = ebit pe rkg * production = ebit.

June2023 Model Production 4,300,000 kg. Farm gate price $16 per kg. Costs 9.5 per kg, overhead per kg $2.5 = $4 ebit profit per kg. Ebit $17m which is Ebitda$23.6m. Free cash flow $15m. EV $90m less $10m cash today, less $15m end June2023 = $74m. EV/Ebit 4.3. Norwegian Salmon quoted equites trades 12* ev/ebit June 2023.

June2024 Model Production 5,500,000 kg. Farm gate price $16 per kg. Cost per of $9,overhead per kg $2.4 = $4.5 ebit profit per kg. Ebit $24.7m which is Ebitda$33m. Free cash flow $24.5m. EV $74m less $24.5m = $49.5m. EV/Ebit 2*

These are my numbers and they may well chose to growth faster but the mechanics /principles are right. Indeed the company has ambitions to growth much more than this re production - see Hosfeth for a feel of ambition and scale.

The pricing environment is clearly miles better than forecast, the routes to markets are working re “optionality” & all this feeds through to much better free cash flow and therefore high net cash.

The stock is an enormous valuation outlier to quoted Salmon fish farms. Well worth a look under the hood. A 1/3 of Norwegian peers valuation with a lot more growth…….Interesting?