Salmon farming
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
Salmon farming 23 April 2008 - INITIATION OF COVERAGE
EUROPE - SMALL / MID-CAPS
FOOD PRODUCERS 380
Limited supply growth and strong demand We forecast increasing salmon prices in 2009 and 2010 due to limited growth in supply. We expect a good salmon market in 2008, but high costs will affect earnings. CEQ and MHG are our preferred options in the sector. Weaker prices in Q2 and Q1 reports in May could impact shares negatively short term, but we expect the shares to rebound. Pri ce
P/E a d j.
EV/K G
E V/EBIT
NOK
2 00 8 E
20 09 E
2 01 0 E
20 0 8E
2 00 9 E
20 1 0E
20 0 8
R e c.
T arg et
M arin e Ha rve st G ro up C e rm a q
2 .8 2 5 4.7 5
17 .4 12 .8
1 0.9 1 0.2
7 .8 7 .5
1 5 .3 1 1 .4
10 .5 9 .0
7 .7 6 .9
40 .6 17 .1
Bu y Bu y
3 .1 75
L e rø y Sea fo o d G rou p S alm a r
1 0 6.5 0 4 0.2 0
18 .1 13 .6
1 3.3 1 1.9
10 .7 9 .8
1 4 .9 1 1 .6
11 .4 10 .4
9 .4 8 .6
54 .9 74 .5
R e du ce H o ld
95 40
1 2.6 0
14 .8
9 .1
5 .3
1 3 .3
9 .6
6 .7
35 .2
H o ld
14
G rie g S ea fo od Source: Landsbanki
Increasing salmon prices in 2009 and 2010 due to limited growth in supply We forecast 2-5 % annual growth in global supply during 2009-2010, as biological problems appear to limit growth in Chile, while Norwegian producers operate near full capacity. We believe that low to moderate growth in supply should result in higher salmon prices and increased margins. Although feed cost should increase we expect production costs to come down in the medium term as biological problems gradually are reduced. Outstanding long-term outlook The long-term outlook for the salmon sector is outstanding as underlying growth in demand for seafood in general is strong, while supply from traditional fisheries is stagnating. Economic growth, significant product development, a general shift towards a more healthy diet and increasing meat prices are all developments that support the market. However, the cyclicality of the industry will continue to impact earnings. 2008 earnings will be impacted by high costs Global growth in supply of salmon will come down in 2008. We expect a good salmon market, but Norwegian spot prices should come down in Q2. Higher costs due to biological problems will prevail, especially in Chile, although we expect improvements in 2009. Buy CEQ and MHG during Q2 based on the outlook for 2009 and 2010 Valuation of farming companies have come down significantly over recent months. We believe there is upside potential in the medium term, as margins should increase. We initiate coverage of the sector with a buy recommendation on Cermaq (top pick in the sector, as the company is undervalued) and Marine Harvest Group, and suggest entry during Q2. We initiate coverage of Lerøy Seafood Group and Salmar with a reduce and hold recommendation respectively and targets of NOK 95 and NOK 40. We advice investors to be cautious with Grieg Seafood until operational progress is achieved.
Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
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Landsbanki
Salmon farming
2
Contents Salmon farming 23 April 2008 Summary
3
Global protein and seafood consumption
4
Demand for Atlantic salmon
5
Economic growth and development in retail
7
Product development
8
Shift to a more healthy diet
9
Increasing food prices globally
9
WTO panel concludes in favour of Norway
12
Conclusions on demand
13
Supply of farmed Atlantic salmon
14
Supply of red fish
14
The cyclicality of the industry
14
Price developments
16
Short-term supply developments
18
Long-term supply developments
21
Conclusions on the supply side
24
Valuation of salmon companies compared to protein and food producers.
25
Key risks to our assumptions
27
Companies
28
Marine Harvest Group
28
Cermaq
35
Lerøy Seafood
42
Salmar
47
Grieg Seafood
53
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
1.
3
Summary
The fundamentals in the salmon market appear fairly strong in the short term, as demand is growing in all markets and particularly in emerging markets. Growth in the global supply of Atlantic salmon in 2008 appears moderate as Chilean supply is limited by biological problems, while growth in Norwegian supply is coming down compared to 2007. We foresee a decrease in wild catches of salmon during 2008 and no significant increase in the total supply of red fish (farmed Atlantic, wild salmon, Pacific salmon and trout) in 2008. Salmon markets in Q1 2008 has been good, but we expect some downward pressure on prices during the summer due to harvest of a larger generation of fish in Norway. Outlook for the rest of 2008 is good. Salmon prices are correlated with economic growth in main markets and slower economic growth in the EU and the US could have a negative impact on markets. On the other hand, the recent increase in global food prices should have a positive impact on demand for salmon. Due to a significant increase in grain prices, bringing for example wheat prices to record levels, we expect prices for pork and poultry products to increase significantly. This is positive for salmon producers, as substitution should increase. In the medium term we indicate a low to moderate annual growth (2–5 %) in global supply of Atlantic salmon over 2008-2010 for two reasons: firstly, it appears that biological problems will limit significant growth in Chile until 2010 and 2011. Secondly, managing growth in Norwegian production will be increasingly difficult in 2009 and 2010 based on the current number of licenses. Low to moderate supply growth should under normal conditions result in a firm salmon market, particularly during late 2009 and in 2010. The longer-term outlook for the salmon farming sector appears outstanding, as underlying growth in demand for seafood in general is strong, while supply from traditional fisheries is stagnating. Demand for Atlantic salmon has grown with annual growth rates averaging 9 % over the last 11 years. Economic growth has increased personal purchasing power and the number of individuals who can afford salmon, while significant product development and a general shift towards a more healthy diet are developments that support the market. However, the cyclical nature of this industry will continue to impact earnings. Valuation of most farming companies listed on the Oslo stock exchange have come down significantly recently, due to lower salmon prices, significantly higher cost of production and the general market downturn. Costs have increased due to higher feed costs and particularly biological problems (sea lice, SRS and ILA in Chile and PD on the southern and western parts of Norway), reducing operating margins of farmers. Particularly Marine Harvest Group but also Lerøy (Austevoll), Grieg and Cermaq (Mainstream Chile) have been affected by cost increases. We expect costs to remain high in 2008, but over time gradually improve, depending on developments in the biological situation. CEQ and MHG are our preferred options in the sector. Weaker prices in Q2 and Q1 reports in May could impact shares negatively short term, but we expect the shares to rebound. We believe that low to moderate growth in supply should result in higher salmon prices and increased margins.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
2.
4
Global protein and seafood consumption
Due to increased demand and growth in intensive livestock production, the global production of meat has more than trebled since 1960. According to the Food and Agriculture Organization of the United Nations (FAO) approximately 247 million tons of meat were consumed in 2002, of which , approximately 54 million tons were consumed in Europe and 40 million tons in the US. Poultry production has been particularly strong, increasing from 15 million tons in 1970 to 68 million tons in 2000. FAO forecasts that global meat production will increase to approximately 300 million tons by 2020. Chart 1: Protein consumption in the EU market
Chart 2: Protein consumption in the US market
50
60
40
50
K g /c a p i t a
K g /c a p i t a
40
30
30
20
20
10
10
0 1973
1983
1993
0
2003
1973
1983
Pork Beef Poultry Seafood
1993
2003
Pork Beef Poultry Seafood
Source: FAO
Source: FAO
Developments in per capita consumption of proteins in the US and the EU market are somewhat divergent, as pork is increasingly dominant as the most important animal protein source in the EU, while poultry is increasingly dominant in the US, as illustrated in chart 1 and 2. Consumption of beef has decreased in both markets while seafood consumption is increasing. According to Kontali total seafood production was 146 mill tons in 2007 of which 94 mill tons from catches and 52 mill tons from aquaculture. Global consumption of seafood has increased from 13.5 kg per capita in 1993 to 16.6 kg per capita in 2004 according to FAO statistics. This trend is expected to continue in the coming years due to economic growth and a general shift to a healthier diet. As the world catch of seafood has been stagnating over recent years (due to depletion of stocks), increased demand will have to be met by increased production from aquaculture, cf. chart 3. Chart 3: Global capture and aquaculture production 200,000,000 150,000,000
Tons
100,000,000 50,000,000
Capture
2028
2025
2022
2019
2016
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
0 1980
Landsbanki
Aquaculture
Source: FAO, Landsbanki
Salmon accounts for only a small share of the total protein market: 1 % of the total animal protein consumption in Europe and approximately 4 % of total seafood consumption in the region. However, the potential for further growth in market share is significant.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
5
Farmed salmon represents only a small part of total seafood (approximately 1 %) and aquaculture production (approximately 3 %) as illustrated in chart 4. However, salmon farming is among the fastest growing segments of the farming industry, together with tilapia, pangasius and shrimp, cf. chart 5. Salmon farming has been industrialized more than any other segment of the sector, and over time we expect salmon companies to integrate into other species and drive developments in other segments of the sector. Chart 4: Global seafood production 40
Mill tons
30 20 10 0 No n human fo o ds
Whitefish
Carps
P elagic
M o lluscs & Crusteances
A quatic plants
Shrimp & P rawns
Farmed salmo nids
Flatfish
Source: Kontali, Landsbanki
Chart 5: Fast growing farming segments 3.5 3 2.5
Mill tons
Landsbanki
2 1.5 1 0.5 0 P angasius
Salmo nids 1986
Tilapia 1996
Shrimp
2006
Source: Kontali
3.
Demand for Atlantic salmon
Demand for Atlantic salmon has grown significantly over the last 11 years, with yearly growth rates of 2–15 %, averaging 9 %. Currently demand is strong in both traditional and emerging markets, but we see particularly strong growth in emerging markets. Demand in markets other than the EU, Japan and the US increased by approximately 23 % (in volume) in 2007. Salmon consumption in more mature markets like the EU also increased significantly, while consumption has been stagnating in the US and falling in Japan. Preliminary figures indicate that global consumption of farmed Atlantic salmon has remained strong in 2008 with an increase of approximately 12 % during January and February. Table 1: Global consumption of Atlantic salmon 2001 2002 2003 EU 495,000 522,000 597,000 Japan 66,000 65,000 50,000 USA 252,000 297,000 311,000 Russia 15,000 21,000 30,000 Others 160,000 151,000 155,000 Total 988,000 1,056,000 1,143,000 Growth 13 % 7% 8%
2004 603,000 66,000 301,000 43,000 193,000 1,206,000 6%
2005 634,000 61,000 302,000 62,000 188,000 1,247,000 3%
Source: Norwegian Seafood Export Council, Kontali, Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2006 653,000 52,000 295,000 50,000 219,000 1,269,000 2%
2007 E 714,000 44,000 313,000 72,000 260,000 1,403,000 11 %
Landsbanki
Salmon farming
6
Other markets, including Russia, have increased their share of total demand from 16 % in 2003 to an estimated 23.5 % in 2007 as illustrated in chart 6. Although other markets include countries such as Norway and Canada, this category is composed mainly of markets in Asia, South America and the Middle East. Chart 6: Share of global demand 60 % 50 % 40 % 30 % 20 % 10 % 0% 2001
2002
2003 EU
2004 USA
Russia/o thers
2005
2006
2007 E
Japan
Source: Landsbanki
In the long term, the market potential for Atlantic salmon producers in many emerging markets is significant, as seafood consumption per capita is high while personal income is increasing. Traditionally, local or regional aquaculture and fisheries have supplied these markets, but over time, we expect consumers to increase consumption of Atlantic salmon. Barriers to trade, such as tariffs, currently have a negative impact on trade, but both Chile and Norway are actively promoting free trade agreements with countries that represent potentially important seafood markets. Both countries have entered into free trade agreements with South Korea that are gradually reducing import tariffs on salmon. Norwegian authorities also foresee the commencement of free trade negotiations with China (bilateral) and possibly India (through EFTA) in 2008, while Norway might also pursue agreements with both Russia and Thailand. The current WTO negotiations could also benefit long-term market access for salmon producers. Further, the Norwegian Seafood and Export Council (NSEC) (financed through a levy on Norwegian exporters) is increasing marketing efforts to promote salmon consumption in emerging markets. Although these developments have only a minor effect on the value of listed salmon companies in the short and medium term they represent important long term trends due to significant growth potential. Depending on developments in the general economy, we expect salmon consumption over time to grow faster in these markets than in more mature markets. We have identified the following key drivers and developments on the demand side: 1.
GDP growth and development of retailers in important markets
2.
Product development and more value added products available for the consumer
3.
Continued shift towards a healthy diet
4.
Increasing food prices globally
5.
WTO concludes in favour of Norway
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
1.
7
Economic growth and development in retail
Global economic growth has been strong in recent years resulting in increased purchasing power for consumers and increased demand for salmon products. We find some correlation between GDP growth and salmon prices as illustrated in chart 7 Chart 7: GDP growth in Euro area and salmon prices 35
4
3.5
30
3
25
2.5 NOK
%
20 2 15 1.5 10
1
5
0.5
0
0 1996
1997
1998
1999
2000
2001
2002
Euro area
2003
2004
2005
2006
2007
2008
Norwegian export price
Source: IMF and Landsbanki
Estimates of global growth are coming down in important salmon markets like the US and the Euro area and we expect this reduction to have some negative impact on salmon markets in the short term. IMF forecast for GDP growth in 2008 is included in chart 2. Table 2: Annual GDP growth in per cent 2003 Emerging markets 6.2 Euro area 0.8 United States 2.5 World 3.6
2004 7.5 2.1 3.6 4.9
2005 7.1 1.6 3.1 4.4
2006 7.8 2.8 2.9 5.0
2007 7.9 2.6 2.2 4.9
2008 6.7 1.4 0.5 3.7
Source: IMF
One factor explaining the increased demand in emerging markets is the expansion of retail chains. According to Marine Harvest approximately 32 % of all group sales were to retail customers in 2006 whereas in France approximately 46 % of all salmon sales to the end consumer are made through retailers, according to the NSEC. Increasingly, retailers also represent a key distributor in emerging markets, as groups such as Carrefour, Auchan and Metro are targeting growth in emerging markets. Planetretail expects total turnover in retail in Russia to increase by 20-25 % annually in the coming years, cf. chart 8. Strong growth in retail turn over is also expected in other emerging markets cf. chart 9-11. Through expansion of retail distribution, salmon is finding new end consumers. Chart 8: Forecast turnover in retail in Russia
12000 10000 USD mill
80000 70000 60000 50000 40000 30000 20000 10000 0 2002
Chart 9: Forecast turnover in retail in the Ukraine
USD mill
Landsbanki
8000 6000 4000 2000
2003
2004
2005
2006
2007
2008
2009
2010
2011
0 2002
2003
2004
2005
Hypermarkets Supermarkets
Source: Planetretail
2006
2007
2008
Hypermarkets Supermarkets
Source: Planetretail
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2009
2010
2011
Salmon farming
8
Chart 10: Forecast turnoverin retail in Asia (ex Japan) 1,800 1,600 1,400 1,200 1,000 800 600 400 200
Chart 11: Forecast turnover in retail in China 1,000 900 800 700 600 500 400 300 200 100
Euro mill
Euro bln
Landsbanki
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total Asiaexcl Japan
Source: Planetretail
Source: Planetretail
Developments in Russian demand appear particularly promising, as Russian imports of Atlantic salmon have increased annually by over 40 % in recent years (except in 2006 because of import restrictions). We believe the strong Russian import growth will continue in the years to come. In chart 12 we have for illustrative purposes indicated a yearly increase in imports of 20 % and imports of approximately 86,000 tons in 2008 and 124,000 tons in 2010. Strong demand from Russia should particularly benefit producers in Norway. Chart 12: Russian demand for Atlantic salmon 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2000
2001
2002
2003
2004
2005
2006
2007
2008 E
2009 E
2010 E
Russia Source: Landsbanki
2.
Product development
Seafood is given more shelf space in retail stores, and the products on offer today are quite different from some years ago. Significant product development and the availability of more value-added consumer products, especially fresh products, have contributed to the increased consumption. We expect this trend to continue with larger seafood companies further developing the scope of salmon products. Chart 13: Salmon products
Chart 14: Salmon products
Source: Norwegian Seafood Export Council
Source: Norwegian Seafood Export Council
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
9
Chart 15: Salmon products
Chart 16: Salmon products
Source: Norwegian Seafood Export Council
Source: Norwegian Seafood Export Council
3.
Shift to a more healthy diet
Human health studies indicate that 40–60 % of lifestyle illnesses can be related to diet. Increasingly, consumers’ awareness of this fact appears to influence their purchasing behaviour. We see this becoming reality across different food segments as companies such as Pepsi Cola and McDonalds have improved the nutritional profile of their products and expanding the range of healthy products. In fact, products that can contribute to healthier lifestyles represented two-thirds of Pepsi’s growth in the US market in 2006. Pepsi expects that such products should generate 50 % of total revenues in the US by 2010. (Source: Pepsi) In co-operation with Marine Harvest, McDonalds has introduced a new fast food product (wrap) based on salmon, which will also be introduced internationally if sales are satisfying in Norway. Salmon is rich in omega-3 fatty acids that are effective against a number of health risks. Scientific work shows that omega-3 stimulates the development of the brain and eyes and suggests it reduces risks of asthma, depression and dementia. It also has a positive effect on cholesterol levels and fat accumulations in the arteries. Consumption of Atlantic salmon should increase, as consumers become more health conscious.
4.
Increasing food prices globally
In recent years we have seen a significant increase in the various grain and soy prices as illustrated in charts 17 and 18. Developments have been especially significant over the last year as futures prices for wheat have more than doubled since April 2007, while soybean and corn prices have increased by approximately 60 % since summer 2007. The rise of corn prices is in part due to the use of corn to produce bio-energy. Increased demand from energy producers has shifted acres of land to corn production instead of other grain such as wheat and soybeans. Further, extreme weather conditions have reduced the wheat supply while the demand for soy and wheat is very strong due to global economic growth and a growing population. We expect grain prices to remain high in the short term. In the longer term they will be influenced by developments on the supply side (weather, acres available i.a.) as we expect demand to remain strong.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
10
Chart 17: Wheat, corn and soybean prices Daily QWc1, QCc1, QSc1
06/09/2006 - 30/04/2008 (CHG) Price USc Bsh
Line, QWc1, Last Trade(Last) 21/04/2008, 856@6 Line, QCc1, Last Trade(Last) 21/04/2008, 590@4 IPP, QSc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected]
1000 900 800 700 600 500 400 300 200 1/8
Oct
Nov
Dec
Jan
Q4 2006
Feb
Mar
Apr
May
Q1 2007
Jun
Jul
Q2 2007
Aug
Sep
Oct
Q3 2007
Nov
Dec
Jan
Q4 2007
Feb
Mar
Apr
Q1 2008
[Delayed]
Source: Landsbanki, Reuters
Chart 18: Index wheat, corn and soybean prices Daily QCc1, QWc1, QSc1
06/09/2006 - 30/04/2008 (CHG) V alue USc Bsh
IPP, QCc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected] IPP, QWc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected] IPP, QSc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected]
300 270 240 210 180 150 120 1/8
Oct
Nov
Dec
Q4 2006
Jan
Feb
Mar
A pr
May
Q1 2007
Jun
Jul
Q2 2007
A ug
Sep
Q3 2007
Oct
Nov
Dec
Q4 2007
Jan
Feb
Mar
A pr
Q1 2008
[Delayed]
Source: Landsbanki, Reuters
Grain is an important component in feed for poultry and pigs where feed costs represent 50-70 % of total cost of production. Meat prices have increased over recent years, and we expect this trend to continue. Increasingly poultry and pork producers are feeling the effects of higher costs. Based on discussions with industry sources we expect a considerable increase in the poultry and pork prices over the next year, which will be positive for the demand for salmon, which represents a substitute for poultry in particular. Chart 19: US poultry prices U n i t e d S ta t e s , P r i c e I n d e x , P C E , N o n d u r a b l e G o o d s , F o o d , P o u l t r y , S A
2000 =100
Landsbanki
122.5
122.5
120.0
120.0
117.5
117.5
115.0
115.0
112.5
112.5
110.0
110.0
107.5
107.5
105.0
105.0
102.5
102.5
100.0
100.0
97.5
97.5 00
01
02
03
04
05
06
07
S ou r c e: R e u te r s E c o W in
Source: Reuters, EcoWin
The increased raw material prices will also impact the cost of feed for salmon farmers, which represent approximately 50 % of total costs for salmon farmers. Feed costs will typically develop as a function of costs of feed components, and the ability to develop more cost effective feed. Salmon feed should consist of approximately 30-56 % proteins and 1525 % fat, of which approximately 50 % is normally based on marine ingredients in Norway
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
11
(other producer regions use a higher content of marine ingredients). The share of marine ingredients in the salmon diet have been reduced significantly over recent years due to increased costs of raw materials, cf chart 20 and 21. There is still scope for further reductions, but substitution is getting more difficult.
Chart 20: Raw material cost in salmon feed production
Chart 21: Raw material cost in salmon feed production
1997 0%
23 %
2005 15 %
8%
20 % 16 %
26 %
28 %
46 %
18 %
Vegetable oil Vegetables Pigments and vitamins Fish meal Fish oil
Vegetable oil Vegetables Pigments and vitamins Fish meal Fish oil Source: Kontali, Cermaq
Source: Kontali, Cermaq
Production costs for salmon producers have been reduced significantly since 1990 in all producing regions, cf. chart 22, which illustrates developments in Norway. Chart 22: Developments in production costs in Norway 40 35 25 20 15
NOK
30
10 5
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
0
1986
Landsbanki
Source: Norwegian Directorate of Fisheries
The most important feed components for Atlantic salmon are fish meal and fish oil, for which chart 23 and 24 illustrate price developments. Fishmeal prices have increased significantly from 2005 due to limited supply and strong demand, but have decreased since summer 2007 because of substitution from fish meal to soy meal, which represent a less costly alternative component in feed. As a result, the price ratio between fishmeal (FM) and soymeal (SBM) has come down from levels of 5–6 to below 2.5, cf chart 26, which is approximately at the long-term average. As fishmeal is getting more competitive and storages have been reduced the price of fishmeal has trended upwards in recent weeks. Fish oil prices have remained high because of supply shortages and strong demand.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
12
Chart 24: Prices for fish oil
1500
1900
1300
1700 1500
U S D p e r to n
U S D p e r to n
Chart 23: Prices for fish meal (FM)
1100 900 700
1300 1100 900 700
500
500 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
Week
Week
2005
2006
2007
2008
2005
2006
Source: Weekly newsletter, Oil World, ISTA
Source: Weekly newsletter, Oil World, ISTA
Chart 25: Prices for soy meal (SBM)
Chart 26: Ratio FM/SBM
600
2007
2008
6.50
U S D p e r to n
500
5.50
R a t io
400
4.50
300
3.50
200
2.50
100
1.50 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
Week
Week
2005
2006
2007
2008
2005
Source: Weekly newsletter, Oil World, ISTA
2006
2007
2008
Source: Weekly newsletter, Oil World, ISTA
Farming of salmon is feed efficient compared to production of poultry, pork and lamb, cf. chart 27. The quantity of feed required to produce 1 kg of salmon is one third of the feed required to produce poultry and one fifth of the feed required to produce pork. The ability to transform feed to proteins and fat will be increasingly important in a high feed-cost environment. Although exposed to developments in prices of marine ingredients, we expect production costs of salmon producers to increase less than production costs of other protein producers. Chart 27: Kg of meat from 100 kg of feed 70 60 50
Kg
Landsbanki
40 30 20 10 0 Salmo n
Chicken
P o rk
Lamb
( M e a s ure d a s e dible m e a t ) Source: Biomar, Kontali
5.
WTO panel concludes in favour of Norway
Norwegian and Chilean producers of salmon are dependent on exports to the US and EU markets. Over the years, the EU and the US have imposed anti-dumping and anti-subsidy measures on imports of farmed salmon to protect less cost-effective domestic farmers located in rural areas where they are vital for local employment. Currently there are antidumping measures imposed on Norwegian exports of Atlantic salmon to both the US (in the
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
13
form of an anti-dumping duty) and the EU market (in the form of a minimum import price or MIP). The EU imposed temporary anti-dumping measures on Norwegian exports in 2005, and definitive measures (for five years) in 2006 in the form of a minimum import price (MIP) of Euro 3.11 per kg gutted weight (approximately NOK 24.50 CIF EU border). The Norwegian Government brought this trade restriction to the WTO Dispute Settlement Body in March 2006 in order to have the measures removed. The WTO panel report, published in November 2007, concluded that the EU had breached WTO on 22 of the 60 claimed issues. Most of these issues are of technical nature, but the EU was also found to have erred on some potentially important issues. According to the WTO report, the EU will have to change the definition of “community industry” based on their definition of “product concerned” in the case of salmon. The effect of this change will be to increase the influence of the processing industry in the EU to the detriment of EU farmers. The processing industry normally opposes dumping measures. The “community industry” definition is important in dumping cases as it forms the basis for the European Commission’s assessment of dumping, injury and standing of the case (whether or not a dumping case can be initiated). However, it is currently uncertain how the panel report will affect the outcome of this and possibly future salmon cases. It appears that any future salmon cases will be more complex and time consuming for the Commission to handle, as it will need to collect information from other parts of the industry. However, the key question as to whether the decision making in such cases will be transferred from EU farmers (who favour anti-dumping measures) to the processing industry (which wants access to low-cost raw materials from Norway) remains doubtful. However, it appears evident that the Commission will need to change some of its dumping calculations. Both Norway and the EU have accepted the adoption of the findings in the report and it will therefore not be appealed. Shortly, the EU will implement the findings in the report and adjust the measures accordingly. Implementation will probably take place within 9-12 months. Further, an interim review of the measures currently installed is ongoing and is due for completion by 21 July 2008. Findings in this review will be significant for the further handling of this case by the EU. Only Norwegian membership in the EU would secure Norwegian salmon producers free market access to their most important market. However, membership appears unlikely under current political circumstances.
6.
Conclusions on demand
The underlying growth in demand for seafood in general is strong, while supply from traditional fisheries is stagnating. Demand for Atlantic salmon has grown at annual rates averaging 9 % over the last 11 years. Economic growth has increased the personal purchasing power and the number of individuals who can afford salmon, while significant product development, a general shift towards a more healthy diet and developments in retail distribution are developments that support the markets. Increasing prices for substitutes to Atlantic salmon could further stimulate demand.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
14
4.
Supply of farmed Atlantic salmon
1.
Supply of red fish
Almost 60 % of all salmon consumed (approximately 2.58 mill tons in 2007) is farmed, the rest being essentially wild salmon catches from North America, Russia and Japan. Most farmed salmon is Atlantic while there is some farming of Pacific species, mainly Coho in Chile. In addition, there is farming of large rainbow trout, mainly in Norway, the EU and Chile. Table 3: Global supply of red fish 2000 2001 Wild salmon US 320,000 367,000 Canada 19,000 25,000 Japan 195,000 224,000 Russia 215,000 222,000 Total wild 749,000 838,000 Farmed salmon Pacific salmon Atlantic salmon Total farmed Total salmon Trout Total supply Growth
123,000 873,000 996,000 1,745,000 180,000 1,925,000 1.3 %
167,000 988,000 1,155,000 1,993,000 229,000 2,222,000 15.4 %
2002
2003
2004
2005
2006
2007E
283,000 33,000 243,000 156,000 715,000
362,000 38,000 299,000 231,000 930,000
363,000 19,000 255,000 162,000 799,000
407,000 27,000 239,000 259,000 932,000
331,000 23,000 230,000 257,000 841,000
411,000 28,000 235,000 359,000 1,033,000
142,000 1,057,000 1,199,000 1,914,000 246,000 2,160,000 -2.8 %
141,000 1,143,000 1,284,000 2,214,000 229,000 2,443,000 13.1 %
139,000 1,206,000 1,345,000 2,144,000 233,000 2,377,000 -2.7 %
148,000 1,247,000 1,395,000 2,327,000 228,000 2,555,000 7.5 %
142,000 1,267,000 1,409,000 2,250,000 244,000 2,494,000 -2.4 %
146,000 1,403,000 1,549,000 2,582,000 288,000 2,870,000 15.1 %
Source: Kontali, Landsbanki
Farmed Atlantic salmon and wild salmon are mainly sold in different market segments and competition between the products has traditionally been limited in the main markets (but competition in many Asian markets), although reports indicate that increasingly in 2007, wild salmon was presented in traditional “farmed Atlantic segments”, particularly in the US. Supply of wild salmon is relatively stable, although high catches in 2007 appear to have affected farmed salmon prices somewhat negatively. Although the farmed salmonids; Atlantic salmon, Coho and trout appear to have many similar product characteristics, they are also largely sold in different market segments. Although competition between the species is somewhat limited in many markets, the effect of the total estimated supply increase in 2007 of approximately 370,000 tons of red fish (130,000 tons of Atlantic salmon, 40,000 tons of trout and 190,000 tons of wild salmon) contributed to downward pressure on prices for red fish in 2007. For 2008 we expect a stable supply of trout, an increase of approximately 20 000 tons of Coho and a decrease in catches of wild salmon, particularly of Pink in the US. The estimates for catches are uncertain, and we expect improved data later in the year. Our estimates for Atlantics are presented in table 5 (on page 20). In total, we do not foresee a significant increase in the total supply of red fish in 2008.
