Sanford Limited

Company Overview: Sanford Limited (NZX: SAN) has the vision to become the best seafood company in the world and it has 100+ years of seafood history. In 1881, the company started as a family business in Auckland and since then it has grown to a level where its staff strength stands at above 1,400. With global presence, SAN’s operations span from Stewart Island to Auckland, along with China and Australia. The Sanford brand is renowned for sustainable seafood and it is in the mid of transition from essentially being a fishing company to a producer and marketer of premium high-quality seafood and high-value items.

SAN Details

Investment Summary:

• Topline and bottom line CAGR over FY15-19 reported at ~4.89% and ~31.85%, respectively.
• SAN in the recent years made strategic transition into higher value products such as high-end branded salmon and Greenshell mussel powders.
• Business fundamentals for seafood remain strong.
• Investment in operational capability and branding is expected to stimulate sales.  
• EV/EBITDA multiple based relative valuation approach is indicating a decent upside (in % terms).
• SAN’s business is exposed to warmer waters and adverse weather conditions, which may impact its financials.

Seafood Demand Expected to Rise: New Zealand’s largest and oldest seafood company, Sanford Limited (NZX: SAN) has a diverse range of interests across fishing and aquaculture. It’s market capitalization stood at around $606.855 million as on August 3, 2020.

Looking at the past performance over FY15 to FY19, top-line and bottom-line of the company witnessed a compounded annual growth rate (CAGR) of ~4.89% and ~31.85%, respectively. The company’s total revenue improved from $450.3 million in FY15 to $545.1 million in FY19, and its net income improved from $13.8 million in FY15 to $41.7 million in FY19.

In recent years, the company has made a strategic transition into higher-value products such as high-end branded salmon and Greenshell mussel powders, enhancing its presence in diverse businesses. Despite the challenges during first half, SAN’s normalised EBIT per greenweight kilogram increased across its aquaculture business with salmon at the Stewart Island farm reflecting good growth with a 19% increase in biomass. With the country entering alert level 1, it is expected that the life and economy will return to normalcy soon and business will be as usual.

Historical Performance (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 36.94% of the total shareholding. Amalgamated Dairies Ltd and Harbour Asset Management Limited are holding maximum interests in the company at 12.00% and 6.81%, respectively.

Top 10 Shareholders (Source: Refinitiv (Thomson Reuters))

A Quick Look at Key Metrics: Its gross margin, EBITDA margin and net margin for H1FY20 stood at 19.4%, 17.1% and 7.7%, better than the H2FY19 result of 19.0%, 13.8% and 6.7%, respectively, implying improvement in the operating efficiency of the company.

Key Metrics (Source: Refinitiv (Thomson Reuters))

Subdued Performance for H1FY20: The company recently published its interim result for FY20 (ended March 31, 2020) where it highlighted that its statutory net profit after tax (NPAT) for the period at $19.0 million was 17% lower than last year’s result of $22.9 million for the same period. Adjusted (underlying) EBIT (Earnings Before Interest and Tax) for the first half period stood at $23.2 million, a 29% decrease on adjusted EBIT from the same period last year which was $32.6 million. Underlying EBIT decreased by 16% on a comparable basis, after excluding the pelagic business which was sold in March 2019.

Total revenue for the first half period was reported at $245.5 million, a 7% decrease on pcp. The result can be attributed to shortfall in catch volumes for toothfish, caused in part by weather factors, plus pricing for this species was also softer globally, after the impact of coronavirus. In addition, the sale of Sanford’s pelagics business at the end of March 2019 also impacted the sales volume. The Board of Directors have declared interim dividend payment of 5c per share, as compared to 9c for the same period last year.

H1FY20 Income Statement (Source: Company Reports)

What to Expect: The company comes under New Zealand’s primary industry sector and was classified as a provider of an essential service which allowed it to continue to operate even when New Zealand was placed under Alert Level 4. The company’s robust balance sheet with sufficient headroom in borrowing facilities can help it in absorbing business shocks. Strong balance sheet also helps in deployment of funds for productive use to accelerate the process of its innovation strategy, specifically with the marine extracts as well as its asset rejuvenation strategy.

Fishing & Farming Sector Outlook: According to the provisional trade data provided by Stats NZ, New Zealand’s seafood export revenue tracked down 27 percent in February, up 7 percent in March, and down 44 percent in April relative to the prior year. Trade in February was heavily impacted by China’s lockdown, and April was impacted by the capacity restrictions due to New Zealand’s lockdown. According to the statement made by Stuart Nash, Fisheries Minister on June 14, 2018, aquaculture export earnings are forecast to reach nearly $600 million in 2022. Aquaculture is set to be the main driver for the forecast growth, mainly due to increased mussel harvests, and higher prices as demand continues to grow in key markets. As global population grows and gets wealthier, global middle class is growing. Paired with heightened consumer awareness as well as connectivity, demand for healthy, sustainable and ethically produced seafood has been increasing.

Key Risk: A large proportion of the company’s sales are derived from exporting seafood products. Fluctuations in foreign exchange rates may have a material influence on the profitability of the company.

Key Valuation Metrics (Source: Refinitiv (Thomson Reuters))

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger bands with upper band suggesting overbought status while lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack.

Continuing with the previous week of resilience, the stock in a low volatile market has given close around the same level on the first day of the on-going week. Technical indicator RSI with around 54 reading suggests strong bullish momentum for the stock.

Going forward, the stock may have good resistance around the converging point of 61.8% retracement level and the upper Bollinger band of $7.18 while support could be around 23.6% retracement level of $61.7.

Stock Recommendation: Considering the improvement in the situation in various markets, it can be expected that demand of seafood will improve in the times to come. Moreover, the company is planning to improve its margins by reducing and containing fixed costs and recover its investments in sales and marketing.

Considering the aforesaid facts, recent updates and H1FY20 results, we have valued the stock using EV/EBITDA multiple based relative valuation method (on an illustrative basis) and have arrived at a target price of lower double-digit growth (in % terms).

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$6.490 per share, down by 0.15% on August 3, 2020.

SAN Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Disclaimer

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