Our opinion on the current state of SEAHARVST(SHG)

Sea Harvest Group (SHG) stands out as South Africa’s leading frozen fish brand, commanding approximately 38% of the market. The company, which is majority-owned by Brimstone with a 54.92% stake, specializes in catching, processing, and freezing fish primarily for local and export markets.

Sea Harvest has recently expanded its operations through strategic acquisitions, including the purchase of Viking’s business operations. Viking, with a 40-year history, employs about 1,600 people and operates a fleet of 30 vessels across various South African and Mozambican ports. This acquisition included 50% of Viking’s aquaculture business, making Sea Harvest a significant player in South Africa’s aquaculture industry. The total acquisition cost was R565 million, funded partly by cash (R315 million) and partly through the issuance of 19.2 million Sea Harvest shares.

Further diversifying its portfolio, Sea Harvest ventured beyond its traditional fishing business with the acquisition of Ladismith Cheese Company for R527 million. This move into the dairy sector, based on Ladismith’s after-tax profit of R58 million for the year to January 2018, indicates Sea Harvest’s strategic intent to mitigate the risks associated with the fishing industry. Additionally, in March 2023, Sea Harvest increased its stake in Viking Aquaculture to 82% for R210 million, reinforcing its commitment to growing its aquaculture division.

For the fiscal year ending 31st December 2023, Sea Harvest reported a revenue increase of 6%, although headline earnings per share (HEPS) declined by 5%. The company’s net asset value (NAV) improved by 7% to 1216c per share. The company attributed its performance to strong demand and improved pricing in its markets, coupled with a 43% hard currency exposure which provided a buffer against the weakening rand. However, challenges such as difficult fishing conditions, above-inflation cost increases, load shedding, and global pressure on prawn prices constrained its performance.

The Sea Harvest share has demonstrated volatility with reasonable trading volumes since its listing in March 2017. The stock has largely moved sideways with a recent downward trend, influenced significantly by the acquisition of Viking which has substantially altered the company's business dynamics. Factors such as weather conditions affecting catch volumes and potential changes in regulatory environments regarding fishing quotas continue to pose risks.

Most recently, on 15th May 2024, Sea Harvest announced that its acquisition of 100% of Terrasan, another step in its expansion strategy, received approval from the Competition Tribunal. This approval likely provides a further diversification of its business portfolio, which could influence its market dynamics and investment attractiveness.

Overall, while Sea Harvest is navigating through several challenges and leveraging acquisitions to diversify its business model, the share price, after a recent uptick, remains fairly valued. Investors should consider both the opportunities presented by the company’s strategic acquisitions and the inherent risks of the fishing and aquaculture industries when evaluating its shares.