2.
The cyclicality of the industry
Traditionally, the salmon industry has been cyclical, as farmers have released too many smolts in the sea during periods of high profitability, resulting in overproduction and lower prices. On the other hand, farmers have released low numbers of smolts during periods of low profitability resulting in low supply growth and higher prices. Biological issues and the fragmented structure of the industry have further contributed to the cyclical nature of this industry.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
15
Cyclicality is illustrated in chart 28, which reflects the average operating margin of Norwegian salmon farmers from 1986–2006. On average, Norwegian farmers have had a margin of 12.6 % over the last 14 years, but margins were very good in 2005–2007. Operating margins were 30 % for Norwegian farmers in 2006, but decreased to an estimated 15–20 % in 2007 due to lower salmon prices and increased costs. Chart 28: Operating margin for Norwegian salmon farmers 35.0 30.0 25.0 20.0
%
15.0 10.0 5.0 0.0 -5.0 -10.0 1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: Norwegian Directorate of Fisheries
The global supply growth of Atlantic salmon came down in 2005 and 2006 due to a combination of diseases in the UK, the Faroe Islands and Chile (from 2006) and liquidity problems in previous years resulting in lower outset of smolts. We have seen supply growth coming up in 2007 to approximately 11 %, cf. chart 29, as supply from Norway has been particularly strong. Chart 29: Global supply of Atlantic salmon and annual growth in supply
Tons
Landsbanki
1,600,000 1,400,000
14.0 %
1,200,000 1,000,000
10.0 %
12.0 % 8.0 %
800,000 600,000 400,000
6.0 % 4.0 % 2.0 %
200,000 0
0.0 % 2001
2002
2003
2004
2005
2006
2007
Grow th rate Source: Kontali, Landsbanki
The increased harvest in Norway in 2007 was in part caused by an increased yield per smolt (kg of fish meat from each individual fish released) due to warmer sea temperatures and fantastic growth conditions in Norway in 2006/2007, cf chart 30. The average weight of harvested fish was at record levels in 2007, cf chart 31. On the other hand, biological issues in Chile have continued to hamper growth in production in 2007 from this region. As illustrated in chart 30, Chilean yield decreased significantly in 2007 (harvest of generation 05 and 06).
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
16
Chart 30: Yield per smolt released 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 00 G
01G
02 G
03 G
04 G
No rway
05 G
06 G
Chile
Source:: Kontali
Chart 31: Average weight of slaughtered salmon in Norway (wfe) 5.4 5.2 5
Kg
Landsbanki
4.8 4.6 4.4 4.2 4 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007E
Source: Kontali
3.
Price developments
a.
Relation between prices and supply
As illustrated in chart 32, developments in supply growth and in salmon prices are negatively correlated. When supply is diminishing, the FHL price tends to increase, while when supply is growing, the FHL price tends to decrease. Chart 32: Relationship between growth in supply and change in average FHL price (y-o-y) 30 % 20 % 10 % 0% 2001 -10 %
2002
2003
2004
2005
2006
-20 % -30 % Change FHL prices (y-o -y)
Gro wth rate supply (y-o -y)
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2007
Salmon farming
b.
17
Recent developments of US prices and Norwegian export price
Prices in the US decreased during summer and autumn 2007 both in Seattle (quotation for Canadian salmon) and in Miami (quotation for Chilean fillets) from record levels during spring 2007. Increased catches of wild salmon and somewhat softer economic growth in the US can explain this development. Prices have picked up again in Q1 2008 averaging USD 7.5 in Miami and USD 4.75 in Seattle. Salmon is currently trading at a level of USD 7.4 in Miami and USD 5.1 in Seattle. Average Miami and Seattle prices in 2007 were USD 7.7 and USD 4.9 respectively. Chart 34: Fresh Atl salmon 8-10 lb (Seattle)
Week 2004
2005
2006
52
49
46
43
40
37
34
31
28
25
22
19
1
52
49
46
43
40
37
34
31
28
25
22
19
16
13
7
10
4
1
4.00
16
5.00
13
6.00
6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50
7
7.00
U SD
U SD
8.00
10
9.00
4
Chart 33: Chilean fresh salmon fillets, 2-3 lb (Miami)
Week 2007
2008
2004
Source: Kontali
2005
2006
2007
2008
Source: Kontali
Average Norwegian export prices decreased by 18 % in 2007 as a result of a 21 % increase in export volumes compared to 2006. Export prices decreased during summer 2007 due to the harvest of a large generation of salmon (G 05). Mild winter temperatures resulted in fantastic growing conditions for this generation. Prices rebounded in August but came down due to aggressive harvesting in Norway during autumn. Prices in 2008 have been good with an average export price of NOK 26.3, but prices have been falling over recent weeks. The export price in week 16 was NOK 25.6. The average Norwegian export price in 2007 was approximately NOK 26.7. Chart 35: Norwegian export prices (Fresh whole Atlantic salmon, gw) 45.00 40.00
NOK
35.00 30.00 25.00 20.00
Week 2005
2006
2007
Source: Statistics of Norway
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2008
52
49
46
43
40
37
34
31
28
25
22
19
16
13
10
7
4
15.00
1
Landsbanki
Landsbanki
Salmon farming
18
4
Short-term supply developments
a.
Norway–growth in production in 2008
Growth in Norwegian biomass is coming down
The biomass (salmon in the sea) in Norway increased significantly over the winter 2006/2007 and spring 2007 due to the mild sea temperatures and increased feeding. As illustrated in chart 36, the biomass was 20-30 % higher over the period December 2006– May 2007 compared to the same period the previous year, but it has come down to lower levels as a result of aggressive harvesting during summer and autumn 2007 and lower growth.
Chart 36: Norwegian biomass growth rate (y-o-y) 35.0 % 30.0 % 25.0 % 20.0 % 15.0 % 10.0 % 5.0 % 0.0 %
Source: FHL, Landsbanki
The biomass is currently 6 % higher than in February 2007 according to recent figures from Kontali Analyse comparing biomass in Norway in the end of February 2008 to the biomass end February 2007, cf. table 4. Supply in Q1 and Q2 2008 will mainly consist of generation released to sea in 2006 (06 G), while 07 G will be supplying markets from the end of summer 2008 until end of summer 2009. Table 4: Composition of biomass in Norway Inv. 31.02.08 Inv. 31.02.07 Generation Ind. Kg Biomass Generation 06 G 52,800 4.1 219,100 05 G 07 G 185,200 1.2 215,500 06 G Total 434,600 Sum
Ind. 47,700 163,800
Kg Biomass 4.4 208,500 1.2 201,800 410,300
Change Ind. 11 % 13 %
Weight Biomass -7 % 5% 0% 7% 6%
Source: Kontali
The 06 generation consists of approximately 11 % more individuals than the 05 generation that supplied markets at the same time in 2007, but the average weight of the fish is smaller. We expect expect salmon prices in Q2 to come down compared to price levels in Q1. The number of smolts released in spring 2007 leaves room for a significant increase in Norway’s harvest during Q3 and Q4 2008, but supply growth from Norway will in part be influenced by biological conditions (including temperature) and feeding. We expect a fairly good salmon market in Q3, but aggressive harvest in Norway (due to MAB capacity limitations cf. chapter 5 a) could pose downward pressure on prices. We expect higher prices towards the end of Q4.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
19
Sea temperatures and growth in feeding have come down
Sea temperatures in Norway (during autumn and winter 2007/2008) have been significantly lower than last year, cf. chart 37. Chart 37: Sea temperatures in Norway 2005- 2007
● 2006 ● 2007 ● 2008
Source: FHL
Lower sea temperatures has resulted in reduced feeding and growth of biomass during the winter and spring 2007/2008 compared to the situation in 2006/2007. As illustrated in chart 38, growth in feeding in Norway (y-o-y) has come down from high levels (4 week average increases of 30–50 % in winter 2006/2007 and spring 2007) to an average decrease of 9 % in the last 4 weeks. Total feed sales registered in 2008 has been 3 % lower than for the same period in 2007. Lower feeding implies that supply growth is coming down in Norway. Chart 38: Growth in feed sales in Norway (y-o-y) 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% We e k Source: FHL, Kontali
b.
Chile – no growth in production expected
Chilean production has been plagued by sea lice (a natural seawater parasite), Salmonid Rickettsial Septicaemia (SRS – a contagious bacterial disease currently treated by antibiotics) and lately Infectious Salmon Anaemia (ISA – a contagious viral infection). The industry appears to have expanded production too fast in a small geographical area, without sufficient regulations and control. Official statistics have confirmed ISA outbreaks in 21 different farms (11 controlled by Marine Harvest and 5 by Cermaq) while another 17 farms (13 controlled by Marine Harvest and none by Cermaq) are under suspicion of ISA outbreak and 39 other sites are under quarantine (9 controlled by MHG and 3 controlled by CEQ). However, according to reports, several Chilean-owned producers are not reporting ISA
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
20
to local authorities and in reality, more sites are affected. In combination, these diseases are having serious consequences for producers, as mortality and costs increase significantly. We believe there is a risk of further escalation of these problems in the short and medium term but we remain convinced that they will be solved over time as producers co-ordinate their actions. Chilean producers will gradually relocate production further south (region 11 and 12), use the best available medicines for treatment and vaccines and later expand production again. However, we do expect the biological problems in Chile to remain in 2008, resulting in reduced supply from this region (which represented 26 % of global production in 2007).
c.
Conclusions on 2008 supply
Biological problems will reduce Chilean production, while growth in Norwegian supply is coming down. Production in Scotland rose somewhat in 2007 to approximately 139,000 tons. We expect a further increase in production in Scotland in 2008, but no significant growth. In total, we forecast modest global supply growth at approximately 3–5 % in 2008, which should result in a good salmon market. Our supply estimates are outlined in table 5. Table 5: Global supply of Atlantic salmon 2001 2002 Norway 411,000 444,000 UK 132,000 140,000 Faroe Isl 41,000 42,000 Ireland 24,000 22,000 Iceland 3,000 2,000 Tot. Eur. 611,000 650,000 Chile Canada Australia US Other Tot. Am. Total supply Growth rate
245,000 99,000 12,000 21,000 0 377,000 988,000 13.2 %
268,000 112,000 13,000 13,000 0 406,000 1,056,000 6.9 %
2003 508,000 161,000 47,000 18,000 4,000 738,000
2004 537,000 150,000 37,000 12,000 7,000 743,000
2005 572,000 120,000 17000 12,000 7,000 728,000
2006 597,000 128,000 12,000 15,000 4,000 756,000
2007 723,000 139,000 20,500 16,000 2,000 900,500
2008E 785,000 144,000 29,000 17,000 2,000 977,000
281,000 92,000 14,000 18,000 0 405,000 1,143,000 8.2 %
346,000 89,000 15,000 13,000 2,000 465,000 1,208,000 5.7 %
385,000 108,000 16,000 10,000 2,000 521,000 1,249,000 3.4 %
369,000 115,000 17,000 10,000 2,000 513,000 1,269,000 1.6 %
359,000 112,000 18,000 12,000 1,500 502,500 1,403,000 10.6 %
330,000 120,000 18,000 12,000 2,000 482,000 1,459,000 4.0 %
Source: Kontali, Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
5.
21
Long-term supply developments
Providing an accurate long-term supply prognosis for the salmon industry is challenging, as long-term production is dependent on, among other things, developments in prices and costs, the availability, quality and release of smolts, consolidation and supply side coordination, temperatures, feeding, biological issues and aquaculture policies in key producer regions.
a.
Norway and Chile
We expect long-term global supply of salmon mainly to be a function of developments in Norway and Chile, representing 77 % of total production. These producers further have potential for growth on good locations, whereas other producers (Canada and UK) have limited capacity for growth. We therefore expect supply to increase only moderately from other regions. In Chile, we expect that biological problems will not be improved until 2009. We expect no significant growth in production from this region before 2010 and 2011. In Norway, approximately 850 licenses for farmed salmon production are currently active. Norwegian authorities announced in August 2007 that new licenses will be offered to the market in 2009. Due to the production cycle, salmon from new licenses will not reach the market before 2011. Growth in Norwegian production from 2007 to 2011 will therefore be based on production from existing licenses. In theory, with optimal utilisation of all licenses in Norway, production capacity is very high. However, some farmers have already reached their production capacity limit while others will not be able to exploit their full production potential due to the small scale of operations, limitations on the availability of quality smolts and biological issues. We expect the larger groups to exploit their production potential better than smaller companies. In Norway the number of smolts released increased by 14 % in 2007, cf. chart 39, which indicates the possibility of a significant increase in supply from Norway until 2009. Chart 39: Release growth rate (y-o-y) 15 % 10 % 5 % 0 % 20 00
20 01
20 02
2 00 3
20 04
200 5
20 06
200 7
-5 % - 10 % Source: Kontali, Landsbanki
However, the final supply from this release is uncertain. We expect average weight for harvested salmon to come down from high levels in 2007. Cf. chart 40 we see that growth in release since 2005 has mainly been through autumn (0y) releases. Traditionally, for biological reasons most smolts were released in the spring.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
22
Chart 40: Release of smolts in Norway 250 200
Mill smolt
Landsbanki
150 100 50 0 1999
2000
2001
2002
2003
1 year old (spring)
2004
2005
2006
2007
0-year old (autumn)
Source: Kontali, Landsbanki
Release of smolts in the autumn implies release of younger and smaller salmon. These smolts are sensitive to biological issues (including sea water temperatures) and mortality is normally higher. Colder temperatures are likely to increase mortality and decrease the yield per smolt. By end February 2008 the number of remaining smolts from the 2007 generation (07 G) was 13 % higher than the number of 06 G one year previously. Increased release of smolts in the autumn is a consequence of changes in Norwegian salmon production regulations. In 2005, feed quotas per license were replaced with a system based on maximum allowed biomass per license (MAB). To maximise production growth and harvest under the new regime, Norwegian farmers have changed their production pattern to ensure a large and more stable biomass throughout the year. Furthermore, it appears that Norwegian producers, especially on the south and west coast, increasingly have to face biological challenges as production has grown. Diseases such as Pancreas disease (PD) has increased significantly over recent years, as illustrated in figure 28, particularly in the south and west of Norway. 98 incidents of PD was reported in Norway in 2007 and 28 incidents have been reported in Q1 2008 according to the National Veterinary Institute. Chart 41: Number of outbreaks of Pancreas Disease in Norway 100 80 60 40 20 0 1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Ro galand
Ho rdaland
So gn o g Fjo rdane
M øre o g Ro msdal
No rd Trøndelag
No rdland
Tro ms
Finnmark
2006
2007
Sør Trøndelag
Source: Mattilsynet
To correct the problem, Norwegian authorities have imposed restrictions on the movement of smolts between the southern and northern parts of the country, which potentially could reduce the availability of smolts. Further, the PD problems have raised questions regarding the carrying capacity for further production growth in certain fiords in Norway and also the optimal structure of site locations to minimise escalations of outbreak of diseases. Finding good solutions for these challenges will be necessary in order to fully exploit existing production capacity in Norway.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
23
We expect that Norwegian production from current licenses could increase by a maximum of 20 % (from 2007 levels) but we expect reduced growth rates, as managing growth within existing licenses will be more challenging. According to Marine Harvest Group, the production of Atlantic salmon in Norway in 2007 was already very close to capacity limits within the current number of licenses. Table 6: Indicative global supply growth of Atlantic salmon 2007 2008E Norway 723,000 785,000 UK 139,000 144,000 Faroe Isl 20,500 29,000 Ireland 16,000 17,000 Iceland 2,000 2,000 Tot. Eur. 900,500 977,000
2009E 830,000 145,000 30,000 17,000 2,000 1,024,000
2010E 865,000 147,000 31,000 17,000 2,000 1,062,000
2011E 960,000 150,000 32,000 17,000 2,000 1,161,000
Chile Canada Australia US Other Tot. Am. Total Growth
335,000 123,000 18,000 12,000 2,000 490,000 1,514,000 3.8 %
350,000 125,000 18,000 12,000 2,000 507,000 1,569,000 3.6 %
430,000 130,000 17,000 12,000 2,000 591,000 1,752,000 11.7 %
359,000 112,000 18,000 12,000 1,500 502,500 1,403,000 10.6 %
330,000 120,000 18,000 12,000 2,000 482,000 1,459,000 4.0 %
Source: Landsbanki
On this basis, we expect significant growth in Norwegian production in 2009 but moderate growth in 2010, while Chilean growth will be limited, resulting in a low to moderate global supply growth. We expect an indicative 2-5 % growth in global supply of Atlantic salmon during 2008-2010. Low to moderate supply should normally result in increasing salmon prices. We expect significant increased production in both Norway and Chile in 2011 and 2012 due to harvest from new licenses in Norway and improved biological performance in Chile.
b.
Continued consolidation and supply side co-ordination
Consolidation has been significant in the most important producing countries from 1997 to 2006 cf. chart 42. The industry in Norway remains the most fragmented industry, which is the result of Government policies promoting small and medium sized companies, as well as limiting ownership of Norwegian licenses for one entity to 25 % of total licenses. In 2006, 31 Norwegian companies controlled 80 % of Norwegian production. The corresponding figures for Chile and Scotland were 10 and five respectively. Chart 42: Number of companies representing 80% of production in Norway, Chile and Scotland 80 70 60 50 40 30 20 10 0 1997
2000 No rway
2003 Chile
2006
Sco tland
Source: Kontali Analyse
We expect consolidation in the salmon farming industry to continue in all producing regions. Lower margins and the recent outbreak of ILA in Chile (previously an unknown
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
24
disease for Chilean producers) could open up acquisition opportunities for Norwegian companies that have experience in handling such biological problems in other regions. Increased consolidation may over time increase supply side co-ordination, but we do not foresee any significant co-ordination in the short and medium term. We further expect salmon producers to integrate into other species such as sea bass, sea bream, cod and tilapia, as these are growth segments and could create market synergies.
c.
Conclusions on the supply side
Medium- and long-term projections of global supply of salmon are uncertain. The industry`s long-term production capacity is high and sufficient liquidity is available to finance production growth. However, we forecast an indicative 2–5 % annual growth in the global supply of Atlantic salmon over 2008–2010 as biological problems appear to limit significant growth in Chile until 2010, while managing growth in Norwegian production will be increasingly difficult in 2009–2010, based on the current number of licenses. Low to moderate supply growth should, under normal conditions, result in a strong salmon market over the period.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
25
5. Valuation of salmon companies compared to protein and food producers. Over the last months, the share price of Marine Harvest Group, Cermaq and Grieg Seafood has come down significantly due to biological problems and higher costs, reduced production, lower salmon prices and the general market downturn. Particularly CEQ and MHG, which are exposed to the difficult biological situation in Chile has had a poor performance. The share price of Lerøy Seafood Group and Salmar has held up well. Chart 43: Share price developments 1 30
1 20
1 10
1 00
90
80
70
60
50
40
30 F eb 07
Mar 07
Ap r 0 7
Ma y 07
S o u r c e F a c tS e t
J un 07
Jul 07
A ug 07
S ep 07
Oct 07
L erø y S e af oo d G ro up A SA (R eb ase d) C e rm a q A S A ( R e b a s e d ) M a ri n e H a r v e s t G r o u p A S A ( R e b a s e d )
N ov 07
D ec 07
Ja n 08
F eb 08
G ri e g S e a f o o d A S A (R e b a S a l M a r A S A (R e b a s e d )
Source: JCF/Factset
On current valuation we particularly see significant upside potential in Cermaq and we are also positive to Marine Harvest, cf table 7 and company valuations. Table 7: Landsbanki estimates P/E 2008E Marine Harvest 17.4 Cermaq 12.8 Lerøy Seafood 18.1 Salmar 13.6 Grieg Seafood 14.8
P/E 2009E 10.9 10.2 13.3 11.9 9.1
P/E 2010E 7.8 7.5 10.7 9.8 5.3
EV/EBIT 2008E EV/EBIT 2009E 15.3 10.5 11.4 9.0 14.9 11.4 11.6 10.4 13.3 9.6
EV/EBIT 2010E 7.7 6.9 9.4 8.6 6.7
Source: Landsbanki
Landsbanki earnings estimates for the salmon producers are generally lower for 2008 than current consensus while we are more optimistic (for MHG and CEQ) about the prospect for 2009 and particularly 2010 than consensus. Table 8: Consensus estimates for seafood and protein producers P/E 2008E P/E 2009E P/E 2010E EV/EBIT2008E EV/EBIT2009E EV/EBIT2010E Marine Harvest 15.8 11.2 8.8 15.0 11.9 9.3 Cermaq 11.3 8.9 7.5 9.7 8.0 6.8 Leroy Seafood 14.4 12.3 10.6 13.3 11.3 9.8 Salmar 12.7 11.6 10.9 10.6 9.7 9.1 Grieg Seafood 12.0 7.6 5.2 11.2 6.7 5.8 Lighthouse Caledonian 42.9 17.1 N.A. N.A. N.A. N.A. Marine Farms 12.5 9.0 7.1 10.0 8.6 6.8 Austevoll Seafood 14.4 12.5 13.1 18.2 15.0 14.6 Copeinca 17.7 10.5 11.7 11.0 9.8 9.6 Aker Seafood 20.4 15.3 13.6 12.2 10.5 10.9 Biomar 12.5 11.1 10.4 11.1 9.3 8.6 Nutreco 12.5 11.2 10.3 10.5 9.3 8.5 Multiexport 17.0 10.2 9.2 N.A. N.A. N.A. Source: Bloomberg
Compared to other protein and food producers, included in table 8 and 9, the current pricing of CEQ and MHG appears modest based on outlooks for 2009 and 2010.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
26
Based on consensus estimates, salmon companies are valued on lower multiples than, for example, meat producers and processors such as Tyson and Hormel. Table 9: Consensus estimates for protein producers P/E 2008E P/E 2009E P/E 2010E EV/EBIT 2008E EV/EBIT 2009E EV/EBIT 2010E Tyson Foods 53.4 18.0 15.4 17.2 10.7 9.5 Smithfield Foods 24.5 21.3 10.7 18.0 15.8 12.9 Pilgrim's Pride N.A. 8.7 6.6 33.8 7.7 N.A. Hormel Foods 16.8 15.2 N.A. N.A N.A N.A. Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
6.
27
Key risks to our assumptions •
Reduced global economic growth could result in reduced demand for salmon.
•
Biological problems with sea lice, SRS and recently ILA in Chile entail further risks of escalation with potential negative consequences for producers concerned. Production costs could remain at high levels longer than the market anticipates or could increase further.
•
Biological problems in Chile could be resolved earlier than expected, increasing the supply growth from Chile.
•
Biological problems in Norway or in other producing regions could escalate, affecting the producers concerned and the supply side.
•
Norwegian producers could manage to increase production significantly more than expected within existing licenses in 2009 and 2010.
•
Salmon farming is biological production. Prices may fluctuate due to temporary high supply of salmon and a temporary mix of sizes that do not match the demand in the market.
•
New trade barriers for salmon in important markets could be established.
•
Food safety issues or negative publicity damaging the demand for Atlantic salmon could emerge.
•
The supply side could be larger than expected if the statistical material concerning the Norwegian biomass is incorrect.
•
The earnings of the company could be affected by adverse currency developments
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
andsbanki
+47 926 16 478 [email protected]
Reuters MHG.OL / Bloomberg MHG NO Index: FTSE Euro First 300
Rating
Marine Harvest Group ASA 23 April 2008 - INITIATION OF COVERAGE
Buy 380
- SMALL / MID-CAPS
FOOD PRODUCERS
Increasing margins during 2008-2010 We forecast limited supply growth and higher margins in 2009 and 2010. We have a buy recommendation and target NOK 3.10, but advice investors to be cautious before Q1 report 14 May as biological issues and costs pose risk to earnings. Weaker prices in May and June could also impact share price negatively short term.
Target Price
Current Price
NOK3.10
NOK2.82
Market Cap
Free Float
NOK9.8bn
69%
Buy
Year
EBIT
EBIT
Net
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
2006
15,877.8
2,915.9
18.4
3,063.5
0.57
9.5
6.3
1.7
7.2
9.0
0.0
2007
14,073.0
603.9
4.3
65.6
0.06
101.7
15.8
2.0
20.2
47.1
0.0
2008E
12,936.3
1,035.8
8.0
508.2
0.16
17.4
7.0
1.2
8.8
15.3
0.0
2009E
13,523.4
1,441.4
10.7
899.2
0.26
10.9
5.3
1.1
6.8
10.4
0.0
2010E
14,393.3
1,856.4
12.9
1,249.1
0.36
7.8
4.3
1.0
5.4
7.7
3.8
End Dec. 31
Sales
Previous
EPS
P/E
P/CF
NOK
2.82
9.8
bn
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield (%)
Shares O utstanding (m
69
%
3.10
NOK
NOK
-19.2% 3,479
Daily Trade Vol.(sh 00 52 W eek High/Low
42,695 NO K7.49/NOK2.41
Enterprise Value (NO K
15,820
Net Debt (NO Km)
6,040
Source: Landsbanki
2007 disappointment due to Chile. Delivers Q1 2008 report on 14 May MHG disappointed the market with the Q3 and Q4 2007 reports, due to higher costs in Chile than communicated to the market. Our impression after Q4 was that apart from the farming unit in Chile, operations developed in accordance with our expectations, while margins in Value Added Processing (VAP) were a positive surprise. Although salmon prices have been quite high in Q1 2008 there is risk of bad news as costs could be higher than expected due to biological issues. Strong production in Norway and long term capacity for growth in Chile and Norway We like the group’s strong production base in Norway, as we expect good margins and growth in production from this unit during 2008-2010. Margins from the Chilean activity will increase during 2009-2010 as we expect biological problems to gradually improve. Over time we expect volumes and costs to return to normal levels in Chile.
M ar i ne Har v est Gr oup A SA r el . FT SE E ur o Fi r st 300 M ar i ne Har vest Gr oup A SA 8
FT SE E ur o Fi r s t 300
7
Short term turbulence but medium term upside We forecast low to moderate global supply growth during 2008-2010, and higher margins and prices in 2009 and 2010. We expect a good salmon market in 2008, but lower prices in Q2, and high costs will affect earnings. Weaker salmon prices in Q2 and Q1 report 14 May could impact shares negatively short term, but we expect the shares to rebound.
6
5
4
3
2 A pr 07
Valuation Our DCF calculation suggests a share value of NOK 3.16. The price target of NOK 3.1 implies a discount on DCF and is motivated by short-term P/E multiples and exposure to Chile. MHG is trading at a P/E of 17.4 times 2008 earnings and 10.9 times 2009 earnings. As we expect margins to increase in 2008-2010 we believe that valuation will develop positively. Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
Jul 07
Oc t 07
Jan 08
A pr 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Marine Harvest Group ASA
andsbanki
29
Key financials Company profile Marine Harvest Group is the largest producer of farmed Atlantic salmon in the world with significant production in all producing regions.
Production split – Geographical and divisional 100.0% 90.0%
Ot her 3%
80.0% 70.0%
UK 8%
60.0%
Top shareholders Geveran Trading Co Ltd Fidelity Management Franklin Mutual Wellington Management Folketrygdfondet
Events calendar
50.0%
30.6% 11.3% 10.0% 4.9% 2.9%
Canada 12%
40.0% 30.0%
Chile 27%
20.0% 10.0%
Nor way 50%
0.0%
Incom e statem ent (NOKm ), Dec Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
2007
2008E
2009E
2010E
14,073.0 12,936.3 13,523.4 1,408.7 1,793.3 2,220.0 -804.8 -757.4 -778.5 603.9 1,035.8 1,441.4 97.3 -314.8 -272.3 -550.3 -70.0 0.0 150.9 651.1 1,169.1 -70.7 -141.1 -268.1 25.2% 21.8% 24.5% -1.3 1.7 1.9 65.6 508.2 899.2 0.0 0.0 0.0 65.6 508.2 899.2
14,393.3 2,635.7 -779.3 1,856.4 -225.3 0.0 1,631.2 -380.0 24.5% 2.0 1,249.1 0.0 1,249.1
Balance sheet (NOKm ), Dec. 31 Cash and equivalents Account receivables Other current assets Current assets Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
2007
2008E
2009E
2010E
362.6 1,883.4 7,026.2 9,272.2
266.6 1,991.0 6,659.6 8,917.2
536.8 2,081.3 6,784.7 9,402.9
868.8 2,215.2 7,006.7 10,090.7
3,344.6 3,344.6 3,344.6 5,729.5 5,729.5 5,729.5 3,894.7 4,004.3 4,114.7 1,099.8 1,174.8 1,249.8 14,068.6 14,253.2 14,438.6
3,344.6 5,729.5 4,115.4 1,329.8 14,519.3
Short-term debt Accounts payable Other current liabilities Current liabilities
957.2 1,349.7 1,067.7 3,374.6
957.2 1,327.8 1,067.7 3,352.7
957.2 1,346.5 1,067.7 3,371.4
957.2 1,402.0 1,067.7 3,426.9
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
6,148.9 0.0 1,332.5 7,481.4
5,348.9 0.0 1,474.1 6,823.0
4,848.9 0.0 1,725.5 6,574.4
4,348.9 0.0 2,062.7 6,411.6
Shareholders' equity Minority interest Total shareholders' equity
12,503.0 13,011.2 13,910.4 -18.3 -16.6 -14.7 12,484.7 12,994.6 13,895.7
14,784.2 -12.7 14,771.5
Net debt Net working capital Capital employed Total assets
6,743.5 6,039.5 5,269.3 6,492.2 6,255.0 6,451.8 19,461.0 19,333.4 19,640.7 23,340.8 23,170.3 23,841.5
4,437.3 6,752.2 19,941.7 24,610.0
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
65.6 804.8 911.6 498.3 2,280.3 1,129.3 1,151.00
508.2 757.4 237.2 138.3 1,641.1 867.0 774.07
899.2 778.5 -196.8 178.4 1,659.3 889.0 770.27
1,249.1 779.3 -300.3 259.2 1,987.3 780.0 1,207.32
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na -196.3 -954.7
na na 0.0 na na -70.0 -704.1
na na 0.0 na na na -770.3
na na 375.3 na na na -832.0
2007
2008E
2009E
2010E
Per share (NOK)
2007
2008E
2009E
2010E
-11.4% -61.4% -79.3% -97.9% 34.8% 10.0% 4.3% 0.5%
-8.1% 27.3% 71.5% 674.7% 39.6% 13.9% 8.0% 3.9%
4.5% 23.8% 39.2% 76.9% 41.4% 16.4% 10.7% 6.6%
6.4% 18.7% 28.8% 38.9% 42.7% 18.3% 12.9% 8.7%
EPS adjusted EPS reported CFPS BVPS DPS
0.06 0.02 0.39 3.59 0.00
0.16 0.15 0.40 3.74 0.00
0.26 0.26 0.53 4.00 0.00
0.36 0.36 0.66 4.25 0.11
3,478.9 3,478.9
3,478.9 3,478.9
3,478.9 3,478.9
3,478.9 3,478.9
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
54.0% 4.8 0.5% 3.0% 53.5% 46.1%
46.5% 3.4 4.0% 5.3% 56.1% 48.4%
37.9% 2.4 6.7% 7.4% 58.3% 47.7%
30.0% 1.7 8.7% 9.4% 60.0% 46.9%
Valuation
2007
2008E
2009E
2010E
101.7 1.7 15.8 0.0% na
17.4 0.8 7.0 0.0% na
10.9 0.7 5.3 0.0% na
7.8 0.7 4.3 3.8% na
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
16.2% 8.0% 8.2% 140.3% 0.0%
12.7% 6.7% 6.0% 114.5% 0.0%
12.3% 6.6% 5.7% 114.2% 0.0%
13.8% 5.4% 8.4% 100.1% 30.0%
2.02 20.2 47.1 1.4
1.22 8.8 15.3 0.8
1.11 6.8 10.4 0.8
0.99 5.4 7.7 0.7
Ratios Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
Year-end nb of shares(m) Av. diluted nb of shares(m)
P/E P/BV P/CF Dividend yield FCF yield EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
30
Why the stock is a buy Landsbanki initiates coverage on Marine Harvest Group with a buy recommendation and a target of NOK 3.1. Over the last months, the share price has come down significantly due to biological problems (particularly in Chile) and higher costs, reduced production, lower salmon prices and the general market downturn. Moreover, the group seriously disappointed the market with their 2007 Q3 and Q4 reports, as the group had significantly higher write downs in Chile than previously communicated to the market. In Q4, the group had write-downs of NOK 466 million on Chilean activities. In Chile, the group will accelerate downsizing of activities in region 10 and relocation to regions 11 and 12 as biological problems caused by sea lice, SRS, and for MHG in particular ISA have escalated mortality significantly. The situation will affect volumes, costs and capex in 2008-2010, but over time we expect volumes and costs to return to normal levels. Earnings in 2008 will be significantly affected by high costs in Chile and lower volumes, but we expect earnings to improve over 2009–2010 as gradually, costs should come down and prices improve. We particularly like the group’s strong production base in Norway, as we expect good margins from the Norwegian activity over 2008-2010, while margins from the Chilean activity will improve as biological problems gradually improve. We further expect that the group will succeed in reducing overall costs by NOK 900 million due to synergies, but are doubtful that this will be achieved by 2009 (as targeted by the group). MHG has some Value Added Processing activities (VAP), but for the time being the company remain mainly an exposure to salmon farming. As illustrated in table 10, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). In a likely scenario with limited production growth from Chile and Norway, salmon prices could increase significantly in 2009 and 2010. Our price assumptions of NOK 25 and NOK 26 from Norwegian operations could prove to be conservative. In such a scenario, valuation of the group is likely to rise significantly. Table 10: DCF, PE and EPS sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 -0.5 -2.0 0.8 -1.0 2.0 0.0 3.2 1.0 4.3 2.0 5.4 3.0 6.5
PE Adj. 08 -46.9 220.6 33.0 17.8 12.2 9.3 7.5
EPS Adj. 08 -0.06 0.01 0.08 0.16 0.23 0.30 0.37
Source: Landsbanki
The group intends to integrate further downstream (with more VAP), and into other species. Significant downstream integration should reduce some sensitivity to salmon price fluctuations. The group is further looking for acquisition targets in the salmon farming industry, but as the group currently holds the maximum allowed 25 % of total Norwegian licenses, expansion in Norway will only be possible through a new licensing round in 2009. Lower margins and the recent outbreak of ISA in Chile (until now an unknown disease for Chilean salmon producers) could open up acquisition opportunities for Norwegian companies that have experience in handling such biological problems in other regions. However, based on the group’s operational challenges in Chile, current gearing and low share price (making capital increases unattractive), MHG’s ability to make significant acquisitions appear limited in the short term.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
31
Constructing the forecast Our assumptions for the forecast is included in table 11 below. We expect EBIT margins to improve from 2008 to 2010 as we expect Norwegian salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. Although feed costs are increasing in 2008 we expect cost synergies and over time improved biological situation in Norway and in Chile to have a positive effect on the production cost level during 2009-2010. We expect some improvement in the biological situation in Chile in 2009, and a gradual increase in production in this region from 2010. The group has significant spare production capacity in Norway, which we expect the group will utilise over the next years. Capital expenditure is expected to be at NOK 870 mill and 890 mill in 2008 and 2009 respectively. We have uses an effective tax rate of 24.5 %. We expect good margins in VAP ranging from 5.1 % to 5.5 % during the next years. Table 11: Assumptions for forecast 2006 Revenues 15877.8 EBITDA 3648.3 EBIT 2915.9 Pre tax profit 2620.5 Net profit 3068.5
2007 14073.0 1408.7 603.9 150.9 64.3
2008E 12936.3 1793.3 1035.8 651.1 509.9
2009E 13523.4 2220.0 1441.4 1169.1 901.1
2010E 14393.3 2635.7 1856.4 1631.2 1251.1
2011E 14269.9 2058.7 1279.2 1053.5 805.2
23.0 % 18.4 % 19.3 %
10.0 % 4.3 % 0.5 %
13.9 % 8.0 % 3.9 %
16.4 % 10.7 % 6.7 %
18.3 % 12.9 % 8.7 %
14.4 % 9.0 % 5.6 %
EBIT margin (kg gw) Norway Chile Canada UK Average
2006 12.3 8.5 6.7 5.6 9.4
2007 5.1 -4.6 5.4 2.1 2.2
2008E 4.8 -2.6 3.1 3.3 3.2
2009E 5.6 0.0 3.3 4.0 4.3
2010E 6.6 1.7 3.3 5.0 5.3
2011E 4.5 0.8 1.1 2.5 3.2
EBIT margin VAP
2.3 %
4.7 %
5.1 %
5.2 %
5.3 %
5.5 %
Volume (gw) Total Norway Chile Canada UK Other
334.9 139.9 104.9 33.9 38.9 17.3
336.2 168.2 90.6 39.5 27.4 10.5
314.0 187.0 50.0 39.0 26.0 12.0
323.0 197.0 45.0 42.0 27.0 12.0
340.0 207.0 50.0 44.0 27.0 12.0
358.0 210.0 65.0 44.0 27.0 12.0
Margins EBITDA EBIT Net profit margin
Source: Landsbanki
Valuation Our DCF valuation gives a value per share of NOK 3.16. Based on considerations of current high P/E multiples and exposure to Chile, our target is NOK 3.1, which implies a minor discount from DCF value. Our valuation is based on a WACC of 8.8 % and perpetuity growth rate of 2.5 %. The group has a significant tax loss carrying forward with an estimated NPV of approximately NOK 1 bn (NOK 0.28 per share). The company is currently trading at a P/E of 17.4 times 2008 earnings and 10.9 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 12.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Marine Harvest Group ASA
32
Table 12: Free Cash Flow Free Cash Flow EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2007 603.9 -169.1 792.7 1227.5 -1129.3 911.6 1009.8
2008E 1035.8 -290.0 757.4 1503.2 -867.0 237.2 873.4
2009E 1441.4 -403.6 778.5 1816.4 -889.0 -196.8 730.6
2010E 1856.4 -519.8 779.3 2115.9 -780.0 -300.3 1035.6
2011E 1279.2 -358.2 779.4 1700.5 -780.0 -98.1 822.4
Source: Landsbanki
As illustrated in table 13, the DCF calculation is sensitive to changes in WACC and terminal growth rate. Improved biological situation in Chile and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 13: DCF sensitivity to changes in WACC and growth rate
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
9.8 % 2.0 2.1 2.3 2.5 2.7 2.9 3.2
9.3 % 2.2 2.4 2.6 2.8 3.0 3.3 3.7
WACC 8.8 % 2.5 2.7 2.9 3.2 3.5 3.8 4.2
8.3 % 2.8 3.0 3.3 3.6 3.9 4.4 4.9
7.8 % 3.1 3.4 3.7 4.1 4.5 5.1 5.8
Source: Landsbanki
In terms of valuation by Enterprise Value per kg harvested, Marine Harvest Group is less expensive than Lerøy and Salmar cf. chart 44. MHG is trading at EV/kg of approximately NOK 40 while Cermaq is cheapest trading at EV/kg of NOK 17. As MHG operations in Norway have a high EBIT margin, a premium in EV/KG is reasonable compared to Cermaq which is more exposed to Chile. Chart 44: EV/KG
80.0 70.0 60.0 50.0
NOK
andsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Although more expensive than Cermaq, we find MHG to be the second most attractive option in the industry. On the basis of low to moderate global supply growth salmon markets should be good during 2008 – 2010. If salmon prices overshoot our expectations the value of the company is likely to increase significantly.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
33
Catalysts and news flow •
Financial calendar: Q1 2008 report on 14 May 2008
•
Developments in Norwegian salmon prices in Q2 2008
•
Biological developments in Chile and Norway
•
Increased attention regarding capacity limitations in Norway
Risks to our rating The biological risks in Chile and Norway appear to be of particular importance. MHG’s production in Chile represented 31 % of the group total in 2006 and 27 % in 2007. MHG has been severely affected by the biological problems in Chile, and far more than other companies, according to Sernapesca. 11 of the 21 confirmed farms with ISA outbreaks in Chile (as of April 2008) belonged to MHG, while 13 out of 17 farms with suspected outbreaks belonged to MHG. Of another 39 farms in quarantine, 9 also belong to MHG. There is a risk that the situation will escalate further in Chile, affecting the costs of the company and its ability to supply markets or that it will take more time than we assume for the situation to improve. MHG is also exposed to biological problems in Norway, particularly in the south and west, where outbreaks of PD are affecting costs to MHG and other producers. MHG production in Norway represented approximately 49 % of total production in 2007. There is a risk that higher costs may prevail in Norway for a longer period than we anticipate. Particularly there is a risk that biological problems in Norway could impact costs more than expected in 2008. However, MHG expects improvement of the PD situation due to improved vaccination and mitigating action. Lower prices and margins than anticipated would further impact the earnings of the company and its valuation. As the company has a net debt to EBITDA of approximately 4.8 there is a risk of higher interest rates and renegotiations with banks over terms and instalments if earnings conditions deteriorates significantly. Reference is further made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Marine Harvest Group is the largest producer of Atlantic salmon in the world, with approximately 25 % of global production in 2007. It is an integrated company, with control of smolt production, farming, processing and sale of salmon.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
34
Chart 45: MHG production in different regions
9%
3%
12 % 49 %
27 %
No rway
Chile
Canada
UK
Other
Source: Landsbanki
The group has significant production in Norway, Chile, the UK and Canada. For 2007, Norway represented approximately 49 % of volumes while Chilean production represented 27 % c.f. chart 45. The company has repeatedly reduced guidance on production volumes due to biological problems in Chile and harvest in 2007 was 336,000 (excluding Lighthouse Caledonian that was distributed to shareholders as dividend).
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
Reuters CEQ.OL / Bloomberg CEQ NO Index: FTSE Euro First 300
Rating
Cermaq ASA
Previous
Buy 380
23 April 2008 - INITIATION OF COVERAGE
FOOD PRODUCERS
Top pick in the sector We initiate coverage with a buy recommendation and a price target of NOK 75. We like the outlook for the feed operations and the prospect of increasing salmon prices in 2009 and 2010. We expect a weak Q1 report on 9 May and weaker prices in Q2, but we recommend to buy CEQ as the share should rebound.
Target Price
Current Price
NOK75.00
NOK54.75
Market Cap
Free Float
NOK5.1bn
56%
Buy
Year
Sales
EBIT
EBIT
Net
EPS
P/E
P/CF
EV/
EV/
EV/
Div.
End Dec. 31
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
Sales
EBITDA
EBIT
Yield (%)
2006
7,534
1,311
17.4
938
10.29
7.7
6.1
1.1
5.2
6.2
0.0
2007
7,721
747
9.7
477
7.52
13.1
9.1
1.3
10.3
13.9
2.3
2008E
8,497
602
7.1
393
4.28
12.8
7.4
0.8
7.6
11.4
2.3
2009E
9,121
750
8.2
495
5.38
10.2
6.1
0.7
6.2
9.0
2.9
2010E
9,855
977
9.9
672
7.27
7.5
5.0
0.7
5.0
6.9
4.0
NOK
54.75
5.1
bn
56
%
YTD Abs. Perf.
75.00
NOK
NOK
-27.5% 93
Shares O utstanding (m Daily Trade Vol.(sh 00
416
NOK120.00/NOK54.25
52 W eek High/Low
Enterprise Value (NO K
6,833
Net Debt (NO Km)
1,799
Source: Landsbanki
Lower volumes from Chile in 2008 and 2009. Release of weak Q1 report on 9 May CEQ guided (on 18 April) 22 % lower volumes from Chile and higher costs in 2008 due to biological problems and the share has come down significantly. We expect a weak Q1 report on 9 May due to problems in Chile, a weak Coho/trout market and lower Ewos margins. We advice investors to buy CEQ during Q2 as we expect the share to rebound . Increasing margins in salmon farming in 2009 and 2010. Capacity for growth We expect margins within salmon farming to increase in 2009 and 2010 as we forecast low to moderate global supply growth and higher salmon prices. Although feed costs are increasing, we expect the high cost level in Chile to improve in 2009 and 2010. Within farming, Cermaq has significant capacity for organic growth and we expect growth also through acquisitions. CEQ has a strong balance sheet with net debt to EBITDA of only 1.25.
Cer maq A SA r el . FT SE E ur o Fi r s t 300
Cer maq A SA 130
Strong outlook for the feed unit We like the outlook for the feed operations of the group. Ewos has a 33 % share of a growing salmon feed market and the best operating margins in the business. We expect good margins from the feed unit in the coming years, although the recent increase in raw material prices should reduce margins in Q1 and Q2 2008.
FT SE E ur o Fi r s t 300
120 110 100 90 80 70 60
Value for money Our DCF valuation suggests a share value of NOK 88.2. Our target of NOK 75 implies a discount on DCF and is motivated by short-term EPS and Chile exposure. Cermaq is trading at 12.8 times 2008 earnings and 10.2 times 2009 earnings and is the cheapest salmon company at OSE. EV is approximately NOK 6300 mill. We find that the feed division is worth approximately NOK 4000 mill and that the farming operations are significantly undervalued.
Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
50 A pr 07
Jul 07
Oct 07
Jan 08
A pr 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Cermaq ASA
36
Key financials Company profile Cermaq is the world's second largest producer of both Atlantic salmon and salmon feed with operations in all main salmon producing regions.
Production split – Geographical 100.0% 90.0%
UK 7%
80.0% 70.0% 60.0%
Canada 22%
50.0%
Top shareholders Ministry of Industry and Trade Landsdowne Partners Fidelity Management PGGM Vermogensbeheer New Jersey Division of Invest
Events calendar
40.0%
43.5% 5.3% 4.9% 4.0% 3.1%
Incom e statem ent (NOKm ), Dec
Chile 48%
30.0% 20.0% 10.0%
Nor way 23%
0.0%
2007
2008E
2009E
2010E
Balance sheet (NOKm ), Dec. 31
7,721 1,008 -261 747 -12 -280 455 24 -5.5% 2 477 0 477
8,497 902 -301 602 -81 0 521 -125 24.7% 2 393 0 393
9,121 1,094 -344 750 -95 0 655 -157 24.6% 2 495 0 495
9,855 1,335 -358 977 -91 0 886 -213 24.4% 2 672 0 672
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
477 261 96 265 1,098 521 578
393 301 -195 -13 486 700 -214
495 344 -76 -13 751 500 251
672 358 -380 -14 636 385 251
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0 na na na -578
na na 327 na na na 541
na na 149 na na na -102
na na 202 na na na -49
Ratios
2007
2008E
2009E
2010E
Per share (NOK)
2.5% -35.7% -43.0% -49.1% 34.0% 13.1% 9.7% 6.2%
10.0% -10.5% -19.5% -17.5% 29.8% 10.6% 7.1% 4.6%
7.3% 21.2% 24.6% 26.0% 30.4% 12.0% 8.2% 5.4%
8.1% 22.1% 30.3% 35.6% 31.2% 13.5% 9.9% 6.8%
EPS adjusted EPS reported CFPS BVPS DPS
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
29.6% 1.2 11.2% 14.0% 57.2% 23.2%
41.7% 2.0 9.3% 10.4% 52.9% 23.4%
36.4% 1.6 11.1% 12.1% 54.4% 22.6%
32.1% 1.2 13.8% 15.0% 56.6% 24.8%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
14.2% 6.7% 7.5% 199.1% 30.0%
5.7% 8.2% -2.5% 232.8% 30.0%
8.2% 5.5% 2.8% 145.3% 30.0%
6.5% 3.9% 2.5% 107.4% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
232 866 2,202 3,299
191 952 2,470 3,613
293 1,022 2,545 3,860
292 1,183 2,844 4,319
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
875 1,075 1,724 451 4,125
875 1,075 2,123 466 4,539
875 1,075 2,279 481 4,710
875 1,075 2,306 496 4,752
Short-term debt Accounts payable Other current liabilities Current liabilities
321 933 342 1,597
321 1,093 342 1,756
321 1,162 342 1,825
321 1,241 342 1,905
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
1,169 0 412 1,582
1,669 0 412 2,082
1,669 0 412 2,082
1,619 0 412 2,032
Shareholders' equity Minority interest Total shareholders' equity
4,218 29 4,246
4,284 31 4,315
4,630 33 4,663
5,098 36 5,134
Net debt Net working capital Capital employed Total assets
1,259 1,792 5,465 7,424
1,799 1,987 6,060 8,153
1,698 2,063 6,292 8,570
1,648 2,443 6,698 9,071
2007
2008E
2009E
2010E
7.52 5.18 10.84 45.59 2.26
4.28 4.28 7.37 46.31 1.28
5.38 5.38 8.94 50.05 1.61
7.27 7.27 10.99 55.12 2.18
Year-end nb of shares(m) Av. diluted nb of shares(m)
92.5 92.5
92.5 92.5
92.5 92.5
92.5 92.5
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
13.1 2.2 9.1 2.3% na
12.8 1.2 7.4 2.3% na
10.2 1.1 6.1 2.9% na
7.5 1.0 5.0 4.0% na
1.34 10.3 13.9 1.9
0.80 7.6 11.4 1.2
0.74 6.2 9.0 1.1
0.68 5.0 6.9 1.0
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
37
Why the stock is a buy The share price has come down significantly over recent months due to biological problems and higher costs in Chile, reduced production, lower salmon and trout prices and the general market downturn. The group reported a Q4 EBIT before biomass of NOK 89 mill (excluding one offs and consolidation of Norgrain) which was in line with our estimates of 91 mill, but below consensus of 120 mill. Chile was better than expected while Norway was slightly below expectations due to one offs. UK and Canada was in line with our estimates. EWOS performance was strong with margins of 6.4 %, but some one offs. The group guided down volumes from Chile in 2008 on 18 April by 22 % due to biological problems mostly due to reduced production of Atlantic salmon. Cermaq volumes from Chile are likely to increase only modestly in 2009 and we expect the company to provide more accurate guiding on this subject in Q1 report on 9 May. We expect a weak Q1 report due to problems in Chile, a weak Coho/trout market, PD in Norway and lower Ewos margins in the quarter. CEQ will take write downs of NOK 25 mill on Chilean operations in Q1. The company has a significant production of trout and Coho in Chile that are exposed to low prices in the Japanese market. However, we expect margins in the farming division to increase in 2009 and 2010 as the supply side for Atlantic salmon appears low to moderate. Further, we expect the high cost level in Chile to improve in 2009 and 2010. The farming unit of group has a significant capacity for organic growth as estimated production in 2008 is 112 000 tons gutted weight (gw) while production capacity is approximately 200 000 tons gw. Over time we expect CEQ to utilise this production capacity. We particularly like the stable earnings from the feed operations. The Cermaq subsidiary Ewos has a 33 % share of the growing salmon feed market. Due to improved capacity utilisation and the strong position Ewos holds in R&D, product development and functional feed, the margins in EWOS were 6.4 % in 2007 (6.1 % excluding one-offs), which is better than other fish feed producers. We expect good margins from the feed unit in coming years, as the current disease problems in the salmon sector increase demand for high margin feed types and capacity utilisation remains high. As feed contracts normally are based on a costplus margin, the feed division is insulated from changing raw material prices over time. However, the recent increase in raw material prices could reduce margins in EWOS in 2008 as transfer of costs to clients typically will take some time and will be related to renegotiations of contracts. We like the outlook for the feed operations of the group, which should provide increasing operational income and profits over the coming years. In terms of valuation Cermaq is the cheapest of the listed salmon companies. Enterprise Value of the group is currently NOK 6300 mill. Based on a EV value of EWOS of NOK 4000 mill and other assets of NOK 400 mill, the farming unit of the group is undervalued at NOK 1900 mill. Cermaq is trading at EV/kg of NOK 17 while other groups are ranging between EV/kg 35 – 75 NOK.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
38
Chart 46: EV/KG 80.0 70.0 60.0
NOK
50.0 40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Constructing the forecast Our assumptions for the forecast is included in table 14. We expect EBIT margins to improve from 2008 to 2010 as we expect salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010 in Norway. We further expect some improvements in the biological situation in Chile during 2009, but no significant growth in volumes from Chile before 2010 and 2011 particularly. The group has significant spare production capacity in Norway, which we expect the group will utilise over the next years. Increased capacity utilisation should have a positive effect on production costs in Norway. Capital expenditure is expected to be high 2008 and 2009 due to investment in feed factory in Norway. We have used an effective tax rate of 24.5 % on Cermaq. We expect good margins in Ewos ranging from 5.8 % to 6.2 % during the next years. Table 14: Assumptions for forecast P&L in NOK Mill 2006 Revenues 7534 EBITDA 1568 EBIT 1311 Pre tax profit 1240 Net profit 938
2007 7721 1008 747 455 479
2008E 8497 902 602 521 396
2009E 9121 1094 750 655 498
2010E 9855 1335 977 885 673
2011E 10607 1296 921 834 633
20.8 % 17.4 % 12.4 %
13.1 % 9.7 % 6.2 %
10.6 % 7.1 % 4.7 %
12.0 % 8.2 % 5.5 %
13.5 % 9.9 % 6.8 %
12.2 % 8.7 % 6.0 %
EBIT margin (kg gw) Norway Chile Canada UK Average
2006 11.5 10.2 14.1 3.5 10.9
2007 4.2 5.1 4.7 -0.5 4.2
2008E 4.6 0.7 2.5 2.0 2.3
2009E 5.3 1.7 3.0 2.0 3.0
2010E 6.3 3.5 3.6 3.0 4.3
2011E 3.8 3.0 1.9 0.0 2.8
EBIT margin feed
4.8 %
6.4 %
5.8 %
6.1 %
6.2 %
6.1 %
Volume farming (gw) Total Norway Chile Canada UK
103.5 15.5 54.5 26.5 7.0
100.1 22.8 47.9 22.0 7.3
111.6 30.6 47.7 25.2 8.1
123.3 36.0 53.1 25.2 9.0
136.8 39.6 61.2 26.1 9.9
157.5 45.0 73.8 27.9 10.8
Margins EBITDA EBIT Net profit margin
Source: Landsbanki
Cermaq announced 15 April the purchase through subsidiary Norgrain of an additional 20 % of the shares in Denofa (importer and processor of soybeans) for NOK 10.7 mill bringing total ownership to 60 %. This acquisition is not included in the forecast above, but its impact on valuation is negligible. The group has stated its intention to divest Norgrain.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
39
Increased ownership implies consolidation of a net depth of approximately 250 mill in Denofa in group balance from Q2 2008 if CEQ retains ownership.
Valuation Our DCF valuation indicates a value per share of NOK 88.2. However, based in part on considerations of short-term EPS, P/E and exposure to Chile, our target is NOK 75 on a 12months basis, which implies a discount from DCF value of approximately 18 %. Our target is based on a WACC of 9.4 % and terminal growth rate of 2.5 %. The company is currently trading at a P/E of 12.8 times 2008 earnings and 10.2 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 15. Table 15: Free Cash Flow 2007 746.9 -179.3 247.4 815.0 -520.5 95.6 390.1
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 601.5 -144.4 300.7 757.9 -700.0 -195.3 -137.4
2009E 749.7 -179.9 344.1 913.9 -500.0 -75.8 338.1
2010E 976.7 -234.4 358.4 1100.6 -385.0 -380.1 335.5
2011E 921.1 -221.1 375.3 1075.3 -565.0 -231.2 279.2
Source: Landsbanki
As illustrated in table 16, the DCF calculation is sensitive to changes in WACC and growth rate. Improved biological situation in Chile and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 16: DCF sensitivity to changes in WACC and growth rate
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
10.4 % 62.9 66.0 69.6 73.5 78.1 83.2 89.2
9.9 % 68.0 71.6 75.7 80.4 85.7 91.8 99.0
WACC 9.4 % 73.7 78.0 82.7 88.2 94.5 101.9 110.7
8.9 % 80.3 85.2 90.8 97.3 104.9 113.9 124.8
8.4 % 87.7 93.5 100.2 108.0 117.3 128.5 142.2
Source: Landsbanki
Although the feed operations are significant, the group`s DCF, EPS and PE are significantly affected by changes in EBIT per kg salmon produced, cf. table 17. If salmon prices increases more than anticipated in 2009 and 2010 this would increase valuation. If salmon prices increases by NOK 1 more than expected in 2008 EPS would increase from 4.3 to 5.1 NOK. Table 17: DCF, PE and EPS sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 42.3 -2.0 57.6 -1.0 72.9 0.0 88.2 1.0 103.5 2.0 118.8 3.0 134.1
PE Adj. 08 30.4 21.2 16.3 13.2 11.1 9.6 8.4
EPS Adj. 08 1.9 2.7 3.5 4.3 5.1 5.9 6.7
Source: Landsbanki
Enterprise Value of the group is currently approximately NOK 6300 mill. According to our estimate, the feed division, with EBIT of NOK 378 mill in 2007 and estimated increase in EBIT to over NOK 500 mill in 2013, should be valued at approximately NOK 4000 million. The group owns other assets with a fair value of NOK 400-500 million in addition to the
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
40
farming entity. We find that the farming operations of the group are undervalued at approximately NOK 17 per kg which is significantly lower than other companies.
Catalysts and news flow -
Financial calendar: Q1 2008 report 9 May 2008
-
Expecting weaker salmon spot prices in Norway during Q2
-
Increasing focus on MAB capacity limitations in Norway
-
Possibility for acquisitions
Risks to our rating The group`s farming operations are particularly exposed to biological problems in Chile, as almost 50 % of total salmon production is located in the region. The group has informed the market about these problems, but it has appeared less affected than other companies. CEQ has reported less mortality than other producers but has been affected through slower growth of biomass. The recent guiding of lower volumes from Chile implies that impacts are more significant than management had previously communicated to the market. According to Sernapesca (April 2008), 5 out of the 21 farms with a confirmed ISA outbreak in Chile belonged to CEQ, while none of 17 farms with a suspected outbreak belonged to the company. Of another 39 farms in quarantine, 3 also belong to Cermaq. There is a risk that the situation could escalate further in Chile, affecting the costs of the company and its harvest volumes. It could further take more time than we assume for the situation to improve in Chile. There is a risk that the group do not achieve the forecasted margins due to higher costs of production or lower prices. The group recently appointed a new CFO, which could imply increased risks for write downs in the near term. Further, we note that the COO of Mainstream Americas sold 83 350 shares of a total of 183 350 shares in March, and look at this as a negative short term signal. The Norwegian production of the group is located in the north, an area that is less exposed to problems related to PD than are areas further south, although there has been two incidents reported in recent months. Reference is further made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Cermaq is the world’s second largest producer of both Atlantic salmon (7% of production) and feed (through its ownership of Ewos). Furthermore, the company produces approximately 28,000 tons of Coho and trout in Chile. The company has a diversified salmon production in all the main salmon regions, but its main production base is in Chile (48 % of total production including Coho and trout). Production in Norway represents 23 % and Canada 22 %. The group has capacity for further growth, both in Chile and Norway. The group acquired Arctic Seafood (five licenses in Nordland and four in Troms and significant smolt production) in December 2007. The activity of Arctic in Troms (four licenses) has been sold to Salmar.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
41
Chart 47: Regional split of salmon production
UK
No rway
Canada
Chile
No rway
Chile
Canada
UK
Source: Landsbanki
The salmon feed industry is consolidated with the three largest companies (Skretting, Ewos/Cermaq and Biomar) serving approximately 92 % of the total market. Cermaq is a leading feed company investing significantly in R&D to improve feed performance and it appears well positioned to take its share of a growing feed market. The group has feed production in all producing regions with investment plans for significant increased capacity (approximately 25 %) in Norway. The new capacity will be operational in Norway from 2009 and 2011. (Final investment decision concerning latest capacity increase to be taken at a later stage). Cermaq also owns 72.5 % of Norgrain (importer and trader of grain and other commodities), but has stated that this part of the business will be divested.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
Reuters LSG.OL / Bloomberg LSG.NO Index: FTSE Euro First 300
Rating
Lerøy Seafood Group ASA 23 April 2008 - INITIATION OF COVERAGE
Reduce 380
- SMALL / MID-CAPS
FOOD PRODUCERS
Valuation is stretched Landsbanki initiates coverage with a reduce recommendation and a target of NOK 95. We find that valuation is stretched on current levels and that other companies in the sector represent better investment opportunities.
Target Price
Current Price
NOK95.00
NOK106.50
Market Cap
Free Float
NOK5.7bn
51%
Reduce
Year
EBIT
EBIT
Net
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
2006
5,616.6
683.8
12.2
651.9
13.72
7.7
8.6
1.3
9.2
10.4
0.0
2007
6,290.9
387.2
6.2
279.6
4.99
24.5
17.2
1.3
15.4
21.5
1.5
2008E
6,915.6
505.4
7.3
315.9
5.89
18.1
12.9
1.1
11.3
14.9
1.7
2009E
7,374.0
644.8
8.7
430.7
8.04
13.3
10.5
1.0
9.2
11.4
2.3
2010E
7,872.5
756.1
9.6
534.1
9.96
10.7
9.0
0.9
7.8
9.4
2.8
End Dec. 31
Sales
Previous
EPS
P/E
P/CF
NOK
106.50
5.7
bn
51
%
95.00
NOK
NOK
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield (%)
Shares O utstanding (m
54
Daily Trade Vol.(sh 00
35
-3.2%
NOK146.00/NOK89.00
52 W eek High/Low
Enterprise Value (NO K
7,542
Net Debt (NO Km)
1,836
Source: Landsbanki
Valuation of LSG is stretched The company is currently trading at a P/E of 18.1 times 2008 earnings and 13.3 times 2009 earnings and is the most expensive of the salmon companies listed in Oslo. On the basis of our DCF valuation and earning potential we can’t see that current valuation is justified. Disappointing Q4 report and operational challenges in main entities Lerøy recorded an EBIT before biomass of NOK 66 mill in Q4 2007 against our estimates of NOK 105 mill and consensus estimates of NOK 122 mill. Several of the main salmon producing entities of Lerøy such as Midnor and Hydrotech performed below expectations due i.a. to high costs. We expect high costs to impact Q1 2008 result significantly. Ler øy Seaf ood Gr oup A SA r el . FT SE E ur o Fi r st 300
Limited capacity for growth in production and biological problems in Lerøy Austevoll With the exception of Lerøy Austevoll, the group has limited capacity for growth in salmon production. Biological problems due to Pancreas disease (PD) is significantly impacting costs at Austevoll and could hamper growth in production from this entity for years. We expect growth to materialise through more acquisitions.
Ler øy Seaf ood Gr oup A SA 160
FT SE E ur o Fi r st 300
150 140 130 120 110
Significant production of trout The company produces a significant volume of large rainbow trout i.a. in Fossen and Hydrotech. Although the group will reduce its production of trout over time, the earnings in 2008 will be impacted by the current weak trout market. Upside potential We expect Lerøy to make further acquisitions which could be value enhancing for the group There is further upside potential in the share price if Austevoll Seafood decides to increase its holding in Lerøy. Start up of operations in Chile could also be a value driver. Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
100 90 80 A pr 07
Jul 07
Oct 07
Jan 08
A pr 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Lerøy Seafood Group ASA
Landsbanki
43
Key financials Company profile Lerøy is one of the largest producers of farmed Atlantic salmon in Norway and a large exporter of seafood products from Norway. Lerøy owns 50 % of Norskott Havbruk with significant production of salmon in Scotland.
Production split – Geographical 100.0% 90.0%
Norskot t (LSG share) 13%
80.0%
Aust evoll 15%
70.0% 60.0% 50.0%
Top shareholders Austevoll Seafood Ole-Eirik Lerøy Fidelity Management Skagen AS
Events calendar
Fossen 10%
Aurora 19%
40.0%
33.3% 15.4% 4.0% 3.6%
30.0%
Hydr ot ech 23%
20.0% Midnor 33% 10.0% 0.0%
Incom e statem ent (NOKm ), Dec
2007
2008E
2009E
2010E
6,290.9 541.1 -153.8 387.2 -34.2 15.8 368.8 -89.3 26.8% 0.0 279.6 0.0 279.6
6,915.6 664.8 -159.5 505.4 -80.1 0.0 425.3 -109.4 28.0% 0.0 315.9 0.0 315.9
7,374.0 803.7 -158.9 644.8 -63.7 0.0 581.1 -150.4 28.0% 0.0 430.7 0.0 430.7
7,872.5 914.4 -158.4 756.1 -37.0 0.0 719.1 -185.0 28.0% 0.0 534.1 0.0 534.1
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
279.6 153.8 -484.0 -51.3 -102.0 607.9 -709.83
315.9 159.5 -176.8 -34.5 264.0 155.0 108.99
430.7 158.9 -83.5 -44.0 462.0 155.0 307.04
534.1 158.4 -83.3 -58.5 550.7 155.0 395.72
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na na 709.8
na na 191.2 na na na 82.2
na na 129.2 na na na -177.8
na na 160.2 na na na -235.5
2007
2008E
2009E
2010E
Per share (NOK)
12.0% -29.6% -43.4% -57.1% 25.3% 8.6% 6.2% 4.4%
9.9% 22.9% 30.5% 13.0% 22.7% 9.6% 7.3% 4.6%
6.6% 20.9% 27.6% 36.4% 23.8% 10.9% 8.7% 5.8%
6.8% 13.8% 17.3% 24.0% 24.4% 11.6% 9.6% 6.8%
EPS adjusted EPS reported CFPS BVPS DPS
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
46.4% 3.2 9.2% 7.9% 50.3% 29.9%
47.0% 2.8 8.3% 8.5% 52.7% 29.7%
39.4% 2.1 10.7% 10.6% 55.8% 29.0%
31.1% 1.6 12.2% 12.3% 59.1% 28.2%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
-1.6% 9.7% -11.3% 395.1% 36.0%
3.8% 2.2% 1.6% 97.2% 30.0%
6.3% 2.1% 4.2% 97.6% 30.0%
7.0% 2.0% 5.0% 97.9% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Ratios Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
Balance sheet (NOKm ), Dec. 31
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
537.7 800.7 1,869.1 3,207.6
155.5 933.6 1,988.9 3,078.1
133.4 995.5 2,042.7 3,171.6
168.9 1,062.8 2,097.7 3,329.4
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
2,052.3 780.0 1,149.1 317.1 4,298.5
2,052.3 780.0 1,144.7 351.6 4,328.6
2,052.3 780.0 1,140.8 395.6 4,368.7
2,052.3 780.0 1,137.4 454.1 4,423.8
Short-term debt Accounts payable Other current liabilities Current liabilities
566.6 550.0 239.9 1,356.5
400.0 625.9 239.9 1,265.8
300.0 658.0 239.9 1,197.9
300.0 697.0 239.9 1,236.9
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
1,724.7 0.0 646.1 2,370.8
1,591.3 0.0 646.1 2,237.4
1,491.3 0.0 646.1 2,137.4
1,291.3 0.0 646.1 1,937.4
Shareholders' equity Minority interest Total shareholders' equity
3,758.0 20.8 3,778.8
3,882.7 20.8 3,903.5
4,184.1 20.8 4,204.9
4,558.0 20.8 4,578.8
Net debt Net working capital Capital employed Total assets
1,753.6 1,879.9 5,861.4 7,506.1
1,835.8 2,056.8 6,033.7 7,406.6
1,657.9 2,140.3 6,113.4 7,540.3
1,422.4 2,223.6 6,193.3 7,753.1
2007
2008E
2009E
2010E
4.99 5.22 7.13 70.11 1.80
5.89 5.89 8.22 72.44 1.77
8.04 8.04 10.18 78.06 2.41
9.96 9.96 11.83 85.04 2.99
Year-end nb of shares(m) Av. diluted nb of shares(m)
53.6 48.2
53.6 53.6
53.6 53.6
53.6 53.6
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
24.5 1.7 17.2 1.5% na
18.1 1.5 12.9 1.7% na
13.3 1.4 10.5 2.3% na
10.7 1.3 9.0 2.8% na
1.32 15.4 21.5 1.7
1.09 11.3 14.9 1.3
1.00 9.2 11.4 1.2
0.91 7.8 9.4 1.2
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Lerøy Seafood Group ASA
44
Why the stock is a reduce We initiate coverage with a reduce recommendation and a target of NOK 95. While the values of other listed salmon producers have decreased significantly recently, the share price of LSG has held up well. However, we find that valuation is stretched on current levels and that other companies in the sector present better investment opportunities.
Constructing the forecast Our assumptions for the forecasts is included in table 18 below. We expect EBIT margins to improve from 2008 to 2010 as we expect salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. We further expect some improvements in the biological situation in Lerøy Austevoll and improved margins from poor levels in 2007 in this unit. We expect a limited growth in salmon production due to operating entities producing close to full capacity. We have used a tax rate of 28 % in our forecast. Margins in the Sales & Distribution (S&D) unit is expected around 2 % during the next years. Table 18: Assumptions for the forecast P&L in NOK mill. 2006 Revenues 5616.6 EBITDA 768.5 EBIT 683.8 Pre tax profit 858.4 Net profit 652.4
2007 6290.9 541.1 387.2 368.8 279.6
2008E 6915.6 664.8 505.4 425.3 315.9
2009E 7374.0 803.7 644.8 581.1 430.7
2010E 7872.5 914.4 756.1 719.1 534.1
2011E 8289.2 726.5 568.6 522.7 386.6
13.7 % 12.2 % 11.6 %
8.6 % 6.2 % 4.4 %
9.6 % 7.3 % 4.6 %
10.9 % 8.7 % 5.8 %
11.6 % 9.6 % 6.8 %
8.8 % 6.9 % 4.7 %
EBIT margin (kg gw) Average Midnor Hydrotech Aurora Fossen Austevoll Norskott
2006 9.5 13.2 6.6 9.6 7.3 0.0 10.5
2007 3.5 6.4 2.0 4.7 2.8 -3.5 5.9
2008E 4.1 5.3 3.5 5.0 3.8 1.0 4.0
2009E 5.1 6.0 4.8 5.8 4.0 3.0 4.8
2010E 5.9 7.0 5.5 6.3 5.0 4.0 5.8
2011E 3.8 4.5 3.5 4.5 2.5 2.5 3.5
EBIT margin S&D
2.1 %
2.0 %
2.0 %
2.1 %
2.0 %
2.1 %
63.4 27.2 8.5 13.7 4.9 0.0 10.1
88.9 29.2 20.1 17.1 9.1 13.4 11.9
99.0 30.0 23.0 20.0 7.5 18.5 13.0
103.0 31.0 24.0 20.0 9.0 19.0 13.5
107.0 32.0 25.0 20.0 10.0 20.0 14.5
110.0 33.0 25.0 20.0 10.0 22.0 15.0
Margins EBITDA EBIT Net profit margin
Volume farming (gw) Total (excl associates) Midnor Hydrotech Aurora Fossen Austevoll Norskott (LSG share) Source: Landsbanki
Valuation Our target is based on DCF valuation (DCF value of NOK 95.8 per share) with a WACC of 8.7 % and perpetuity growth rate of 2.5 %. The company is currently trading at a P/E of 18.1 times 2008 earnings and 13.3 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 19.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Lerøy Seafood Group ASA
45
Table 19: Free Cash Flow 2007 387.2 -108.4 153.8 432.6 -607.9 -484.0 -659.3
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 505.4 -141.5 159.5 523.3 -155.0 -176.8 191.5
2009E 644.8 -180.5 158.9 623.1 -155.0 -83.5 384.6
2010E 756.1 -211.7 158.4 702.7 -155.0 -83.3 464.4
2011E 568.6 -159.2 157.9 567.3 -155.0 -38.0 374.3
Source: Landsbanki
Share of associated company Norskott is valued at approximately NOK 475 mill (NOK 8.9 per share). As illustrated in table 20, the DCF calculation is sensitive to changes in WACC and terminal growth rate. Improved biological situation in Norway and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 20: DCF sensitivity to changes in WACC and terminal growth
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
9.7 % 66.3 69.9 74.0 78.6 84.0 90.2 97.5
9.2 % 72.1 76.3 81.1 86.6 93.0 100.5 109.4
WACC 8.7 % 78.7 83.6 89.3 95.8 103.6 112.8 124.0
8.2 % 86.3 92.1 98.8 106.8 116.2 127.8 142.0
7.7 % 94.9 101.9 110.0 119.8 131.6 146.3 165.0
Source: Landsbanki
Although LSG is a significant Norwegian exporter of seafood products, an investment in the group is mainly an exposure to salmon prices. As illustrated in table 21, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). Table 21: Sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 24.6 -2.0 48.3 -1.0 72.1 0.0 95.8 1.0 119.6 2.0 143.3 3.0 167.1
PE Adj. 08 79.3 37.7 24.7 18.4 14.7 12.2 10.4
EPS Adj. 08 1.37 2.88 4.38 5.89 7.40 8.91 10.42
Source: Landsbanki
Based on a valuation of the S&D unit of approximately NOK 1500 mill the farming division of the company is currently trading at EV/kg 55 NOK, cf. chart 48, which is more expensive than other groups with the exception of Salmar. Chart 48: EV/KG 80.0 70.0 60.0 50.0
NOK
Landsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmar
Landsbanki
Lerøy Seafood Group ASA
46
Catalysts and news flow -
Financial calendar: Q1 2008 report on 8 May
-
Salmon price developments during Q2 in Norway
-
Biological developments in Norway
Risks to our rating Margins could be higher than we anticipate due to higher prices or lower cost. Harvest volumes from current licenses could further be higher than we forecast. This would have positive effects on valuation. If performance at Lerøy Austevoll improves significantly in a shorter period of time than we have anticipated this would increase valuation somewhat. Austevoll Seafood is currently the largest shareholder, with 33.34 % of total shares. There is upside share price potential if an acquisition by Austevoll Seafood materialises. Start up of operations in Chile could further represent an upside in terms of valuation. Reference is further made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background The group has a considerable production of Atlantic salmon in Norway, and some in Scotland through an affiliated company Norskott Havbruk, which owns 100% of Scottish Sea Farms Ltd., the second-largest salmon farmer in the UK with production capacity in excess of 30,000 tonnes gutted weight. Lerøy has some production of trout in Norway (mainly Hydrotech and Fossen). Lerøy through subsidiary Lerøy Midnor recently acquired 3 licenses for producing salmon in Norway from Villa Organic for NOK 130 mill. The acquisition is subject to findings in due diligence and is not included in our forecasts. Lerøy was the largest exporter of seafood from Norway in 2006, and has traditionally had a strong focus on sales and processed products. Chart 49: Lerøy production in different regions
12 % 29 %
12 %
8% 21%
18 %
M idno r
Hydro tech
A uro ra
Fo ssen
A ustevo ll
No rsko tt (LSG share)
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
Reuters SALM.OL / Bloomberg SALM.NO Index: FTSE Euro First 300
Rating
SalMar ASA
Hold 380
23 April 2008 - INITIATION OF COVERAGE
- SMALL / MID-CAPS
FOOD PRODUCERS
A well run company but limited upside We initiate coverage with a hold recommendation and a price target of NOK 40. Salmar is a well run salmon company, but based on our valuation, limited capacity for growth in production, and the risk of PD spreading in Mid-Norway, we find that risk/reward is less attractive than other alternatives.
Target Price
Current Price
NOK40.00
40.20
Market Cap
Free Float
NOK4.1bn
44%
Hold
Year
Sales
EBIT
End
Previous
EBIT
Net
Margin
Profit
EP S
P/E
P/CF
NOK
40.20
4.1
bn
44
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield
Shares O utstanding (m
Dec. 31
(NOKm)
(NOKm)
(%)
(NOKm)
(NOK)
(%)
2006
1,248.6
447.4
35.8
445.1
3.96
na
na
na
na
na
na
2007
1,679.2
411.4
24.5
351.8
2.75
14.6
14.9
2.9
10.6
12.0
2.7
2008E
1,826.1
431.5
23.6
305.3
2.96
13.6
12.7
2.7
10.4
11.6
2.2
2009E
1,943.2
478.7
24.6
347.0
3.37
11.9
11.1
2.6
9.2
10.4
2.5
2010E
2,060.0
555.5
27.0
420.5
4.08
9.8
9.4
2.3
7.6
8.6
3.0
%
40.00
NOK
Year End Dec . 31 2006 2007
Sales
EBIT
EBI T Margin
Net Profit
EPS
(NOKm) 1 ,248.6
(N OKm) 447.4
(% ) 35.8
(NOKm) 445.1
(N OK) 3.96
411.4
24.5
351.8
2.75
52 W eek High/Low
2.2
10 .4
2.5
7.6
8.6
3.0
5,008 867
FT SE E ur o Fi r s t 300
50 48 46
Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
44 42 40 38 36 34 Feb 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
(%) na
11 .6
9.2
2.3
62
Nov 07
Di v. Yield
na
10.4
2.6
9.4
Sal M ar A SA
A ug 07
EV/ EBIT
2.7
11.1
9.8
Sal M ar A SA r el . FT SE E ur o Fi r st 300
M ay 07
na 10.6
12.7
11.9
4.08
NOK44.00/NOK35.00
Net Debt (NO Km)
EV/ EBITDA
13.6
3.37
420.5
103
Enterprise Value (NO K
na 2.9
2.96
347.0
27.0
A well run company, but upside in terms of valuation is limited We like the group’s strong production base in Norway and traditions of low production cost and high margins in Salmar Mid Norway. We expect margins to be significantly improved also at Salmar North in the coming years. However, our DCF valuations suggest a fair value of NOK 40.4 per share and the share is currently trading at NOK 40.2 at P/E of 13.6 times 2008 earnings and 11.9 times 2009 earnings. On such basis we see only limited upside, and we initiate coverage with a hold recommendation.
Risk of diseases in main producing region of Mid-Norway The salmon production of the group remains concentrated in Mid-Norway (Trøndelag and north of Møre and Romsdal), a region that traditionally has not been exposed to problems related to Pancreas Disease (PD). However, PD is increasingly a problem in the neighbouring county of Møre og Romsdal and there is a significant risk of spreading of this disease to the main production region of Salmar. Recently there has been an incident reported also in the north of Møre and Romsdal. If PD should spread in Mid-Norway and affect Salmar’s activities in the region, this could have a significant negative impact on the valuation of the company.
14.9
EV/ Sal es
305.3
24.6
555.5
-8.6%
Daily Trade Vol.(sh 00
52
14.6
na
23.6
478.7
Source: Landsbanki
Limited capacity for growth in production Salmar has limited capacity for growth in production based on the current number of licenses. We expect the group to continue targeting growth through the acquisition of small to medium-sized farmers in Norway, possibly also expanding in other salmon producing regions. The company has a strong balance sheet and could make significant acquisitions.
P/CF
na
431.5
1 ,943.2 2 ,060.0
2008E
1 ,679.2
P/E
1 ,826.1
2009E 2010E
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
12 .0
2.7
SalMar ASA
Landsbanki
48
Key financials Company profile Salmar is one of the largest producers of Atlantic salmon in Norway with production in the regions of Trøndelag and Tromsø. The group owns 50 % of Norskott Havbruk with significant production in Scotland.
Production split – Geographical and divisional 100.0% 90.0% Norskot t 19% 80.0% 70.0% 60.0%
Top shareholders Kverva Holding Odin Forvaltning Pareto Forvaltning ABN Amro Kapitalforvaltning
Events calendar
50.0%
55.8% 8.8% 6.0% 1.0%
Salmar Nort h 11%
40.0% 30.0% 20.0%
Salmar Mid 70%
10.0% 0.0%
Incom e statem ent (NOKm ), Dec
2007
2008E
2009E
2010E
1,679.2 463.6 -52.2 411.4 -24.4 94.2 481.2 -129.4 28.8% 0.0 351.8 0.0 351.8
1,826.1 483.3 -51.8 431.5 -19.7 0.0 411.8 -106.5 28.0% 0.0 305.3 0.0 305.3
1,943.2 543.9 -65.2 478.7 -12.4 0.0 466.4 -119.4 28.0% 0.0 347.0 0.0 347.0
2,060.0 630.8 -75.2 555.5 7.6 0.0 563.2 -142.7 28.0% 0.0 420.5 0.0 420.5
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
351.8 52.2 -137.5 -125.8 140.7 93.8 46.90
305.3 51.8 -82.4 -31.5 243.2 100.0 143.22
347.0 65.2 -33.5 -40.0 338.7 210.0 128.68
420.5 75.2 -29.1 -53.5 413.2 75.0 338.18
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na na -46.9
na na 204.9 na na na 61.7
na na 104.1 na na na -24.6
na na 126.1 na na na -212.0
Ratios
2007
2008E
2009E
2010E
Per share (NOK)
34.5% -4.5% -8.1% -21.0% 52.0% 27.6% 24.5% 21.0%
8.7% 4.2% 4.9% -13.2% 48.0% 26.5% 23.6% 16.7%
6.4% 12.5% 10.9% 13.6% 49.1% 28.0% 24.6% 17.9%
6.0% 16.0% 16.0% 21.2% 50.9% 30.6% 27.0% 20.4%
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
60.9% 1.7 31.9% 20.4% 45.7% 53.2%
61.0% 1.8 22.3% 18.1% 45.8% 53.5%
50.6% 1.5 22.5% 18.8% 50.0% 52.0%
32.2% 1.0 23.2% 21.0% 56.3% 50.4%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
8.4% 5.6% 2.8% 179.7% 40.0%
13.3% 5.5% 7.8% 193.2% 30.0%
17.4% 10.8% 6.6% 322.2% 30.0%
20.1% 3.6% 16.4% 99.7% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
Balance sheet (NOKm ), Dec. 31
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
47.8 124.3 1,025.7 1,197.8
56.1 161.4 1,113.5 1,331.1
50.7 171.8 1,148.6 1,371.1
112.8 182.1 1,173.6 1,468.4
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
90.0 988.5 348.2 269.8 1,696.5
90.0 988.5 396.4 301.3 1,776.2
90.0 988.5 541.2 341.3 1,961.0
90.0 988.5 541.0 394.8 2,014.3
88.4 240.1 16.0 344.5
130.0 282.7 16.0 428.7
130.0 294.6 16.0 440.6
130.0 300.9 16.0 446.9
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
764.7 0.0 463.7 1,228.4
793.1 0.0 463.7 1,256.8
763.1 0.0 463.7 1,226.8
613.1 0.0 463.7 1,076.8
Shareholders' equity Minority interest Total shareholders' equity
1,320.8 0.6 1,321.4
1,421.2 0.6 1,421.8
1,664.1 0.6 1,664.7
1,958.4 0.6 1,959.0
Net debt Net working capital Capital employed Total assets
805.3 893.9 2,320.6 2,894.3
867.0 976.3 2,451.2 3,107.3
842.4 1,009.8 2,629.5 3,332.1
630.3 1,038.8 2,658.3 3,482.7
2007
2008E
2009E
2010E
EPS adjusted EPS reported CFPS BVPS DPS
2.75 3.42 2.70 12.82 1.10
2.96 2.96 3.16 13.80 0.89
3.37 3.37 3.61 16.16 1.01
4.08 4.08 4.29 19.01 1.22
Year-end nb of shares(m) Av. diluted nb of shares(m)
103.0 101.5
103.0 103.0
103.0 103.0
103.0 103.0
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
14.6 3.1 14.9 2.7% na
13.6 2.9 12.7 2.2% na
11.9 2.5 11.1 2.5% na
9.8 2.1 9.4 3.0% na
2.94 10.6 12.0 2.4
2.74 10.4 11.6 2.1
2.56 9.2 10.4 2.0
2.32 7.6 8.6 1.8
Short-term debt Accounts payable Other current liabilities Current liabilities
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
SalMar ASA
49
Why the stock is a hold We like the strong production base in Norway and traditions of low production cost and strong margins in Salmar Mid Norway. We further expect margins to be significantly improved at Salmar North (Senja Sjøfarm) in the coming years. Compared to other salmon companies Salmar has limited capacity for growth in production, although the group has good availability of smolt over the year, and is well positioned to exploit the current regulatory regime (MAB) in Norway. The salmon production of the group remains concentrated in Mid-Norway (Trøndelag and north of Møre and Romsdal), a region that traditionally has not been exposed to significant problems related to Pancreas Disease. However, PD is increasingly a problem in the neighbouring county of Møre og Romsdal and there is a significant risk of spreading of this disease to the main production region of Salmar. According to the National Veterinary Institute in Norway the number of reported incidents of PD in Møre og Romsdal increased significantly in 2007. PD is also recently reported north of Hustadvika in Møre og Romsdal which has been the barrier (in terms i.a. of regulative initiatives) to prevent the disease from spreading further north. If PD should spread in Mid-Norway and affect Salmar’s activities in the region, this could have a significant negative impact on the valuation of the company. Based on our valuation, limited capacity for growth in production, the risk of PD spreading to Mid-Norway and a share price that has held up well through recent turbulence, we find that the risk/reward is unattractive compared to other alternatives in the sector. However, the company’s profitability over the years is impressive and a strong production base in Norway is positive as supply from Chile is limited.
Constructing the forecast Landsbanki assumptions for the forecasts is included in table 22 below. We expect EBIT margins to improve from 2008 to 2010 as we expect Norwegian salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. We expect EBIT margins to improve significantly in Salmar North from a level of NOK 3.5 per kg gw in 2008 to NOK 6 per kg gw in 2010, and average margins for the company should increase in the period. We have used a tax rate of 28 % in our forecast. Estimated growth in salmon production will be limited from 2008 to 2010 due to operating entities producing close to full capacity. Table 22: Assumptions for forecast 2006 Revenues 1248.6 EBITDA 485.3 EBIT 447.4 Pre tax profit 577.3 Net profit 445.1
2007 1679.2 463.6 411.4 481.3 351.8
2008E 1826.1 483.3 431.5 411.8 305.3
2009E 1943.2 543.9 478.7 466.4 347.0
2010E 2060.0 630.8 555.5 563.2 420.5
2011E 1993.5 522.2 447.0 443.7 328.4
EBITDA EBIT Net profit margin
39% 36% 36%
28% 24% 21%
26% 24% 17%
28% 25% 18%
31% 27% 20%
26% 22% 16%
EBIT margin (kg gw) Average
14.2
8.4
7.0
7.6
8.7
6.8
Volume farming (gw) Total (excl. associates) Salmar Mid Salmar North Norskott
32.0 29.8 2.2 10.1
52.1 45.1 7.0 11.9
60.0 47.0 13.0 13.0
63.0 49.0 14.0 13.5
65.0 50.0 15.0 14.5
67.0 51.0 16.0 15.0
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
SalMar ASA
50
Valuation Landsbanki initiates coverage with a hold recommendation and a price target of NOK 40. Our target is based on a DCF valuation (DCF value of NOK 40.4 per share), a WACC of 9.1 % and terminal growth rate of 2.5 %. The company is currently trading at a P/E of 13.6 times 2008 earnings and 11.9 times 2009 earnings. The Free Cash Flow used for valuation is included in table 23. Table 23: Free Cash Flow 2007 411.4 -110.6 52.2 353.0 -93.8 -137.5 121.7
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 431.5 -120.8 51.8 362.5 -100.0 -82.4 180.1
2009E 478.7 -134.0 65.2 409.9 -210.0 -33.5 166.4
2010E 555.5 -155.6 75.2 475.2 -75.0 -29.1 371.2
2011E 447.0 -125.2 75.2 397.1 -75.0 -2.4 319.6
Source: Landsbanki
Share of associated company Norskott is valued at approximately NOK 475 mill (NOK 4.6 per share). As illustrated in table 24, the DCF calculation is sensitive to changes in WACC and growth rate. Improved biological situation in Norway and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 24: DCF sensitivity to changes in WACC and terminal growth
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
10.1 % 30.1 31.4 32.8 34.4 36.2 38.4 40.8
9.6 % 32.2 33.7 35.3 37.2 39.4 41.9 44.9
WACC 9.1 % 34.6 36.3 38.2 40.4 43.0 46.1 49.7
8.6 % 37.2 39.2 41.5 44.2 47.3 51.1 55.7
8.1 % 40.3 42.6 45.4 48.6 52.5 57.2 63.0
Source: Landsbanki
As illustrated in table 25, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). If salmon prices increases more than anticipated in 2009 and 2010 this would increase valuation. If salmon prices increases by NOK 1 more than expected in 2008 EPS would increase from 3.0 to 3.5 NOK. Table 25: DCF, PE and EPS sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 17.4 -2.0 25.1 -1.0 32.7 0.0 40.4 1.0 48.1 2.0 55.8 3.0 63.5
PE Adj. 08 28.5 21.1 16.7 13.8 11.8 10.3 9.1
EPS Adj. 08 1.44 1.95 2.46 2.96 3.47 3.98 4.49
Source: Landsbanki
The company is currently trading at EV/kg of NOK 75, cf. chart 50, which is significantly higher than other groups that are trading in the range 17-55 NOK. We find that it is reasonable that Salmar is trading on a premium as margins per kg produced is higher than for other groups. However, on current levels we see only limited upside.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
SalMar ASA
51
Chart 50: EV/KG 80.0 70.0 60.0 50.0
NOK
Landsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Catalysts and news flow -
Financial Calendar: 29 April 2008 – presentation of Q1 2008
-
Developments in Norwegian salmon prices during Q2 2008
-
Developments in the biological situation for salmon farmers in Mid Norway
Risks to our rating There is an upside potential in valuation if operating margins increases more than we foresee or if the company manages to increase production more than we expect. There is further upside potential if the company decides to start up operations in Chile. Reference is made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Salmar owns 52 licences for producing salmon in Norway, 39 of which are located in the company's principal producing region in Mid-Norway and 13 in Troms (Senja Sjøfarm). Senja Sjøfarm was previously an affiliated company but 100 % of shares were acquired in October 2006. Salmar processes a significant share of its production at its VAP facilities in Mid Norway and will construct a new processing plant “Innovamar” that will be operational from 2009. Salmar recently acquired two licenses in Mid Norway and four licenses in Troms from Cermaq. The company also owns 50 % of Norskott Havbruk AS, which owns 100 % of Scottish Sea Farms Ltd., the second-largest salmon farmer in the UK, with production capacity in excess of 30 000 tonnes gutted weight.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
SalMar ASA
52
Chart 51: Salmar production in different regions
19 %
12 % 69 %
Salmar M id
Salmar No rth
No rsko tt
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
,
Reuters GSF.OL / Bloomberg GSF NO Index: FTSE Euro First 300
Rating
Grieg Seafood ASA 23 April 2008 - INITIATION OF COVERAGE
Hold 380
- SMALL / MID-CAPS
FOOD PRODUCERS
Upside potential but high operational and financial risks We expect Grieg Seafood to increase production significantly and improve margins during 2008-2010. However, GSF has operational challenges in most producing regions and the financial gearing is significant. We advice investors to be cautious in the short term as the risk is high.
Target Price
Current Price
NOK14.00
NOK12.60
Market Cap
Free Float
NOK964.1m
39%
Hold
Year
EBIT
EBIT
Net
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
2006
543.5
125.7
23.1
104.5
0.89
na
na
na
na
na
na
2007
1,026.8
79.6
7.8
51.4
0.73
27.6
9.0
2.6
17.5
33.6
0.0
2008E
1,559.1
180.5
11.6
65.0
0.85
14.8
5.5
1.5
8.3
13.3
0.0
2009E
1,691.4
249.3
14.7
106.3
1.39
9.1
4.2
1.4
6.4
9.6
0.0
2010E
1,943.6
348.8
17.9
183.3
2.38
5.3
3.1
1.2
4.9
6.7
5.7
End Dec. 31
Sales
Previous
EPS
P/E
P/CF
NOK
12.60
964.1
m
39
%
14.00
NOK
NOK
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield (%)
Shares O utstanding (m
77
Daily Trade Vol.(sh 00
37
-20.3%
52 W eek High/Low
NOK24.50/NOK10.25
Enterprise Value (NO K
2,401
Net Debt (NO Km)
1,437
Source: Landsbanki
Potential for growth in production and reduced costs We like the significant potential for increased production in the group and the scope for reduced production costs due to economies of scale and (over time) an improved biological situation in Norway. The group recently received approval for exports to Russia from its operations in Finnmark, which will be important in the development of the group’s activity in the north of Norway. The group does not have any production in Chile and their Canadian operations should benefit from higher prices in the US market in 2008–2010, as Chilean supply is reduced due to the biological problems. Significant operational and financial risks. The Q4 report was in line with our estimates, but biological issues in most producing regions remain a concern. The company has high capex and working capital requirements to achieve the targeted growth, and the financial gearing is significant. Operational and financial risks appears significant in the short term.
Gr i eg Seaf ood A SA r el . FT SE E ur o Fi r st 300
Gr i eg Seaf ood A SA 26
FT SE E ur o Fi r s t 300
24 22 20
Valuation and recommendation - be cautious in the short term Our DCF calculation suggests a share value of NOK 14. The share is currently trading at 14.8 times 2008 earning and 9.1 times 2009 earnings. Landsbanki forecasts EPS of NOK 1.4 in 2009 and 2.4 in 2010 based on our salmon market expectations and lower cost levels in GSF. Although GSF appears an attractive investment based on outlook for 2009 and 2010 we advice investors to be cautious in the short term due to high risk.
18 16 14 12 10 M ay 07
A ug 07
Nov 07
Feb 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it. Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
Merrion Landsbanki: Ireland
Landsbanki Securities (UK): UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Grieg Seafood ASA
Landsbanki
54
Key financials Company profile Grieg Seafood is a producer of farmed Atlantic salmon with production in Norway, Canada and the UK.
Sales split – Geographical and divisional 100.0% 90.0%
UK 23%
80.0% 70.0%
Canada 23%
60.0% 50.0%
Top shareholders Grieg Holding Halde Invest Hakon Volden
Events calendar
Chile 21%
40.0%
40.6% 20.5% 2.5%
30.0%
Nor way 32%
20.0% 10.0%
Tot al 100%
0.0%
Incom e statem ent (NOKm ), Dec
Balance sheet (NOKm ), Dec. 31
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
24.3 111.9 1,187.1 1,323.3
13.1 173.8 1,303.7 1,490.6
62.7 188.6 1,357.3 1,608.5
80.8 216.7 1,447.8 1,745.2
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
138.7 851.5 637.4 24.2 1,651.8
138.7 851.5 817.9 24.2 1,832.3
138.7 851.5 842.9 24.2 1,857.3
138.7 851.5 817.9 24.2 1,832.3
471.4 191.1 43.6 706.1
471.4 193.4 43.6 708.4
471.4 200.0 43.6 715.0
471.4 224.1 43.6 739.1
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
698.1 0.0 304.8 1,002.9
978.6 0.0 304.8 1,283.4
1,008.6 0.0 304.8 1,313.4
968.6 0.0 304.8 1,273.4
Shareholders' equity Minority interest Total shareholders' equity
1,214.5 0.0 1,214.5
1,279.5 0.0 1,279.5
1,385.8 0.0 1,385.8
1,513.4 0.0 1,513.4
Net debt Net working capital Capital employed Total assets
1,145.2 1,064.3 2,691.8 2,975.1
1,436.9 1,240.5 3,048.6 3,322.8
1,417.3 1,302.3 3,135.4 3,465.8
1,359.2 1,396.8 3,204.8 3,577.5
2007
2008E
2009E
2010E
0.73 0.68 2.24 16.55 0.00
0.85 0.85 2.28 17.40 0.00
1.39 1.39 3.02 18.79 0.00
2.38 2.38 4.02 20.45 0.71
Year-end nb of shares(m) Av. diluted nb of shares(m)
76.5 76.5
76.5 76.5
76.5 76.5
76.5 76.5
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
27.6 1.2 9.0 0.0% na
14.8 0.7 5.5 0.0% na
9.1 0.7 4.2 0.0% na
5.3 0.6 3.1 5.7% na
2.61 17.5 33.6 1.3
1.54 8.3 13.3 0.8
1.41 6.4 9.6 0.8
1.20 4.9 6.7 0.7
2007
2008E
2009E
2010E
1,026.8 153.2 -73.6 79.6 0.4 -44.0 36.0 16.1 -42.5% 0.8 51.4 0.0 51.4
1,559.1 290.1 -109.5 180.5 -87.7 0.0 92.9 -27.9 30.0% 0.0 65.0 0.0 65.0
1,691.4 374.3 -125.0 249.3 -97.4 0.0 151.9 -45.6 30.0% 0.0 106.3 0.0 106.3
1,943.6 473.8 -125.0 348.8 -88.4 0.0 261.4 -78.1 29.9% 0.0 183.3 0.0 183.3
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
51.4 73.6 -457.7 46.7 -286.0 416.9 -702.93
65.0 109.5 -176.3 0.0 -1.7 290.0 -291.72
106.3 125.0 -61.8 0.0 169.6 150.0 19.56
183.3 125.0 -94.5 -1.0 212.8 100.0 112.82
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na na 702.9
na na 0.0 na na na 291.7
na na 0.0 na na na -19.6
na na 54.7 na na na -58.1
2007
2008E
2009E
2010E
Per share (NOK)
Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
88.9% -9.8% -36.6% -50.8% 47.4% 14.9% 7.8% 5.0%
51.8% 89.3% 126.7% 26.5% 43.6% 18.6% 11.6% 4.2%
8.5% 29.0% 38.1% 63.6% 46.3% 22.1% 14.7% 6.3%
14.9% 26.6% 39.9% 72.3% 47.6% 24.4% 17.9% 9.4%
EPS adjusted EPS reported CFPS BVPS DPS
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
94.3% 7.5 5.8% 3.9% 40.8% 103.7%
112.3% 5.0 5.2% 6.3% 38.5% 79.6%
102.3% 3.8 8.0% 8.1% 40.0% 77.0%
89.8% 2.9 12.6% 11.0% 42.3% 71.9%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
-27.9% 40.6% -68.5% 566.4% 0.0%
-0.1% 18.6% -18.7% 264.8% 0.0%
10.0% 8.9% 1.2% 120.0% 0.0%
11.0% 5.1% 5.8% 80.0% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Ratios
Short-term debt Accounts payable Other current liabilities Current liabilities
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Grieg Seafood ASA
55
Why the stock is a hold We initiate coverage with a hold recommendation and target NOK 14. The share price has come down significantly recently, due to increased biological risks, higher costs in Norway, lower salmon prices and the general market downturn. We like the significant potential for increased production in the group and the scope for improvement in production costs resulting from economies of scale and (over time) an improved biological situation. However, the group has biological challenges related to PD in Norway, particularly in Rogaland but also in Finnmark, in Canada with algeas and oxygen levels and sea lices in the UK. These problems could reduce margins and cash flow for a longer period of time than anticipated. There is further regulatory issues to be resolved in Canada for the group to utilise its production capacity in the region. The current gearing of the group is significant (7.5 times EBITDA) and the group will have utilise most of its credit facility (1.430 mill out of 1.500 mill in December 2008) in order to grow production. If salmon prices are significantly lower than expected or costs higher than expected this could impact the interest rates paid by the group and also its ability to honour its obligations towards the bank. Although the group faces operational challenges to its ability to expand production and reduce costs, GSF could an attractive investment based on the outlook for 2009 and 2010. Due to high risks we advice investors to be cautious in the short term until the company delivers progress in operations.
Constructing the forecast Our assumptions for the forecast is included in table 26 below. We expect EBIT margins to improve from 2008 to 2010 as we expect Norwegian salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. Production costs should come down approaching 2009 due to improved biological situation particularly in Norway, and economies of scale. We expect production to increase from 36 000 tons in 2007 to 72 000 tons in 2010, which is below company guiding of 75-80 000 tons in 2010. Table 26: Assumptions for forecast 2006 Revenues 543.5 EBITDA 169.8 EBIT 125.7 Pre tax profit 139.1 Net profit 107.9
2007 1026.8 153.2 79.6 36.1 52.2
2008E 1559.1 290.1 180.5 92.9 65.0
2009E 1691.4 374.3 249.3 151.9 106.3
2010E 1943.6 473.8 348.8 260.4 182.3
2011E 1835.8 321.5 198.4 116.6 81.6
Margins EBITDA EBIT Net profit margin
31.2 % 23.1 % 19.9 %
14.9 % 7.8 % 5.1 %
18.6 % 11.6 % 4.2 %
22.1 % 14.7 % 6.3 %
24.4 % 17.9 % 9.4 %
17.5 % 10.8 % 4.4 %
2006 8.0 3.0 7.3 12.7 9.5
2007 2.4 -0.5 4.5 3.4 2.5
2008E 2.4 2.5 3.3 3.6 3.0
2009E 4.2 3.7 3.6 4.0 3.9
2010E 5.5 5.8 3.6 4.5 4.8
2011E 3.0 3.5 1.5 2.5 2.6
28.7 8.6 1.9 6.5 11.8
36.2 11.6 7.6 8.5 8.5
60.0 10.0 17.0 17.0 16.0
64.5 13.5 19.0 15.0 17.0
72.0 14.0 22.0 19.0 17.0
75.0 15.0 23.0 19.0 18.0
EBIT margin (kg gw) Norway Rogaland Norway Finnmark Canada UK Average Volume (gw) Total Norway Rogaland Norway Finnmark Canada UK Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Grieg Seafood ASA
56
Valuation We initiate coverage with a hold recommendation and target NOK 14. Our target is based on DCF valuation (DCF value of NOK 14 per share) and a WACC of 8.9 % and a terminal growth rate of 2.5 %. The company is currently trading at a P/E of 14.8 times 2008 earnings and 9.1 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 27. Table 27: Free Cash Flow 2007 79.6 35.6 73.6 188.9 -416.9 -457.7 -685.7
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 180.5 -54.2 109.5 235.9 -290.0 -176.3 -230.3
2009E 249.3 -74.8 125.0 299.5 -150.0 -61.8 87.7
2010E 348.8 -104.6 125.0 369.1 -100.0 -94.5 174.7
2011E 198.4 -59.5 123.1 262.0 -123.0 -10.5 128.5
Source: Landsbanki
As illustrated in table 28, the DCF calculation is sensitive to changes in WACC and terminal growth rate. Improved biological situation and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 28: DCF sensitivity to changes in WACC and growth rate
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
9.9 % 5.9 6.9 8.0 9.3 10.8 12.5 14.5
9.4 % 7.5 8.7 10.0 11.5 13.3 15.4 17.8
WACC 8.9 % 9.3 10.7 12.3 14.1 16.2 18.7 21.7
8.4 % 11.4 13.0 14.9 17.1 19.6 22.8 26.6
7.9 % 13.8 15.7 18.0 20.6 23.8 27.7 32.7
Source: Landsbanki
An investment in the group is mainly an exposure to salmon prices. As illustrated in table 29, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). Our price assumptions of NOK 25 and NOK 26 in 2009 and 2010 from Norwegian operations could prove to be conservative. In such a scenario, valuation of the group is likely to rise significantly. Table 29: Sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 -15.2 -2.0 -5.4 -1.0 4.3 0.0 14.1 1.0 23.8 2.0 33.6 3.0 43.3
PE Adj. 08 -15.4 -48.3 42.8 14.8 9.0 6.4 5.0
EPS Adj. 08 -0.8 -0.3 0.3 0.8 1.4 2.0 2.5
Source: Landsbanki
GSF is currently trading at EV/kg NOK 35 which is more expensive than CEQ but lower priced than MHG, LSG and SALM cf. chart 52. However, the net debt of GSF will increase significantly in 2008 as GSF increase production capabilities, which will impact EV/KG negatively. There is further high risk to estimates for the group.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Grieg Seafood ASA
57
Chart 52: EV/Kg based on 2008 figures 80.0 70.0 60.0 50.0
NOK
Landsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Catalysts and news flow •
Financial calendar: Q1 2008 report on 22 May 2008
•
Biological developments in Norway, UK and Canada
•
Developments in Norwegian salmon prices in Q2 2008
•
Increased attention regarding capacity limitations in Norway
Risks to our rating The group could increase margins and volumes more than we anticipate which would increase earnings and valuation of the group. Approximately 29 % of group production in 2007 was in Rogaland, where the group have problems with PD. PD has also recently been a problem in Finnmark for Grieg. We expect costs to come down gradually as 2009 approaches, but there is a risk that these problems will continue for a longer period. Also biological problems in UK and Canada may impact earnings more than anticipated. The group will expand production but controls only approximately 50 % of its smolt requirement for yearly releases. The rest is acquired through partners and contracts in the market. There is a risk related to the future availability of the required quantity and the quality of the available smolt although the group is expending its own production of smolt. According to the group, the release in 2007 went according to plan. Reference is made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Grieg Seafood has significant production of Atlantic salmon in Norway, Scotland and Canada. Production in Norway is located in Rogaland (15 licenses producing 11,600 tons in 2007) and Finnmark (23 licenses producing 9,600 tons in 2007) and represented approximately 48.5 % of total group production in 2007. Canada represented 19.5 % and Scotland 32 % of total production. With capacity for significant growth in all producing regions, particularly in Norway and Canada, the group estimates current production capacity at 77,000–80,000 tons and intends to exploit this capacity by 2010. In April 2008 the group acquired additional licenses and 3000 tons of production capacity in the UK.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Grieg Seafood ASA
58
Chart 53: Grieg production in different regions
27 %
29 %
21%
No rway Ro galand
23 %
No rway Finnmark
Canada
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
UK
59
Landsbanki
Disclosures Disclosure checklist - Potential conflict of interests Stock Cermaq ASA Grieg Seafood ASA Lerøy Seafood Group ASA Marine Harvest Group ASA Nutreco SalMar ASA
ISIN
Disclosure (See Below) nothing to disclose nothing to disclose nothing to disclose nothing to disclose nothing to disclose nothing to disclose
NO0010365521 NL0000375400
Currency NOK NOK NOK NOK EUR NOK
Price 54.75 12.60 105.50 2.83 46.61 41.50
Source: Factset closing prices of $DatePrice$ Key: 1. Landsbanki Islands hf. (Landsbanki) or its affiliate(s)* hold or own or control 5% or more of the issued share capital of this company. 2. The company holds or owns or controls 5% or more of the issued share capital of Landsbanki or its affiliate(s)*. 3. Landsbanki or its affiliate(s)* are or may be regularly doing proprietary trading in equity securities of this company. 4. Landsbanki or its affiliate(s)* have been lead manager or co-lead manager in a public offering of the issuer’s financial instruments during the last twelve months. 5. Landsbanki or its affiliate(s)* are a market maker in the issuer’s financial instruments. 6. Landsbanki or its affiliate(s)* are a liquidity provider in relation to price stabilisation activities for the issuer to provide liquidity in such instruments. 7. Landsbanki or its affiliate(s)* act as a corporate broker or a sponsor or a sponsor specialist (in accordance with the local regulations) to this company. 8. Landsbanki or its affiliate(s)* and the issuer have agreed that Landsbanki or its affiliate(s)* will produce and disseminate investment research on the said issuer as a service to the issuer. 9. Landsbanki or its affiliate(s)* have received compensation from this company for the provision of investment banking or financial advisory services within the previous twelve months. 10. Landsbanki or its affiliate(s)* may expect to receive or intend to seek compensation for investment banking services from this company in the next three months. 11. The author of, or an individual who assisted in the preparation of, this report (or a member of his/her household), or a person who although not involved in the preparation of the report had or could reasonably be expected to have access to the substance of the report prior to its dissemination has a direct ownership position in securities issued by this company. 12. An employee of Landsbanki or its affiliate(s)* serves on the board of directors of this company. 13. As at the end of the month immediately preceding the date of publication of the research report Landsbanki Kepler Inc. or its affliates beneficially owned 1% or more of a class of common equity securities of the subject company. 14. Landsbanki Securities (UK) Limited acts as nominated adviser to the Company on the Alternative Investment Market in the UK. *: affiliates: Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited. We have [or have not] discussed this report with the company and the recommendation has not been [or has been] amended as a result of these discussions.
Rating ratio Landsbanki Kepler Q1 2008 Rating breakdown
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
Rating ratio Merrion Stockbrokers Limited Q1 2008 A
B
61.9% 10.8% 22.0% 5.3% 100.0%
0.0% 0.0% 0.0% 0.0% 0.0%
Source: Landsbanki Kepler A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
A
B
46.4% 53.6% 0.0% 0.0% 100.0%
0.0% 0.0% 0.0% 0.0% 0.0%
Source: Merrion Stockbrokers Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
Rating ratio Landsbanki Islands hf. Q1 2008 Rating breakdown
Rating breakdown
Rating ratio Landsbanki Securities (UK) Limited Q1 2008 A
B
75.0% 9.0% 13.0% 3.0% 100.0%
5.0% 19.0% 0.0% 76.0% 100.0%
Source: Landsbanki Islands hf. A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
Rating breakdown
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
A
B
57.7% 29.7% 9.3% 3.3% 100.0%
70.4% 24.0% 1.4% 4.2% 100.0%
Source: Landsbanki Securities (UK) Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
From May 9th 2006, Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited and Landsbanki Islands hf.’s rating system consists of three recommendations: Buy, Hold and Reduce. For a Buy rating, the minimum expected upside is 10% in absolute terms over 12 months. For a Hold rating the expected upside is below 10% in absolute terms. A Reduce rating is applied when there is expected downside on the stock. Target prices are set on all stocks under coverage, based on a 12-month view. Equity ratings and valuations are issued in absolute terms, not relative to any given benchmark. Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited and Landsbanki Islands hf.’s strategy teams’ sector allocations rate each sector Overweight, Underweight or Neutral. Job titles: The functional job title of the person/s responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover Compensation: The research analyst (s) primarlily responsible for the preparation of the content of the research report attest that no part of the analyst’ (s’) compensation was, is or will be, directly or indirectly, related to the specific recommendations expressed by the research analyst’ (s’) in the research report. The research analyst’ (s’) compensation is, however, determined by the overall economic performance of the relevant Landsbanki affiliate and the Landsbanki Group. Analysts own views: The research analyst (s) primarlily responsible for the preparation of the content of the research report attest that the views expressed in the research report accurately reflect the analyst’ (s’) personal and current views about all of the subject securities or issuers. Stock prices: Prices are taken as of the previous day’s close (to the date of this report) on the home market unless otherwise stated.
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Salmon farming 23 April 2008 - INITIATION OF COVERAGE
EUROPE - SMALL / MID-CAPS
FOOD PRODUCERS 380
Limited supply growth and strong demand We forecast increasing salmon prices in 2009 and 2010 due to limited growth in supply. We expect a good salmon market in 2008, but high costs will affect earnings. CEQ and MHG are our preferred options in the sector. Weaker prices in Q2 and Q1 reports in May could impact shares negatively short term, but we expect the shares to rebound. Pri ce
P/E a d j.
EV/K G
E V/EBIT
NOK
2 00 8 E
20 09 E
2 01 0 E
20 0 8E
2 00 9 E
20 1 0E
20 0 8
R e c.
T arg et
M arin e Ha rve st G ro up C e rm a q
2 .8 2 5 4.7 5
17 .4 12 .8
1 0.9 1 0.2
7 .8 7 .5
1 5 .3 1 1 .4
10 .5 9 .0
7 .7 6 .9
40 .6 17 .1
Bu y Bu y
3 .1 75
L e rø y Sea fo o d G rou p S alm a r
1 0 6.5 0 4 0.2 0
18 .1 13 .6
1 3.3 1 1.9
10 .7 9 .8
1 4 .9 1 1 .6
11 .4 10 .4
9 .4 8 .6
54 .9 74 .5
R e du ce H o ld
95 40
1 2.6 0
14 .8
9 .1
5 .3
1 3 .3
9 .6
6 .7
35 .2
H o ld
14
G rie g S ea fo od Source: Landsbanki
Increasing salmon prices in 2009 and 2010 due to limited growth in supply We forecast 2-5 % annual growth in global supply during 2009-2010, as biological problems appear to limit growth in Chile, while Norwegian producers operate near full capacity. We believe that low to moderate growth in supply should result in higher salmon prices and increased margins. Although feed cost should increase we expect production costs to come down in the medium term as biological problems gradually are reduced. Outstanding long-term outlook The long-term outlook for the salmon sector is outstanding as underlying growth in demand for seafood in general is strong, while supply from traditional fisheries is stagnating. Economic growth, significant product development, a general shift towards a more healthy diet and increasing meat prices are all developments that support the market. However, the cyclicality of the industry will continue to impact earnings. 2008 earnings will be impacted by high costs Global growth in supply of salmon will come down in 2008. We expect a good salmon market, but Norwegian spot prices should come down in Q2. Higher costs due to biological problems will prevail, especially in Chile, although we expect improvements in 2009. Buy CEQ and MHG during Q2 based on the outlook for 2009 and 2010 Valuation of farming companies have come down significantly over recent months. We believe there is upside potential in the medium term, as margins should increase. We initiate coverage of the sector with a buy recommendation on Cermaq (top pick in the sector, as the company is undervalued) and Marine Harvest Group, and suggest entry during Q2. We initiate coverage of Lerøy Seafood Group and Salmar with a reduce and hold recommendation respectively and targets of NOK 95 and NOK 40. We advice investors to be cautious with Grieg Seafood until operational progress is achieved.
Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
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Landsbanki
Salmon farming
2
Contents Salmon farming 23 April 2008 Summary
3
Global protein and seafood consumption
4
Demand for Atlantic salmon
5
Economic growth and development in retail
7
Product development
8
Shift to a more healthy diet
9
Increasing food prices globally
9
WTO panel concludes in favour of Norway
12
Conclusions on demand
13
Supply of farmed Atlantic salmon
14
Supply of red fish
14
The cyclicality of the industry
14
Price developments
16
Short-term supply developments
18
Long-term supply developments
21
Conclusions on the supply side
24
Valuation of salmon companies compared to protein and food producers.
25
Key risks to our assumptions
27
Companies
28
Marine Harvest Group
28
Cermaq
35
Lerøy Seafood
42
Salmar
47
Grieg Seafood
53
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
1.
3
Summary
The fundamentals in the salmon market appear fairly strong in the short term, as demand is growing in all markets and particularly in emerging markets. Growth in the global supply of Atlantic salmon in 2008 appears moderate as Chilean supply is limited by biological problems, while growth in Norwegian supply is coming down compared to 2007. We foresee a decrease in wild catches of salmon during 2008 and no significant increase in the total supply of red fish (farmed Atlantic, wild salmon, Pacific salmon and trout) in 2008. Salmon markets in Q1 2008 has been good, but we expect some downward pressure on prices during the summer due to harvest of a larger generation of fish in Norway. Outlook for the rest of 2008 is good. Salmon prices are correlated with economic growth in main markets and slower economic growth in the EU and the US could have a negative impact on markets. On the other hand, the recent increase in global food prices should have a positive impact on demand for salmon. Due to a significant increase in grain prices, bringing for example wheat prices to record levels, we expect prices for pork and poultry products to increase significantly. This is positive for salmon producers, as substitution should increase. In the medium term we indicate a low to moderate annual growth (2–5 %) in global supply of Atlantic salmon over 2008-2010 for two reasons: firstly, it appears that biological problems will limit significant growth in Chile until 2010 and 2011. Secondly, managing growth in Norwegian production will be increasingly difficult in 2009 and 2010 based on the current number of licenses. Low to moderate supply growth should under normal conditions result in a firm salmon market, particularly during late 2009 and in 2010. The longer-term outlook for the salmon farming sector appears outstanding, as underlying growth in demand for seafood in general is strong, while supply from traditional fisheries is stagnating. Demand for Atlantic salmon has grown with annual growth rates averaging 9 % over the last 11 years. Economic growth has increased personal purchasing power and the number of individuals who can afford salmon, while significant product development and a general shift towards a more healthy diet are developments that support the market. However, the cyclical nature of this industry will continue to impact earnings. Valuation of most farming companies listed on the Oslo stock exchange have come down significantly recently, due to lower salmon prices, significantly higher cost of production and the general market downturn. Costs have increased due to higher feed costs and particularly biological problems (sea lice, SRS and ILA in Chile and PD on the southern and western parts of Norway), reducing operating margins of farmers. Particularly Marine Harvest Group but also Lerøy (Austevoll), Grieg and Cermaq (Mainstream Chile) have been affected by cost increases. We expect costs to remain high in 2008, but over time gradually improve, depending on developments in the biological situation. CEQ and MHG are our preferred options in the sector. Weaker prices in Q2 and Q1 reports in May could impact shares negatively short term, but we expect the shares to rebound. We believe that low to moderate growth in supply should result in higher salmon prices and increased margins.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
2.
4
Global protein and seafood consumption
Due to increased demand and growth in intensive livestock production, the global production of meat has more than trebled since 1960. According to the Food and Agriculture Organization of the United Nations (FAO) approximately 247 million tons of meat were consumed in 2002, of which , approximately 54 million tons were consumed in Europe and 40 million tons in the US. Poultry production has been particularly strong, increasing from 15 million tons in 1970 to 68 million tons in 2000. FAO forecasts that global meat production will increase to approximately 300 million tons by 2020. Chart 1: Protein consumption in the EU market
Chart 2: Protein consumption in the US market
50
60
40
50
K g /c a p i t a
K g /c a p i t a
40
30
30
20
20
10
10
0 1973
1983
1993
0
2003
1973
1983
Pork Beef Poultry Seafood
1993
2003
Pork Beef Poultry Seafood
Source: FAO
Source: FAO
Developments in per capita consumption of proteins in the US and the EU market are somewhat divergent, as pork is increasingly dominant as the most important animal protein source in the EU, while poultry is increasingly dominant in the US, as illustrated in chart 1 and 2. Consumption of beef has decreased in both markets while seafood consumption is increasing. According to Kontali total seafood production was 146 mill tons in 2007 of which 94 mill tons from catches and 52 mill tons from aquaculture. Global consumption of seafood has increased from 13.5 kg per capita in 1993 to 16.6 kg per capita in 2004 according to FAO statistics. This trend is expected to continue in the coming years due to economic growth and a general shift to a healthier diet. As the world catch of seafood has been stagnating over recent years (due to depletion of stocks), increased demand will have to be met by increased production from aquaculture, cf. chart 3. Chart 3: Global capture and aquaculture production 200,000,000 150,000,000
Tons
100,000,000 50,000,000
Capture
2028
2025
2022
2019
2016
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
0 1980
Landsbanki
Aquaculture
Source: FAO, Landsbanki
Salmon accounts for only a small share of the total protein market: 1 % of the total animal protein consumption in Europe and approximately 4 % of total seafood consumption in the region. However, the potential for further growth in market share is significant.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
5
Farmed salmon represents only a small part of total seafood (approximately 1 %) and aquaculture production (approximately 3 %) as illustrated in chart 4. However, salmon farming is among the fastest growing segments of the farming industry, together with tilapia, pangasius and shrimp, cf. chart 5. Salmon farming has been industrialized more than any other segment of the sector, and over time we expect salmon companies to integrate into other species and drive developments in other segments of the sector. Chart 4: Global seafood production 40
Mill tons
30 20 10 0 No n human fo o ds
Whitefish
Carps
P elagic
M o lluscs & Crusteances
A quatic plants
Shrimp & P rawns
Farmed salmo nids
Flatfish
Source: Kontali, Landsbanki
Chart 5: Fast growing farming segments 3.5 3 2.5
Mill tons
Landsbanki
2 1.5 1 0.5 0 P angasius
Salmo nids 1986
Tilapia 1996
Shrimp
2006
Source: Kontali
3.
Demand for Atlantic salmon
Demand for Atlantic salmon has grown significantly over the last 11 years, with yearly growth rates of 2–15 %, averaging 9 %. Currently demand is strong in both traditional and emerging markets, but we see particularly strong growth in emerging markets. Demand in markets other than the EU, Japan and the US increased by approximately 23 % (in volume) in 2007. Salmon consumption in more mature markets like the EU also increased significantly, while consumption has been stagnating in the US and falling in Japan. Preliminary figures indicate that global consumption of farmed Atlantic salmon has remained strong in 2008 with an increase of approximately 12 % during January and February. Table 1: Global consumption of Atlantic salmon 2001 2002 2003 EU 495,000 522,000 597,000 Japan 66,000 65,000 50,000 USA 252,000 297,000 311,000 Russia 15,000 21,000 30,000 Others 160,000 151,000 155,000 Total 988,000 1,056,000 1,143,000 Growth 13 % 7% 8%
2004 603,000 66,000 301,000 43,000 193,000 1,206,000 6%
2005 634,000 61,000 302,000 62,000 188,000 1,247,000 3%
Source: Norwegian Seafood Export Council, Kontali, Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2006 653,000 52,000 295,000 50,000 219,000 1,269,000 2%
2007 E 714,000 44,000 313,000 72,000 260,000 1,403,000 11 %
Landsbanki
Salmon farming
6
Other markets, including Russia, have increased their share of total demand from 16 % in 2003 to an estimated 23.5 % in 2007 as illustrated in chart 6. Although other markets include countries such as Norway and Canada, this category is composed mainly of markets in Asia, South America and the Middle East. Chart 6: Share of global demand 60 % 50 % 40 % 30 % 20 % 10 % 0% 2001
2002
2003 EU
2004 USA
Russia/o thers
2005
2006
2007 E
Japan
Source: Landsbanki
In the long term, the market potential for Atlantic salmon producers in many emerging markets is significant, as seafood consumption per capita is high while personal income is increasing. Traditionally, local or regional aquaculture and fisheries have supplied these markets, but over time, we expect consumers to increase consumption of Atlantic salmon. Barriers to trade, such as tariffs, currently have a negative impact on trade, but both Chile and Norway are actively promoting free trade agreements with countries that represent potentially important seafood markets. Both countries have entered into free trade agreements with South Korea that are gradually reducing import tariffs on salmon. Norwegian authorities also foresee the commencement of free trade negotiations with China (bilateral) and possibly India (through EFTA) in 2008, while Norway might also pursue agreements with both Russia and Thailand. The current WTO negotiations could also benefit long-term market access for salmon producers. Further, the Norwegian Seafood and Export Council (NSEC) (financed through a levy on Norwegian exporters) is increasing marketing efforts to promote salmon consumption in emerging markets. Although these developments have only a minor effect on the value of listed salmon companies in the short and medium term they represent important long term trends due to significant growth potential. Depending on developments in the general economy, we expect salmon consumption over time to grow faster in these markets than in more mature markets. We have identified the following key drivers and developments on the demand side: 1.
GDP growth and development of retailers in important markets
2.
Product development and more value added products available for the consumer
3.
Continued shift towards a healthy diet
4.
Increasing food prices globally
5.
WTO concludes in favour of Norway
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
1.
7
Economic growth and development in retail
Global economic growth has been strong in recent years resulting in increased purchasing power for consumers and increased demand for salmon products. We find some correlation between GDP growth and salmon prices as illustrated in chart 7 Chart 7: GDP growth in Euro area and salmon prices 35
4
3.5
30
3
25
2.5 NOK
%
20 2 15 1.5 10
1
5
0.5
0
0 1996
1997
1998
1999
2000
2001
2002
Euro area
2003
2004
2005
2006
2007
2008
Norwegian export price
Source: IMF and Landsbanki
Estimates of global growth are coming down in important salmon markets like the US and the Euro area and we expect this reduction to have some negative impact on salmon markets in the short term. IMF forecast for GDP growth in 2008 is included in chart 2. Table 2: Annual GDP growth in per cent 2003 Emerging markets 6.2 Euro area 0.8 United States 2.5 World 3.6
2004 7.5 2.1 3.6 4.9
2005 7.1 1.6 3.1 4.4
2006 7.8 2.8 2.9 5.0
2007 7.9 2.6 2.2 4.9
2008 6.7 1.4 0.5 3.7
Source: IMF
One factor explaining the increased demand in emerging markets is the expansion of retail chains. According to Marine Harvest approximately 32 % of all group sales were to retail customers in 2006 whereas in France approximately 46 % of all salmon sales to the end consumer are made through retailers, according to the NSEC. Increasingly, retailers also represent a key distributor in emerging markets, as groups such as Carrefour, Auchan and Metro are targeting growth in emerging markets. Planetretail expects total turnover in retail in Russia to increase by 20-25 % annually in the coming years, cf. chart 8. Strong growth in retail turn over is also expected in other emerging markets cf. chart 9-11. Through expansion of retail distribution, salmon is finding new end consumers. Chart 8: Forecast turnover in retail in Russia
12000 10000 USD mill
80000 70000 60000 50000 40000 30000 20000 10000 0 2002
Chart 9: Forecast turnover in retail in the Ukraine
USD mill
Landsbanki
8000 6000 4000 2000
2003
2004
2005
2006
2007
2008
2009
2010
2011
0 2002
2003
2004
2005
Hypermarkets Supermarkets
Source: Planetretail
2006
2007
2008
Hypermarkets Supermarkets
Source: Planetretail
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2009
2010
2011
Salmon farming
8
Chart 10: Forecast turnoverin retail in Asia (ex Japan) 1,800 1,600 1,400 1,200 1,000 800 600 400 200
Chart 11: Forecast turnover in retail in China 1,000 900 800 700 600 500 400 300 200 100
Euro mill
Euro bln
Landsbanki
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total Asiaexcl Japan
Source: Planetretail
Source: Planetretail
Developments in Russian demand appear particularly promising, as Russian imports of Atlantic salmon have increased annually by over 40 % in recent years (except in 2006 because of import restrictions). We believe the strong Russian import growth will continue in the years to come. In chart 12 we have for illustrative purposes indicated a yearly increase in imports of 20 % and imports of approximately 86,000 tons in 2008 and 124,000 tons in 2010. Strong demand from Russia should particularly benefit producers in Norway. Chart 12: Russian demand for Atlantic salmon 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2000
2001
2002
2003
2004
2005
2006
2007
2008 E
2009 E
2010 E
Russia Source: Landsbanki
2.
Product development
Seafood is given more shelf space in retail stores, and the products on offer today are quite different from some years ago. Significant product development and the availability of more value-added consumer products, especially fresh products, have contributed to the increased consumption. We expect this trend to continue with larger seafood companies further developing the scope of salmon products. Chart 13: Salmon products
Chart 14: Salmon products
Source: Norwegian Seafood Export Council
Source: Norwegian Seafood Export Council
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
9
Chart 15: Salmon products
Chart 16: Salmon products
Source: Norwegian Seafood Export Council
Source: Norwegian Seafood Export Council
3.
Shift to a more healthy diet
Human health studies indicate that 40–60 % of lifestyle illnesses can be related to diet. Increasingly, consumers’ awareness of this fact appears to influence their purchasing behaviour. We see this becoming reality across different food segments as companies such as Pepsi Cola and McDonalds have improved the nutritional profile of their products and expanding the range of healthy products. In fact, products that can contribute to healthier lifestyles represented two-thirds of Pepsi’s growth in the US market in 2006. Pepsi expects that such products should generate 50 % of total revenues in the US by 2010. (Source: Pepsi) In co-operation with Marine Harvest, McDonalds has introduced a new fast food product (wrap) based on salmon, which will also be introduced internationally if sales are satisfying in Norway. Salmon is rich in omega-3 fatty acids that are effective against a number of health risks. Scientific work shows that omega-3 stimulates the development of the brain and eyes and suggests it reduces risks of asthma, depression and dementia. It also has a positive effect on cholesterol levels and fat accumulations in the arteries. Consumption of Atlantic salmon should increase, as consumers become more health conscious.
4.
Increasing food prices globally
In recent years we have seen a significant increase in the various grain and soy prices as illustrated in charts 17 and 18. Developments have been especially significant over the last year as futures prices for wheat have more than doubled since April 2007, while soybean and corn prices have increased by approximately 60 % since summer 2007. The rise of corn prices is in part due to the use of corn to produce bio-energy. Increased demand from energy producers has shifted acres of land to corn production instead of other grain such as wheat and soybeans. Further, extreme weather conditions have reduced the wheat supply while the demand for soy and wheat is very strong due to global economic growth and a growing population. We expect grain prices to remain high in the short term. In the longer term they will be influenced by developments on the supply side (weather, acres available i.a.) as we expect demand to remain strong.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
10
Chart 17: Wheat, corn and soybean prices Daily QWc1, QCc1, QSc1
06/09/2006 - 30/04/2008 (CHG) Price USc Bsh
Line, QWc1, Last Trade(Last) 21/04/2008, 856@6 Line, QCc1, Last Trade(Last) 21/04/2008, 590@4 IPP, QSc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected]
1000 900 800 700 600 500 400 300 200 1/8
Oct
Nov
Dec
Jan
Q4 2006
Feb
Mar
Apr
May
Q1 2007
Jun
Jul
Q2 2007
Aug
Sep
Oct
Q3 2007
Nov
Dec
Jan
Q4 2007
Feb
Mar
Apr
Q1 2008
[Delayed]
Source: Landsbanki, Reuters
Chart 18: Index wheat, corn and soybean prices Daily QCc1, QWc1, QSc1
06/09/2006 - 30/04/2008 (CHG) V alue USc Bsh
IPP, QCc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected] IPP, QWc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected] IPP, QSc1, Last Trade(Last), Specif ied Date, 26/06/2006, 100.0 21/04/2008, [email protected]
300 270 240 210 180 150 120 1/8
Oct
Nov
Dec
Q4 2006
Jan
Feb
Mar
A pr
May
Q1 2007
Jun
Jul
Q2 2007
A ug
Sep
Q3 2007
Oct
Nov
Dec
Q4 2007
Jan
Feb
Mar
A pr
Q1 2008
[Delayed]
Source: Landsbanki, Reuters
Grain is an important component in feed for poultry and pigs where feed costs represent 50-70 % of total cost of production. Meat prices have increased over recent years, and we expect this trend to continue. Increasingly poultry and pork producers are feeling the effects of higher costs. Based on discussions with industry sources we expect a considerable increase in the poultry and pork prices over the next year, which will be positive for the demand for salmon, which represents a substitute for poultry in particular. Chart 19: US poultry prices U n i t e d S ta t e s , P r i c e I n d e x , P C E , N o n d u r a b l e G o o d s , F o o d , P o u l t r y , S A
2000 =100
Landsbanki
122.5
122.5
120.0
120.0
117.5
117.5
115.0
115.0
112.5
112.5
110.0
110.0
107.5
107.5
105.0
105.0
102.5
102.5
100.0
100.0
97.5
97.5 00
01
02
03
04
05
06
07
S ou r c e: R e u te r s E c o W in
Source: Reuters, EcoWin
The increased raw material prices will also impact the cost of feed for salmon farmers, which represent approximately 50 % of total costs for salmon farmers. Feed costs will typically develop as a function of costs of feed components, and the ability to develop more cost effective feed. Salmon feed should consist of approximately 30-56 % proteins and 1525 % fat, of which approximately 50 % is normally based on marine ingredients in Norway
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
11
(other producer regions use a higher content of marine ingredients). The share of marine ingredients in the salmon diet have been reduced significantly over recent years due to increased costs of raw materials, cf chart 20 and 21. There is still scope for further reductions, but substitution is getting more difficult.
Chart 20: Raw material cost in salmon feed production
Chart 21: Raw material cost in salmon feed production
1997 0%
23 %
2005 15 %
8%
20 % 16 %
26 %
28 %
46 %
18 %
Vegetable oil Vegetables Pigments and vitamins Fish meal Fish oil
Vegetable oil Vegetables Pigments and vitamins Fish meal Fish oil Source: Kontali, Cermaq
Source: Kontali, Cermaq
Production costs for salmon producers have been reduced significantly since 1990 in all producing regions, cf. chart 22, which illustrates developments in Norway. Chart 22: Developments in production costs in Norway 40 35 25 20 15
NOK
30
10 5
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
0
1986
Landsbanki
Source: Norwegian Directorate of Fisheries
The most important feed components for Atlantic salmon are fish meal and fish oil, for which chart 23 and 24 illustrate price developments. Fishmeal prices have increased significantly from 2005 due to limited supply and strong demand, but have decreased since summer 2007 because of substitution from fish meal to soy meal, which represent a less costly alternative component in feed. As a result, the price ratio between fishmeal (FM) and soymeal (SBM) has come down from levels of 5–6 to below 2.5, cf chart 26, which is approximately at the long-term average. As fishmeal is getting more competitive and storages have been reduced the price of fishmeal has trended upwards in recent weeks. Fish oil prices have remained high because of supply shortages and strong demand.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
12
Chart 24: Prices for fish oil
1500
1900
1300
1700 1500
U S D p e r to n
U S D p e r to n
Chart 23: Prices for fish meal (FM)
1100 900 700
1300 1100 900 700
500
500 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
Week
Week
2005
2006
2007
2008
2005
2006
Source: Weekly newsletter, Oil World, ISTA
Source: Weekly newsletter, Oil World, ISTA
Chart 25: Prices for soy meal (SBM)
Chart 26: Ratio FM/SBM
600
2007
2008
6.50
U S D p e r to n
500
5.50
R a t io
400
4.50
300
3.50
200
2.50
100
1.50 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
Week
Week
2005
2006
2007
2008
2005
Source: Weekly newsletter, Oil World, ISTA
2006
2007
2008
Source: Weekly newsletter, Oil World, ISTA
Farming of salmon is feed efficient compared to production of poultry, pork and lamb, cf. chart 27. The quantity of feed required to produce 1 kg of salmon is one third of the feed required to produce poultry and one fifth of the feed required to produce pork. The ability to transform feed to proteins and fat will be increasingly important in a high feed-cost environment. Although exposed to developments in prices of marine ingredients, we expect production costs of salmon producers to increase less than production costs of other protein producers. Chart 27: Kg of meat from 100 kg of feed 70 60 50
Kg
Landsbanki
40 30 20 10 0 Salmo n
Chicken
P o rk
Lamb
( M e a s ure d a s e dible m e a t ) Source: Biomar, Kontali
5.
WTO panel concludes in favour of Norway
Norwegian and Chilean producers of salmon are dependent on exports to the US and EU markets. Over the years, the EU and the US have imposed anti-dumping and anti-subsidy measures on imports of farmed salmon to protect less cost-effective domestic farmers located in rural areas where they are vital for local employment. Currently there are antidumping measures imposed on Norwegian exports of Atlantic salmon to both the US (in the
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
13
form of an anti-dumping duty) and the EU market (in the form of a minimum import price or MIP). The EU imposed temporary anti-dumping measures on Norwegian exports in 2005, and definitive measures (for five years) in 2006 in the form of a minimum import price (MIP) of Euro 3.11 per kg gutted weight (approximately NOK 24.50 CIF EU border). The Norwegian Government brought this trade restriction to the WTO Dispute Settlement Body in March 2006 in order to have the measures removed. The WTO panel report, published in November 2007, concluded that the EU had breached WTO on 22 of the 60 claimed issues. Most of these issues are of technical nature, but the EU was also found to have erred on some potentially important issues. According to the WTO report, the EU will have to change the definition of “community industry” based on their definition of “product concerned” in the case of salmon. The effect of this change will be to increase the influence of the processing industry in the EU to the detriment of EU farmers. The processing industry normally opposes dumping measures. The “community industry” definition is important in dumping cases as it forms the basis for the European Commission’s assessment of dumping, injury and standing of the case (whether or not a dumping case can be initiated). However, it is currently uncertain how the panel report will affect the outcome of this and possibly future salmon cases. It appears that any future salmon cases will be more complex and time consuming for the Commission to handle, as it will need to collect information from other parts of the industry. However, the key question as to whether the decision making in such cases will be transferred from EU farmers (who favour anti-dumping measures) to the processing industry (which wants access to low-cost raw materials from Norway) remains doubtful. However, it appears evident that the Commission will need to change some of its dumping calculations. Both Norway and the EU have accepted the adoption of the findings in the report and it will therefore not be appealed. Shortly, the EU will implement the findings in the report and adjust the measures accordingly. Implementation will probably take place within 9-12 months. Further, an interim review of the measures currently installed is ongoing and is due for completion by 21 July 2008. Findings in this review will be significant for the further handling of this case by the EU. Only Norwegian membership in the EU would secure Norwegian salmon producers free market access to their most important market. However, membership appears unlikely under current political circumstances.
6.
Conclusions on demand
The underlying growth in demand for seafood in general is strong, while supply from traditional fisheries is stagnating. Demand for Atlantic salmon has grown at annual rates averaging 9 % over the last 11 years. Economic growth has increased the personal purchasing power and the number of individuals who can afford salmon, while significant product development, a general shift towards a more healthy diet and developments in retail distribution are developments that support the markets. Increasing prices for substitutes to Atlantic salmon could further stimulate demand.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
14
4.
Supply of farmed Atlantic salmon
1.
Supply of red fish
Almost 60 % of all salmon consumed (approximately 2.58 mill tons in 2007) is farmed, the rest being essentially wild salmon catches from North America, Russia and Japan. Most farmed salmon is Atlantic while there is some farming of Pacific species, mainly Coho in Chile. In addition, there is farming of large rainbow trout, mainly in Norway, the EU and Chile. Table 3: Global supply of red fish 2000 2001 Wild salmon US 320,000 367,000 Canada 19,000 25,000 Japan 195,000 224,000 Russia 215,000 222,000 Total wild 749,000 838,000 Farmed salmon Pacific salmon Atlantic salmon Total farmed Total salmon Trout Total supply Growth
123,000 873,000 996,000 1,745,000 180,000 1,925,000 1.3 %
167,000 988,000 1,155,000 1,993,000 229,000 2,222,000 15.4 %
2002
2003
2004
2005
2006
2007E
283,000 33,000 243,000 156,000 715,000
362,000 38,000 299,000 231,000 930,000
363,000 19,000 255,000 162,000 799,000
407,000 27,000 239,000 259,000 932,000
331,000 23,000 230,000 257,000 841,000
411,000 28,000 235,000 359,000 1,033,000
142,000 1,057,000 1,199,000 1,914,000 246,000 2,160,000 -2.8 %
141,000 1,143,000 1,284,000 2,214,000 229,000 2,443,000 13.1 %
139,000 1,206,000 1,345,000 2,144,000 233,000 2,377,000 -2.7 %
148,000 1,247,000 1,395,000 2,327,000 228,000 2,555,000 7.5 %
142,000 1,267,000 1,409,000 2,250,000 244,000 2,494,000 -2.4 %
146,000 1,403,000 1,549,000 2,582,000 288,000 2,870,000 15.1 %
Source: Kontali, Landsbanki
Farmed Atlantic salmon and wild salmon are mainly sold in different market segments and competition between the products has traditionally been limited in the main markets (but competition in many Asian markets), although reports indicate that increasingly in 2007, wild salmon was presented in traditional “farmed Atlantic segments”, particularly in the US. Supply of wild salmon is relatively stable, although high catches in 2007 appear to have affected farmed salmon prices somewhat negatively. Although the farmed salmonids; Atlantic salmon, Coho and trout appear to have many similar product characteristics, they are also largely sold in different market segments. Although competition between the species is somewhat limited in many markets, the effect of the total estimated supply increase in 2007 of approximately 370,000 tons of red fish (130,000 tons of Atlantic salmon, 40,000 tons of trout and 190,000 tons of wild salmon) contributed to downward pressure on prices for red fish in 2007. For 2008 we expect a stable supply of trout, an increase of approximately 20 000 tons of Coho and a decrease in catches of wild salmon, particularly of Pink in the US. The estimates for catches are uncertain, and we expect improved data later in the year. Our estimates for Atlantics are presented in table 5 (on page 20). In total, we do not foresee a significant increase in the total supply of red fish in 2008.
2.
The cyclicality of the industry
Traditionally, the salmon industry has been cyclical, as farmers have released too many smolts in the sea during periods of high profitability, resulting in overproduction and lower prices. On the other hand, farmers have released low numbers of smolts during periods of low profitability resulting in low supply growth and higher prices. Biological issues and the fragmented structure of the industry have further contributed to the cyclical nature of this industry.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
15
Cyclicality is illustrated in chart 28, which reflects the average operating margin of Norwegian salmon farmers from 1986–2006. On average, Norwegian farmers have had a margin of 12.6 % over the last 14 years, but margins were very good in 2005–2007. Operating margins were 30 % for Norwegian farmers in 2006, but decreased to an estimated 15–20 % in 2007 due to lower salmon prices and increased costs. Chart 28: Operating margin for Norwegian salmon farmers 35.0 30.0 25.0 20.0
%
15.0 10.0 5.0 0.0 -5.0 -10.0 1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: Norwegian Directorate of Fisheries
The global supply growth of Atlantic salmon came down in 2005 and 2006 due to a combination of diseases in the UK, the Faroe Islands and Chile (from 2006) and liquidity problems in previous years resulting in lower outset of smolts. We have seen supply growth coming up in 2007 to approximately 11 %, cf. chart 29, as supply from Norway has been particularly strong. Chart 29: Global supply of Atlantic salmon and annual growth in supply
Tons
Landsbanki
1,600,000 1,400,000
14.0 %
1,200,000 1,000,000
10.0 %
12.0 % 8.0 %
800,000 600,000 400,000
6.0 % 4.0 % 2.0 %
200,000 0
0.0 % 2001
2002
2003
2004
2005
2006
2007
Grow th rate Source: Kontali, Landsbanki
The increased harvest in Norway in 2007 was in part caused by an increased yield per smolt (kg of fish meat from each individual fish released) due to warmer sea temperatures and fantastic growth conditions in Norway in 2006/2007, cf chart 30. The average weight of harvested fish was at record levels in 2007, cf chart 31. On the other hand, biological issues in Chile have continued to hamper growth in production in 2007 from this region. As illustrated in chart 30, Chilean yield decreased significantly in 2007 (harvest of generation 05 and 06).
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
16
Chart 30: Yield per smolt released 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 00 G
01G
02 G
03 G
04 G
No rway
05 G
06 G
Chile
Source:: Kontali
Chart 31: Average weight of slaughtered salmon in Norway (wfe) 5.4 5.2 5
Kg
Landsbanki
4.8 4.6 4.4 4.2 4 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007E
Source: Kontali
3.
Price developments
a.
Relation between prices and supply
As illustrated in chart 32, developments in supply growth and in salmon prices are negatively correlated. When supply is diminishing, the FHL price tends to increase, while when supply is growing, the FHL price tends to decrease. Chart 32: Relationship between growth in supply and change in average FHL price (y-o-y) 30 % 20 % 10 % 0% 2001 -10 %
2002
2003
2004
2005
2006
-20 % -30 % Change FHL prices (y-o -y)
Gro wth rate supply (y-o -y)
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2007
Salmon farming
b.
17
Recent developments of US prices and Norwegian export price
Prices in the US decreased during summer and autumn 2007 both in Seattle (quotation for Canadian salmon) and in Miami (quotation for Chilean fillets) from record levels during spring 2007. Increased catches of wild salmon and somewhat softer economic growth in the US can explain this development. Prices have picked up again in Q1 2008 averaging USD 7.5 in Miami and USD 4.75 in Seattle. Salmon is currently trading at a level of USD 7.4 in Miami and USD 5.1 in Seattle. Average Miami and Seattle prices in 2007 were USD 7.7 and USD 4.9 respectively. Chart 34: Fresh Atl salmon 8-10 lb (Seattle)
Week 2004
2005
2006
52
49
46
43
40
37
34
31
28
25
22
19
1
52
49
46
43
40
37
34
31
28
25
22
19
16
13
7
10
4
1
4.00
16
5.00
13
6.00
6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50
7
7.00
U SD
U SD
8.00
10
9.00
4
Chart 33: Chilean fresh salmon fillets, 2-3 lb (Miami)
Week 2007
2008
2004
Source: Kontali
2005
2006
2007
2008
Source: Kontali
Average Norwegian export prices decreased by 18 % in 2007 as a result of a 21 % increase in export volumes compared to 2006. Export prices decreased during summer 2007 due to the harvest of a large generation of salmon (G 05). Mild winter temperatures resulted in fantastic growing conditions for this generation. Prices rebounded in August but came down due to aggressive harvesting in Norway during autumn. Prices in 2008 have been good with an average export price of NOK 26.3, but prices have been falling over recent weeks. The export price in week 16 was NOK 25.6. The average Norwegian export price in 2007 was approximately NOK 26.7. Chart 35: Norwegian export prices (Fresh whole Atlantic salmon, gw) 45.00 40.00
NOK
35.00 30.00 25.00 20.00
Week 2005
2006
2007
Source: Statistics of Norway
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
2008
52
49
46
43
40
37
34
31
28
25
22
19
16
13
10
7
4
15.00
1
Landsbanki
Landsbanki
Salmon farming
18
4
Short-term supply developments
a.
Norway–growth in production in 2008
Growth in Norwegian biomass is coming down
The biomass (salmon in the sea) in Norway increased significantly over the winter 2006/2007 and spring 2007 due to the mild sea temperatures and increased feeding. As illustrated in chart 36, the biomass was 20-30 % higher over the period December 2006– May 2007 compared to the same period the previous year, but it has come down to lower levels as a result of aggressive harvesting during summer and autumn 2007 and lower growth.
Chart 36: Norwegian biomass growth rate (y-o-y) 35.0 % 30.0 % 25.0 % 20.0 % 15.0 % 10.0 % 5.0 % 0.0 %
Source: FHL, Landsbanki
The biomass is currently 6 % higher than in February 2007 according to recent figures from Kontali Analyse comparing biomass in Norway in the end of February 2008 to the biomass end February 2007, cf. table 4. Supply in Q1 and Q2 2008 will mainly consist of generation released to sea in 2006 (06 G), while 07 G will be supplying markets from the end of summer 2008 until end of summer 2009. Table 4: Composition of biomass in Norway Inv. 31.02.08 Inv. 31.02.07 Generation Ind. Kg Biomass Generation 06 G 52,800 4.1 219,100 05 G 07 G 185,200 1.2 215,500 06 G Total 434,600 Sum
Ind. 47,700 163,800
Kg Biomass 4.4 208,500 1.2 201,800 410,300
Change Ind. 11 % 13 %
Weight Biomass -7 % 5% 0% 7% 6%
Source: Kontali
The 06 generation consists of approximately 11 % more individuals than the 05 generation that supplied markets at the same time in 2007, but the average weight of the fish is smaller. We expect expect salmon prices in Q2 to come down compared to price levels in Q1. The number of smolts released in spring 2007 leaves room for a significant increase in Norway’s harvest during Q3 and Q4 2008, but supply growth from Norway will in part be influenced by biological conditions (including temperature) and feeding. We expect a fairly good salmon market in Q3, but aggressive harvest in Norway (due to MAB capacity limitations cf. chapter 5 a) could pose downward pressure on prices. We expect higher prices towards the end of Q4.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
19
Sea temperatures and growth in feeding have come down
Sea temperatures in Norway (during autumn and winter 2007/2008) have been significantly lower than last year, cf. chart 37. Chart 37: Sea temperatures in Norway 2005- 2007
● 2006 ● 2007 ● 2008
Source: FHL
Lower sea temperatures has resulted in reduced feeding and growth of biomass during the winter and spring 2007/2008 compared to the situation in 2006/2007. As illustrated in chart 38, growth in feeding in Norway (y-o-y) has come down from high levels (4 week average increases of 30–50 % in winter 2006/2007 and spring 2007) to an average decrease of 9 % in the last 4 weeks. Total feed sales registered in 2008 has been 3 % lower than for the same period in 2007. Lower feeding implies that supply growth is coming down in Norway. Chart 38: Growth in feed sales in Norway (y-o-y) 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% We e k Source: FHL, Kontali
b.
Chile – no growth in production expected
Chilean production has been plagued by sea lice (a natural seawater parasite), Salmonid Rickettsial Septicaemia (SRS – a contagious bacterial disease currently treated by antibiotics) and lately Infectious Salmon Anaemia (ISA – a contagious viral infection). The industry appears to have expanded production too fast in a small geographical area, without sufficient regulations and control. Official statistics have confirmed ISA outbreaks in 21 different farms (11 controlled by Marine Harvest and 5 by Cermaq) while another 17 farms (13 controlled by Marine Harvest and none by Cermaq) are under suspicion of ISA outbreak and 39 other sites are under quarantine (9 controlled by MHG and 3 controlled by CEQ). However, according to reports, several Chilean-owned producers are not reporting ISA
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
20
to local authorities and in reality, more sites are affected. In combination, these diseases are having serious consequences for producers, as mortality and costs increase significantly. We believe there is a risk of further escalation of these problems in the short and medium term but we remain convinced that they will be solved over time as producers co-ordinate their actions. Chilean producers will gradually relocate production further south (region 11 and 12), use the best available medicines for treatment and vaccines and later expand production again. However, we do expect the biological problems in Chile to remain in 2008, resulting in reduced supply from this region (which represented 26 % of global production in 2007).
c.
Conclusions on 2008 supply
Biological problems will reduce Chilean production, while growth in Norwegian supply is coming down. Production in Scotland rose somewhat in 2007 to approximately 139,000 tons. We expect a further increase in production in Scotland in 2008, but no significant growth. In total, we forecast modest global supply growth at approximately 3–5 % in 2008, which should result in a good salmon market. Our supply estimates are outlined in table 5. Table 5: Global supply of Atlantic salmon 2001 2002 Norway 411,000 444,000 UK 132,000 140,000 Faroe Isl 41,000 42,000 Ireland 24,000 22,000 Iceland 3,000 2,000 Tot. Eur. 611,000 650,000 Chile Canada Australia US Other Tot. Am. Total supply Growth rate
245,000 99,000 12,000 21,000 0 377,000 988,000 13.2 %
268,000 112,000 13,000 13,000 0 406,000 1,056,000 6.9 %
2003 508,000 161,000 47,000 18,000 4,000 738,000
2004 537,000 150,000 37,000 12,000 7,000 743,000
2005 572,000 120,000 17000 12,000 7,000 728,000
2006 597,000 128,000 12,000 15,000 4,000 756,000
2007 723,000 139,000 20,500 16,000 2,000 900,500
2008E 785,000 144,000 29,000 17,000 2,000 977,000
281,000 92,000 14,000 18,000 0 405,000 1,143,000 8.2 %
346,000 89,000 15,000 13,000 2,000 465,000 1,208,000 5.7 %
385,000 108,000 16,000 10,000 2,000 521,000 1,249,000 3.4 %
369,000 115,000 17,000 10,000 2,000 513,000 1,269,000 1.6 %
359,000 112,000 18,000 12,000 1,500 502,500 1,403,000 10.6 %
330,000 120,000 18,000 12,000 2,000 482,000 1,459,000 4.0 %
Source: Kontali, Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
5.
21
Long-term supply developments
Providing an accurate long-term supply prognosis for the salmon industry is challenging, as long-term production is dependent on, among other things, developments in prices and costs, the availability, quality and release of smolts, consolidation and supply side coordination, temperatures, feeding, biological issues and aquaculture policies in key producer regions.
a.
Norway and Chile
We expect long-term global supply of salmon mainly to be a function of developments in Norway and Chile, representing 77 % of total production. These producers further have potential for growth on good locations, whereas other producers (Canada and UK) have limited capacity for growth. We therefore expect supply to increase only moderately from other regions. In Chile, we expect that biological problems will not be improved until 2009. We expect no significant growth in production from this region before 2010 and 2011. In Norway, approximately 850 licenses for farmed salmon production are currently active. Norwegian authorities announced in August 2007 that new licenses will be offered to the market in 2009. Due to the production cycle, salmon from new licenses will not reach the market before 2011. Growth in Norwegian production from 2007 to 2011 will therefore be based on production from existing licenses. In theory, with optimal utilisation of all licenses in Norway, production capacity is very high. However, some farmers have already reached their production capacity limit while others will not be able to exploit their full production potential due to the small scale of operations, limitations on the availability of quality smolts and biological issues. We expect the larger groups to exploit their production potential better than smaller companies. In Norway the number of smolts released increased by 14 % in 2007, cf. chart 39, which indicates the possibility of a significant increase in supply from Norway until 2009. Chart 39: Release growth rate (y-o-y) 15 % 10 % 5 % 0 % 20 00
20 01
20 02
2 00 3
20 04
200 5
20 06
200 7
-5 % - 10 % Source: Kontali, Landsbanki
However, the final supply from this release is uncertain. We expect average weight for harvested salmon to come down from high levels in 2007. Cf. chart 40 we see that growth in release since 2005 has mainly been through autumn (0y) releases. Traditionally, for biological reasons most smolts were released in the spring.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmon farming
22
Chart 40: Release of smolts in Norway 250 200
Mill smolt
Landsbanki
150 100 50 0 1999
2000
2001
2002
2003
1 year old (spring)
2004
2005
2006
2007
0-year old (autumn)
Source: Kontali, Landsbanki
Release of smolts in the autumn implies release of younger and smaller salmon. These smolts are sensitive to biological issues (including sea water temperatures) and mortality is normally higher. Colder temperatures are likely to increase mortality and decrease the yield per smolt. By end February 2008 the number of remaining smolts from the 2007 generation (07 G) was 13 % higher than the number of 06 G one year previously. Increased release of smolts in the autumn is a consequence of changes in Norwegian salmon production regulations. In 2005, feed quotas per license were replaced with a system based on maximum allowed biomass per license (MAB). To maximise production growth and harvest under the new regime, Norwegian farmers have changed their production pattern to ensure a large and more stable biomass throughout the year. Furthermore, it appears that Norwegian producers, especially on the south and west coast, increasingly have to face biological challenges as production has grown. Diseases such as Pancreas disease (PD) has increased significantly over recent years, as illustrated in figure 28, particularly in the south and west of Norway. 98 incidents of PD was reported in Norway in 2007 and 28 incidents have been reported in Q1 2008 according to the National Veterinary Institute. Chart 41: Number of outbreaks of Pancreas Disease in Norway 100 80 60 40 20 0 1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Ro galand
Ho rdaland
So gn o g Fjo rdane
M øre o g Ro msdal
No rd Trøndelag
No rdland
Tro ms
Finnmark
2006
2007
Sør Trøndelag
Source: Mattilsynet
To correct the problem, Norwegian authorities have imposed restrictions on the movement of smolts between the southern and northern parts of the country, which potentially could reduce the availability of smolts. Further, the PD problems have raised questions regarding the carrying capacity for further production growth in certain fiords in Norway and also the optimal structure of site locations to minimise escalations of outbreak of diseases. Finding good solutions for these challenges will be necessary in order to fully exploit existing production capacity in Norway.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
23
We expect that Norwegian production from current licenses could increase by a maximum of 20 % (from 2007 levels) but we expect reduced growth rates, as managing growth within existing licenses will be more challenging. According to Marine Harvest Group, the production of Atlantic salmon in Norway in 2007 was already very close to capacity limits within the current number of licenses. Table 6: Indicative global supply growth of Atlantic salmon 2007 2008E Norway 723,000 785,000 UK 139,000 144,000 Faroe Isl 20,500 29,000 Ireland 16,000 17,000 Iceland 2,000 2,000 Tot. Eur. 900,500 977,000
2009E 830,000 145,000 30,000 17,000 2,000 1,024,000
2010E 865,000 147,000 31,000 17,000 2,000 1,062,000
2011E 960,000 150,000 32,000 17,000 2,000 1,161,000
Chile Canada Australia US Other Tot. Am. Total Growth
335,000 123,000 18,000 12,000 2,000 490,000 1,514,000 3.8 %
350,000 125,000 18,000 12,000 2,000 507,000 1,569,000 3.6 %
430,000 130,000 17,000 12,000 2,000 591,000 1,752,000 11.7 %
359,000 112,000 18,000 12,000 1,500 502,500 1,403,000 10.6 %
330,000 120,000 18,000 12,000 2,000 482,000 1,459,000 4.0 %
Source: Landsbanki
On this basis, we expect significant growth in Norwegian production in 2009 but moderate growth in 2010, while Chilean growth will be limited, resulting in a low to moderate global supply growth. We expect an indicative 2-5 % growth in global supply of Atlantic salmon during 2008-2010. Low to moderate supply should normally result in increasing salmon prices. We expect significant increased production in both Norway and Chile in 2011 and 2012 due to harvest from new licenses in Norway and improved biological performance in Chile.
b.
Continued consolidation and supply side co-ordination
Consolidation has been significant in the most important producing countries from 1997 to 2006 cf. chart 42. The industry in Norway remains the most fragmented industry, which is the result of Government policies promoting small and medium sized companies, as well as limiting ownership of Norwegian licenses for one entity to 25 % of total licenses. In 2006, 31 Norwegian companies controlled 80 % of Norwegian production. The corresponding figures for Chile and Scotland were 10 and five respectively. Chart 42: Number of companies representing 80% of production in Norway, Chile and Scotland 80 70 60 50 40 30 20 10 0 1997
2000 No rway
2003 Chile
2006
Sco tland
Source: Kontali Analyse
We expect consolidation in the salmon farming industry to continue in all producing regions. Lower margins and the recent outbreak of ILA in Chile (previously an unknown
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
24
disease for Chilean producers) could open up acquisition opportunities for Norwegian companies that have experience in handling such biological problems in other regions. Increased consolidation may over time increase supply side co-ordination, but we do not foresee any significant co-ordination in the short and medium term. We further expect salmon producers to integrate into other species such as sea bass, sea bream, cod and tilapia, as these are growth segments and could create market synergies.
c.
Conclusions on the supply side
Medium- and long-term projections of global supply of salmon are uncertain. The industry`s long-term production capacity is high and sufficient liquidity is available to finance production growth. However, we forecast an indicative 2–5 % annual growth in the global supply of Atlantic salmon over 2008–2010 as biological problems appear to limit significant growth in Chile until 2010, while managing growth in Norwegian production will be increasingly difficult in 2009–2010, based on the current number of licenses. Low to moderate supply growth should, under normal conditions, result in a strong salmon market over the period.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
25
5. Valuation of salmon companies compared to protein and food producers. Over the last months, the share price of Marine Harvest Group, Cermaq and Grieg Seafood has come down significantly due to biological problems and higher costs, reduced production, lower salmon prices and the general market downturn. Particularly CEQ and MHG, which are exposed to the difficult biological situation in Chile has had a poor performance. The share price of Lerøy Seafood Group and Salmar has held up well. Chart 43: Share price developments 1 30
1 20
1 10
1 00
90
80
70
60
50
40
30 F eb 07
Mar 07
Ap r 0 7
Ma y 07
S o u r c e F a c tS e t
J un 07
Jul 07
A ug 07
S ep 07
Oct 07
L erø y S e af oo d G ro up A SA (R eb ase d) C e rm a q A S A ( R e b a s e d ) M a ri n e H a r v e s t G r o u p A S A ( R e b a s e d )
N ov 07
D ec 07
Ja n 08
F eb 08
G ri e g S e a f o o d A S A (R e b a S a l M a r A S A (R e b a s e d )
Source: JCF/Factset
On current valuation we particularly see significant upside potential in Cermaq and we are also positive to Marine Harvest, cf table 7 and company valuations. Table 7: Landsbanki estimates P/E 2008E Marine Harvest 17.4 Cermaq 12.8 Lerøy Seafood 18.1 Salmar 13.6 Grieg Seafood 14.8
P/E 2009E 10.9 10.2 13.3 11.9 9.1
P/E 2010E 7.8 7.5 10.7 9.8 5.3
EV/EBIT 2008E EV/EBIT 2009E 15.3 10.5 11.4 9.0 14.9 11.4 11.6 10.4 13.3 9.6
EV/EBIT 2010E 7.7 6.9 9.4 8.6 6.7
Source: Landsbanki
Landsbanki earnings estimates for the salmon producers are generally lower for 2008 than current consensus while we are more optimistic (for MHG and CEQ) about the prospect for 2009 and particularly 2010 than consensus. Table 8: Consensus estimates for seafood and protein producers P/E 2008E P/E 2009E P/E 2010E EV/EBIT2008E EV/EBIT2009E EV/EBIT2010E Marine Harvest 15.8 11.2 8.8 15.0 11.9 9.3 Cermaq 11.3 8.9 7.5 9.7 8.0 6.8 Leroy Seafood 14.4 12.3 10.6 13.3 11.3 9.8 Salmar 12.7 11.6 10.9 10.6 9.7 9.1 Grieg Seafood 12.0 7.6 5.2 11.2 6.7 5.8 Lighthouse Caledonian 42.9 17.1 N.A. N.A. N.A. N.A. Marine Farms 12.5 9.0 7.1 10.0 8.6 6.8 Austevoll Seafood 14.4 12.5 13.1 18.2 15.0 14.6 Copeinca 17.7 10.5 11.7 11.0 9.8 9.6 Aker Seafood 20.4 15.3 13.6 12.2 10.5 10.9 Biomar 12.5 11.1 10.4 11.1 9.3 8.6 Nutreco 12.5 11.2 10.3 10.5 9.3 8.5 Multiexport 17.0 10.2 9.2 N.A. N.A. N.A. Source: Bloomberg
Compared to other protein and food producers, included in table 8 and 9, the current pricing of CEQ and MHG appears modest based on outlooks for 2009 and 2010.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
26
Based on consensus estimates, salmon companies are valued on lower multiples than, for example, meat producers and processors such as Tyson and Hormel. Table 9: Consensus estimates for protein producers P/E 2008E P/E 2009E P/E 2010E EV/EBIT 2008E EV/EBIT 2009E EV/EBIT 2010E Tyson Foods 53.4 18.0 15.4 17.2 10.7 9.5 Smithfield Foods 24.5 21.3 10.7 18.0 15.8 12.9 Pilgrim's Pride N.A. 8.7 6.6 33.8 7.7 N.A. Hormel Foods 16.8 15.2 N.A. N.A N.A N.A. Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Salmon farming
6.
27
Key risks to our assumptions •
Reduced global economic growth could result in reduced demand for salmon.
•
Biological problems with sea lice, SRS and recently ILA in Chile entail further risks of escalation with potential negative consequences for producers concerned. Production costs could remain at high levels longer than the market anticipates or could increase further.
•
Biological problems in Chile could be resolved earlier than expected, increasing the supply growth from Chile.
•
Biological problems in Norway or in other producing regions could escalate, affecting the producers concerned and the supply side.
•
Norwegian producers could manage to increase production significantly more than expected within existing licenses in 2009 and 2010.
•
Salmon farming is biological production. Prices may fluctuate due to temporary high supply of salmon and a temporary mix of sizes that do not match the demand in the market.
•
New trade barriers for salmon in important markets could be established.
•
Food safety issues or negative publicity damaging the demand for Atlantic salmon could emerge.
•
The supply side could be larger than expected if the statistical material concerning the Norwegian biomass is incorrect.
•
The earnings of the company could be affected by adverse currency developments
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
andsbanki
+47 926 16 478 [email protected]
Reuters MHG.OL / Bloomberg MHG NO Index: FTSE Euro First 300
Rating
Marine Harvest Group ASA 23 April 2008 - INITIATION OF COVERAGE
Buy 380
- SMALL / MID-CAPS
FOOD PRODUCERS
Increasing margins during 2008-2010 We forecast limited supply growth and higher margins in 2009 and 2010. We have a buy recommendation and target NOK 3.10, but advice investors to be cautious before Q1 report 14 May as biological issues and costs pose risk to earnings. Weaker prices in May and June could also impact share price negatively short term.
Target Price
Current Price
NOK3.10
NOK2.82
Market Cap
Free Float
NOK9.8bn
69%
Buy
Year
EBIT
EBIT
Net
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
2006
15,877.8
2,915.9
18.4
3,063.5
0.57
9.5
6.3
1.7
7.2
9.0
0.0
2007
14,073.0
603.9
4.3
65.6
0.06
101.7
15.8
2.0
20.2
47.1
0.0
2008E
12,936.3
1,035.8
8.0
508.2
0.16
17.4
7.0
1.2
8.8
15.3
0.0
2009E
13,523.4
1,441.4
10.7
899.2
0.26
10.9
5.3
1.1
6.8
10.4
0.0
2010E
14,393.3
1,856.4
12.9
1,249.1
0.36
7.8
4.3
1.0
5.4
7.7
3.8
End Dec. 31
Sales
Previous
EPS
P/E
P/CF
NOK
2.82
9.8
bn
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield (%)
Shares O utstanding (m
69
%
3.10
NOK
NOK
-19.2% 3,479
Daily Trade Vol.(sh 00 52 W eek High/Low
42,695 NO K7.49/NOK2.41
Enterprise Value (NO K
15,820
Net Debt (NO Km)
6,040
Source: Landsbanki
2007 disappointment due to Chile. Delivers Q1 2008 report on 14 May MHG disappointed the market with the Q3 and Q4 2007 reports, due to higher costs in Chile than communicated to the market. Our impression after Q4 was that apart from the farming unit in Chile, operations developed in accordance with our expectations, while margins in Value Added Processing (VAP) were a positive surprise. Although salmon prices have been quite high in Q1 2008 there is risk of bad news as costs could be higher than expected due to biological issues. Strong production in Norway and long term capacity for growth in Chile and Norway We like the group’s strong production base in Norway, as we expect good margins and growth in production from this unit during 2008-2010. Margins from the Chilean activity will increase during 2009-2010 as we expect biological problems to gradually improve. Over time we expect volumes and costs to return to normal levels in Chile.
M ar i ne Har v est Gr oup A SA r el . FT SE E ur o Fi r st 300 M ar i ne Har vest Gr oup A SA 8
FT SE E ur o Fi r s t 300
7
Short term turbulence but medium term upside We forecast low to moderate global supply growth during 2008-2010, and higher margins and prices in 2009 and 2010. We expect a good salmon market in 2008, but lower prices in Q2, and high costs will affect earnings. Weaker salmon prices in Q2 and Q1 report 14 May could impact shares negatively short term, but we expect the shares to rebound.
6
5
4
3
2 A pr 07
Valuation Our DCF calculation suggests a share value of NOK 3.16. The price target of NOK 3.1 implies a discount on DCF and is motivated by short-term P/E multiples and exposure to Chile. MHG is trading at a P/E of 17.4 times 2008 earnings and 10.9 times 2009 earnings. As we expect margins to increase in 2008-2010 we believe that valuation will develop positively. Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
Jul 07
Oc t 07
Jan 08
A pr 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Marine Harvest Group ASA
andsbanki
29
Key financials Company profile Marine Harvest Group is the largest producer of farmed Atlantic salmon in the world with significant production in all producing regions.
Production split – Geographical and divisional 100.0% 90.0%
Ot her 3%
80.0% 70.0%
UK 8%
60.0%
Top shareholders Geveran Trading Co Ltd Fidelity Management Franklin Mutual Wellington Management Folketrygdfondet
Events calendar
50.0%
30.6% 11.3% 10.0% 4.9% 2.9%
Canada 12%
40.0% 30.0%
Chile 27%
20.0% 10.0%
Nor way 50%
0.0%
Incom e statem ent (NOKm ), Dec Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
2007
2008E
2009E
2010E
14,073.0 12,936.3 13,523.4 1,408.7 1,793.3 2,220.0 -804.8 -757.4 -778.5 603.9 1,035.8 1,441.4 97.3 -314.8 -272.3 -550.3 -70.0 0.0 150.9 651.1 1,169.1 -70.7 -141.1 -268.1 25.2% 21.8% 24.5% -1.3 1.7 1.9 65.6 508.2 899.2 0.0 0.0 0.0 65.6 508.2 899.2
14,393.3 2,635.7 -779.3 1,856.4 -225.3 0.0 1,631.2 -380.0 24.5% 2.0 1,249.1 0.0 1,249.1
Balance sheet (NOKm ), Dec. 31 Cash and equivalents Account receivables Other current assets Current assets Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
2007
2008E
2009E
2010E
362.6 1,883.4 7,026.2 9,272.2
266.6 1,991.0 6,659.6 8,917.2
536.8 2,081.3 6,784.7 9,402.9
868.8 2,215.2 7,006.7 10,090.7
3,344.6 3,344.6 3,344.6 5,729.5 5,729.5 5,729.5 3,894.7 4,004.3 4,114.7 1,099.8 1,174.8 1,249.8 14,068.6 14,253.2 14,438.6
3,344.6 5,729.5 4,115.4 1,329.8 14,519.3
Short-term debt Accounts payable Other current liabilities Current liabilities
957.2 1,349.7 1,067.7 3,374.6
957.2 1,327.8 1,067.7 3,352.7
957.2 1,346.5 1,067.7 3,371.4
957.2 1,402.0 1,067.7 3,426.9
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
6,148.9 0.0 1,332.5 7,481.4
5,348.9 0.0 1,474.1 6,823.0
4,848.9 0.0 1,725.5 6,574.4
4,348.9 0.0 2,062.7 6,411.6
Shareholders' equity Minority interest Total shareholders' equity
12,503.0 13,011.2 13,910.4 -18.3 -16.6 -14.7 12,484.7 12,994.6 13,895.7
14,784.2 -12.7 14,771.5
Net debt Net working capital Capital employed Total assets
6,743.5 6,039.5 5,269.3 6,492.2 6,255.0 6,451.8 19,461.0 19,333.4 19,640.7 23,340.8 23,170.3 23,841.5
4,437.3 6,752.2 19,941.7 24,610.0
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
65.6 804.8 911.6 498.3 2,280.3 1,129.3 1,151.00
508.2 757.4 237.2 138.3 1,641.1 867.0 774.07
899.2 778.5 -196.8 178.4 1,659.3 889.0 770.27
1,249.1 779.3 -300.3 259.2 1,987.3 780.0 1,207.32
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na -196.3 -954.7
na na 0.0 na na -70.0 -704.1
na na 0.0 na na na -770.3
na na 375.3 na na na -832.0
2007
2008E
2009E
2010E
Per share (NOK)
2007
2008E
2009E
2010E
-11.4% -61.4% -79.3% -97.9% 34.8% 10.0% 4.3% 0.5%
-8.1% 27.3% 71.5% 674.7% 39.6% 13.9% 8.0% 3.9%
4.5% 23.8% 39.2% 76.9% 41.4% 16.4% 10.7% 6.6%
6.4% 18.7% 28.8% 38.9% 42.7% 18.3% 12.9% 8.7%
EPS adjusted EPS reported CFPS BVPS DPS
0.06 0.02 0.39 3.59 0.00
0.16 0.15 0.40 3.74 0.00
0.26 0.26 0.53 4.00 0.00
0.36 0.36 0.66 4.25 0.11
3,478.9 3,478.9
3,478.9 3,478.9
3,478.9 3,478.9
3,478.9 3,478.9
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
54.0% 4.8 0.5% 3.0% 53.5% 46.1%
46.5% 3.4 4.0% 5.3% 56.1% 48.4%
37.9% 2.4 6.7% 7.4% 58.3% 47.7%
30.0% 1.7 8.7% 9.4% 60.0% 46.9%
Valuation
2007
2008E
2009E
2010E
101.7 1.7 15.8 0.0% na
17.4 0.8 7.0 0.0% na
10.9 0.7 5.3 0.0% na
7.8 0.7 4.3 3.8% na
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
16.2% 8.0% 8.2% 140.3% 0.0%
12.7% 6.7% 6.0% 114.5% 0.0%
12.3% 6.6% 5.7% 114.2% 0.0%
13.8% 5.4% 8.4% 100.1% 30.0%
2.02 20.2 47.1 1.4
1.22 8.8 15.3 0.8
1.11 6.8 10.4 0.8
0.99 5.4 7.7 0.7
Ratios Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
Year-end nb of shares(m) Av. diluted nb of shares(m)
P/E P/BV P/CF Dividend yield FCF yield EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
30
Why the stock is a buy Landsbanki initiates coverage on Marine Harvest Group with a buy recommendation and a target of NOK 3.1. Over the last months, the share price has come down significantly due to biological problems (particularly in Chile) and higher costs, reduced production, lower salmon prices and the general market downturn. Moreover, the group seriously disappointed the market with their 2007 Q3 and Q4 reports, as the group had significantly higher write downs in Chile than previously communicated to the market. In Q4, the group had write-downs of NOK 466 million on Chilean activities. In Chile, the group will accelerate downsizing of activities in region 10 and relocation to regions 11 and 12 as biological problems caused by sea lice, SRS, and for MHG in particular ISA have escalated mortality significantly. The situation will affect volumes, costs and capex in 2008-2010, but over time we expect volumes and costs to return to normal levels. Earnings in 2008 will be significantly affected by high costs in Chile and lower volumes, but we expect earnings to improve over 2009–2010 as gradually, costs should come down and prices improve. We particularly like the group’s strong production base in Norway, as we expect good margins from the Norwegian activity over 2008-2010, while margins from the Chilean activity will improve as biological problems gradually improve. We further expect that the group will succeed in reducing overall costs by NOK 900 million due to synergies, but are doubtful that this will be achieved by 2009 (as targeted by the group). MHG has some Value Added Processing activities (VAP), but for the time being the company remain mainly an exposure to salmon farming. As illustrated in table 10, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). In a likely scenario with limited production growth from Chile and Norway, salmon prices could increase significantly in 2009 and 2010. Our price assumptions of NOK 25 and NOK 26 from Norwegian operations could prove to be conservative. In such a scenario, valuation of the group is likely to rise significantly. Table 10: DCF, PE and EPS sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 -0.5 -2.0 0.8 -1.0 2.0 0.0 3.2 1.0 4.3 2.0 5.4 3.0 6.5
PE Adj. 08 -46.9 220.6 33.0 17.8 12.2 9.3 7.5
EPS Adj. 08 -0.06 0.01 0.08 0.16 0.23 0.30 0.37
Source: Landsbanki
The group intends to integrate further downstream (with more VAP), and into other species. Significant downstream integration should reduce some sensitivity to salmon price fluctuations. The group is further looking for acquisition targets in the salmon farming industry, but as the group currently holds the maximum allowed 25 % of total Norwegian licenses, expansion in Norway will only be possible through a new licensing round in 2009. Lower margins and the recent outbreak of ISA in Chile (until now an unknown disease for Chilean salmon producers) could open up acquisition opportunities for Norwegian companies that have experience in handling such biological problems in other regions. However, based on the group’s operational challenges in Chile, current gearing and low share price (making capital increases unattractive), MHG’s ability to make significant acquisitions appear limited in the short term.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
31
Constructing the forecast Our assumptions for the forecast is included in table 11 below. We expect EBIT margins to improve from 2008 to 2010 as we expect Norwegian salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. Although feed costs are increasing in 2008 we expect cost synergies and over time improved biological situation in Norway and in Chile to have a positive effect on the production cost level during 2009-2010. We expect some improvement in the biological situation in Chile in 2009, and a gradual increase in production in this region from 2010. The group has significant spare production capacity in Norway, which we expect the group will utilise over the next years. Capital expenditure is expected to be at NOK 870 mill and 890 mill in 2008 and 2009 respectively. We have uses an effective tax rate of 24.5 %. We expect good margins in VAP ranging from 5.1 % to 5.5 % during the next years. Table 11: Assumptions for forecast 2006 Revenues 15877.8 EBITDA 3648.3 EBIT 2915.9 Pre tax profit 2620.5 Net profit 3068.5
2007 14073.0 1408.7 603.9 150.9 64.3
2008E 12936.3 1793.3 1035.8 651.1 509.9
2009E 13523.4 2220.0 1441.4 1169.1 901.1
2010E 14393.3 2635.7 1856.4 1631.2 1251.1
2011E 14269.9 2058.7 1279.2 1053.5 805.2
23.0 % 18.4 % 19.3 %
10.0 % 4.3 % 0.5 %
13.9 % 8.0 % 3.9 %
16.4 % 10.7 % 6.7 %
18.3 % 12.9 % 8.7 %
14.4 % 9.0 % 5.6 %
EBIT margin (kg gw) Norway Chile Canada UK Average
2006 12.3 8.5 6.7 5.6 9.4
2007 5.1 -4.6 5.4 2.1 2.2
2008E 4.8 -2.6 3.1 3.3 3.2
2009E 5.6 0.0 3.3 4.0 4.3
2010E 6.6 1.7 3.3 5.0 5.3
2011E 4.5 0.8 1.1 2.5 3.2
EBIT margin VAP
2.3 %
4.7 %
5.1 %
5.2 %
5.3 %
5.5 %
Volume (gw) Total Norway Chile Canada UK Other
334.9 139.9 104.9 33.9 38.9 17.3
336.2 168.2 90.6 39.5 27.4 10.5
314.0 187.0 50.0 39.0 26.0 12.0
323.0 197.0 45.0 42.0 27.0 12.0
340.0 207.0 50.0 44.0 27.0 12.0
358.0 210.0 65.0 44.0 27.0 12.0
Margins EBITDA EBIT Net profit margin
Source: Landsbanki
Valuation Our DCF valuation gives a value per share of NOK 3.16. Based on considerations of current high P/E multiples and exposure to Chile, our target is NOK 3.1, which implies a minor discount from DCF value. Our valuation is based on a WACC of 8.8 % and perpetuity growth rate of 2.5 %. The group has a significant tax loss carrying forward with an estimated NPV of approximately NOK 1 bn (NOK 0.28 per share). The company is currently trading at a P/E of 17.4 times 2008 earnings and 10.9 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 12.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Marine Harvest Group ASA
32
Table 12: Free Cash Flow Free Cash Flow EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2007 603.9 -169.1 792.7 1227.5 -1129.3 911.6 1009.8
2008E 1035.8 -290.0 757.4 1503.2 -867.0 237.2 873.4
2009E 1441.4 -403.6 778.5 1816.4 -889.0 -196.8 730.6
2010E 1856.4 -519.8 779.3 2115.9 -780.0 -300.3 1035.6
2011E 1279.2 -358.2 779.4 1700.5 -780.0 -98.1 822.4
Source: Landsbanki
As illustrated in table 13, the DCF calculation is sensitive to changes in WACC and terminal growth rate. Improved biological situation in Chile and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 13: DCF sensitivity to changes in WACC and growth rate
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
9.8 % 2.0 2.1 2.3 2.5 2.7 2.9 3.2
9.3 % 2.2 2.4 2.6 2.8 3.0 3.3 3.7
WACC 8.8 % 2.5 2.7 2.9 3.2 3.5 3.8 4.2
8.3 % 2.8 3.0 3.3 3.6 3.9 4.4 4.9
7.8 % 3.1 3.4 3.7 4.1 4.5 5.1 5.8
Source: Landsbanki
In terms of valuation by Enterprise Value per kg harvested, Marine Harvest Group is less expensive than Lerøy and Salmar cf. chart 44. MHG is trading at EV/kg of approximately NOK 40 while Cermaq is cheapest trading at EV/kg of NOK 17. As MHG operations in Norway have a high EBIT margin, a premium in EV/KG is reasonable compared to Cermaq which is more exposed to Chile. Chart 44: EV/KG
80.0 70.0 60.0 50.0
NOK
andsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Although more expensive than Cermaq, we find MHG to be the second most attractive option in the industry. On the basis of low to moderate global supply growth salmon markets should be good during 2008 – 2010. If salmon prices overshoot our expectations the value of the company is likely to increase significantly.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
33
Catalysts and news flow •
Financial calendar: Q1 2008 report on 14 May 2008
•
Developments in Norwegian salmon prices in Q2 2008
•
Biological developments in Chile and Norway
•
Increased attention regarding capacity limitations in Norway
Risks to our rating The biological risks in Chile and Norway appear to be of particular importance. MHG’s production in Chile represented 31 % of the group total in 2006 and 27 % in 2007. MHG has been severely affected by the biological problems in Chile, and far more than other companies, according to Sernapesca. 11 of the 21 confirmed farms with ISA outbreaks in Chile (as of April 2008) belonged to MHG, while 13 out of 17 farms with suspected outbreaks belonged to MHG. Of another 39 farms in quarantine, 9 also belong to MHG. There is a risk that the situation will escalate further in Chile, affecting the costs of the company and its ability to supply markets or that it will take more time than we assume for the situation to improve. MHG is also exposed to biological problems in Norway, particularly in the south and west, where outbreaks of PD are affecting costs to MHG and other producers. MHG production in Norway represented approximately 49 % of total production in 2007. There is a risk that higher costs may prevail in Norway for a longer period than we anticipate. Particularly there is a risk that biological problems in Norway could impact costs more than expected in 2008. However, MHG expects improvement of the PD situation due to improved vaccination and mitigating action. Lower prices and margins than anticipated would further impact the earnings of the company and its valuation. As the company has a net debt to EBITDA of approximately 4.8 there is a risk of higher interest rates and renegotiations with banks over terms and instalments if earnings conditions deteriorates significantly. Reference is further made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Marine Harvest Group is the largest producer of Atlantic salmon in the world, with approximately 25 % of global production in 2007. It is an integrated company, with control of smolt production, farming, processing and sale of salmon.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
andsbanki
Marine Harvest Group ASA
34
Chart 45: MHG production in different regions
9%
3%
12 % 49 %
27 %
No rway
Chile
Canada
UK
Other
Source: Landsbanki
The group has significant production in Norway, Chile, the UK and Canada. For 2007, Norway represented approximately 49 % of volumes while Chilean production represented 27 % c.f. chart 45. The company has repeatedly reduced guidance on production volumes due to biological problems in Chile and harvest in 2007 was 336,000 (excluding Lighthouse Caledonian that was distributed to shareholders as dividend).
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
Reuters CEQ.OL / Bloomberg CEQ NO Index: FTSE Euro First 300
Rating
Cermaq ASA
Previous
Buy 380
23 April 2008 - INITIATION OF COVERAGE
FOOD PRODUCERS
Top pick in the sector We initiate coverage with a buy recommendation and a price target of NOK 75. We like the outlook for the feed operations and the prospect of increasing salmon prices in 2009 and 2010. We expect a weak Q1 report on 9 May and weaker prices in Q2, but we recommend to buy CEQ as the share should rebound.
Target Price
Current Price
NOK75.00
NOK54.75
Market Cap
Free Float
NOK5.1bn
56%
Buy
Year
Sales
EBIT
EBIT
Net
EPS
P/E
P/CF
EV/
EV/
EV/
Div.
End Dec. 31
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
Sales
EBITDA
EBIT
Yield (%)
2006
7,534
1,311
17.4
938
10.29
7.7
6.1
1.1
5.2
6.2
0.0
2007
7,721
747
9.7
477
7.52
13.1
9.1
1.3
10.3
13.9
2.3
2008E
8,497
602
7.1
393
4.28
12.8
7.4
0.8
7.6
11.4
2.3
2009E
9,121
750
8.2
495
5.38
10.2
6.1
0.7
6.2
9.0
2.9
2010E
9,855
977
9.9
672
7.27
7.5
5.0
0.7
5.0
6.9
4.0
NOK
54.75
5.1
bn
56
%
YTD Abs. Perf.
75.00
NOK
NOK
-27.5% 93
Shares O utstanding (m Daily Trade Vol.(sh 00
416
NOK120.00/NOK54.25
52 W eek High/Low
Enterprise Value (NO K
6,833
Net Debt (NO Km)
1,799
Source: Landsbanki
Lower volumes from Chile in 2008 and 2009. Release of weak Q1 report on 9 May CEQ guided (on 18 April) 22 % lower volumes from Chile and higher costs in 2008 due to biological problems and the share has come down significantly. We expect a weak Q1 report on 9 May due to problems in Chile, a weak Coho/trout market and lower Ewos margins. We advice investors to buy CEQ during Q2 as we expect the share to rebound . Increasing margins in salmon farming in 2009 and 2010. Capacity for growth We expect margins within salmon farming to increase in 2009 and 2010 as we forecast low to moderate global supply growth and higher salmon prices. Although feed costs are increasing, we expect the high cost level in Chile to improve in 2009 and 2010. Within farming, Cermaq has significant capacity for organic growth and we expect growth also through acquisitions. CEQ has a strong balance sheet with net debt to EBITDA of only 1.25.
Cer maq A SA r el . FT SE E ur o Fi r s t 300
Cer maq A SA 130
Strong outlook for the feed unit We like the outlook for the feed operations of the group. Ewos has a 33 % share of a growing salmon feed market and the best operating margins in the business. We expect good margins from the feed unit in the coming years, although the recent increase in raw material prices should reduce margins in Q1 and Q2 2008.
FT SE E ur o Fi r s t 300
120 110 100 90 80 70 60
Value for money Our DCF valuation suggests a share value of NOK 88.2. Our target of NOK 75 implies a discount on DCF and is motivated by short-term EPS and Chile exposure. Cermaq is trading at 12.8 times 2008 earnings and 10.2 times 2009 earnings and is the cheapest salmon company at OSE. EV is approximately NOK 6300 mill. We find that the feed division is worth approximately NOK 4000 mill and that the farming operations are significantly undervalued.
Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
50 A pr 07
Jul 07
Oct 07
Jan 08
A pr 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Cermaq ASA
36
Key financials Company profile Cermaq is the world's second largest producer of both Atlantic salmon and salmon feed with operations in all main salmon producing regions.
Production split – Geographical 100.0% 90.0%
UK 7%
80.0% 70.0% 60.0%
Canada 22%
50.0%
Top shareholders Ministry of Industry and Trade Landsdowne Partners Fidelity Management PGGM Vermogensbeheer New Jersey Division of Invest
Events calendar
40.0%
43.5% 5.3% 4.9% 4.0% 3.1%
Incom e statem ent (NOKm ), Dec
Chile 48%
30.0% 20.0% 10.0%
Nor way 23%
0.0%
2007
2008E
2009E
2010E
Balance sheet (NOKm ), Dec. 31
7,721 1,008 -261 747 -12 -280 455 24 -5.5% 2 477 0 477
8,497 902 -301 602 -81 0 521 -125 24.7% 2 393 0 393
9,121 1,094 -344 750 -95 0 655 -157 24.6% 2 495 0 495
9,855 1,335 -358 977 -91 0 886 -213 24.4% 2 672 0 672
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
477 261 96 265 1,098 521 578
393 301 -195 -13 486 700 -214
495 344 -76 -13 751 500 251
672 358 -380 -14 636 385 251
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0 na na na -578
na na 327 na na na 541
na na 149 na na na -102
na na 202 na na na -49
Ratios
2007
2008E
2009E
2010E
Per share (NOK)
2.5% -35.7% -43.0% -49.1% 34.0% 13.1% 9.7% 6.2%
10.0% -10.5% -19.5% -17.5% 29.8% 10.6% 7.1% 4.6%
7.3% 21.2% 24.6% 26.0% 30.4% 12.0% 8.2% 5.4%
8.1% 22.1% 30.3% 35.6% 31.2% 13.5% 9.9% 6.8%
EPS adjusted EPS reported CFPS BVPS DPS
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
29.6% 1.2 11.2% 14.0% 57.2% 23.2%
41.7% 2.0 9.3% 10.4% 52.9% 23.4%
36.4% 1.6 11.1% 12.1% 54.4% 22.6%
32.1% 1.2 13.8% 15.0% 56.6% 24.8%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
14.2% 6.7% 7.5% 199.1% 30.0%
5.7% 8.2% -2.5% 232.8% 30.0%
8.2% 5.5% 2.8% 145.3% 30.0%
6.5% 3.9% 2.5% 107.4% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
232 866 2,202 3,299
191 952 2,470 3,613
293 1,022 2,545 3,860
292 1,183 2,844 4,319
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
875 1,075 1,724 451 4,125
875 1,075 2,123 466 4,539
875 1,075 2,279 481 4,710
875 1,075 2,306 496 4,752
Short-term debt Accounts payable Other current liabilities Current liabilities
321 933 342 1,597
321 1,093 342 1,756
321 1,162 342 1,825
321 1,241 342 1,905
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
1,169 0 412 1,582
1,669 0 412 2,082
1,669 0 412 2,082
1,619 0 412 2,032
Shareholders' equity Minority interest Total shareholders' equity
4,218 29 4,246
4,284 31 4,315
4,630 33 4,663
5,098 36 5,134
Net debt Net working capital Capital employed Total assets
1,259 1,792 5,465 7,424
1,799 1,987 6,060 8,153
1,698 2,063 6,292 8,570
1,648 2,443 6,698 9,071
2007
2008E
2009E
2010E
7.52 5.18 10.84 45.59 2.26
4.28 4.28 7.37 46.31 1.28
5.38 5.38 8.94 50.05 1.61
7.27 7.27 10.99 55.12 2.18
Year-end nb of shares(m) Av. diluted nb of shares(m)
92.5 92.5
92.5 92.5
92.5 92.5
92.5 92.5
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
13.1 2.2 9.1 2.3% na
12.8 1.2 7.4 2.3% na
10.2 1.1 6.1 2.9% na
7.5 1.0 5.0 4.0% na
1.34 10.3 13.9 1.9
0.80 7.6 11.4 1.2
0.74 6.2 9.0 1.1
0.68 5.0 6.9 1.0
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
37
Why the stock is a buy The share price has come down significantly over recent months due to biological problems and higher costs in Chile, reduced production, lower salmon and trout prices and the general market downturn. The group reported a Q4 EBIT before biomass of NOK 89 mill (excluding one offs and consolidation of Norgrain) which was in line with our estimates of 91 mill, but below consensus of 120 mill. Chile was better than expected while Norway was slightly below expectations due to one offs. UK and Canada was in line with our estimates. EWOS performance was strong with margins of 6.4 %, but some one offs. The group guided down volumes from Chile in 2008 on 18 April by 22 % due to biological problems mostly due to reduced production of Atlantic salmon. Cermaq volumes from Chile are likely to increase only modestly in 2009 and we expect the company to provide more accurate guiding on this subject in Q1 report on 9 May. We expect a weak Q1 report due to problems in Chile, a weak Coho/trout market, PD in Norway and lower Ewos margins in the quarter. CEQ will take write downs of NOK 25 mill on Chilean operations in Q1. The company has a significant production of trout and Coho in Chile that are exposed to low prices in the Japanese market. However, we expect margins in the farming division to increase in 2009 and 2010 as the supply side for Atlantic salmon appears low to moderate. Further, we expect the high cost level in Chile to improve in 2009 and 2010. The farming unit of group has a significant capacity for organic growth as estimated production in 2008 is 112 000 tons gutted weight (gw) while production capacity is approximately 200 000 tons gw. Over time we expect CEQ to utilise this production capacity. We particularly like the stable earnings from the feed operations. The Cermaq subsidiary Ewos has a 33 % share of the growing salmon feed market. Due to improved capacity utilisation and the strong position Ewos holds in R&D, product development and functional feed, the margins in EWOS were 6.4 % in 2007 (6.1 % excluding one-offs), which is better than other fish feed producers. We expect good margins from the feed unit in coming years, as the current disease problems in the salmon sector increase demand for high margin feed types and capacity utilisation remains high. As feed contracts normally are based on a costplus margin, the feed division is insulated from changing raw material prices over time. However, the recent increase in raw material prices could reduce margins in EWOS in 2008 as transfer of costs to clients typically will take some time and will be related to renegotiations of contracts. We like the outlook for the feed operations of the group, which should provide increasing operational income and profits over the coming years. In terms of valuation Cermaq is the cheapest of the listed salmon companies. Enterprise Value of the group is currently NOK 6300 mill. Based on a EV value of EWOS of NOK 4000 mill and other assets of NOK 400 mill, the farming unit of the group is undervalued at NOK 1900 mill. Cermaq is trading at EV/kg of NOK 17 while other groups are ranging between EV/kg 35 – 75 NOK.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
38
Chart 46: EV/KG 80.0 70.0 60.0
NOK
50.0 40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Constructing the forecast Our assumptions for the forecast is included in table 14. We expect EBIT margins to improve from 2008 to 2010 as we expect salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010 in Norway. We further expect some improvements in the biological situation in Chile during 2009, but no significant growth in volumes from Chile before 2010 and 2011 particularly. The group has significant spare production capacity in Norway, which we expect the group will utilise over the next years. Increased capacity utilisation should have a positive effect on production costs in Norway. Capital expenditure is expected to be high 2008 and 2009 due to investment in feed factory in Norway. We have used an effective tax rate of 24.5 % on Cermaq. We expect good margins in Ewos ranging from 5.8 % to 6.2 % during the next years. Table 14: Assumptions for forecast P&L in NOK Mill 2006 Revenues 7534 EBITDA 1568 EBIT 1311 Pre tax profit 1240 Net profit 938
2007 7721 1008 747 455 479
2008E 8497 902 602 521 396
2009E 9121 1094 750 655 498
2010E 9855 1335 977 885 673
2011E 10607 1296 921 834 633
20.8 % 17.4 % 12.4 %
13.1 % 9.7 % 6.2 %
10.6 % 7.1 % 4.7 %
12.0 % 8.2 % 5.5 %
13.5 % 9.9 % 6.8 %
12.2 % 8.7 % 6.0 %
EBIT margin (kg gw) Norway Chile Canada UK Average
2006 11.5 10.2 14.1 3.5 10.9
2007 4.2 5.1 4.7 -0.5 4.2
2008E 4.6 0.7 2.5 2.0 2.3
2009E 5.3 1.7 3.0 2.0 3.0
2010E 6.3 3.5 3.6 3.0 4.3
2011E 3.8 3.0 1.9 0.0 2.8
EBIT margin feed
4.8 %
6.4 %
5.8 %
6.1 %
6.2 %
6.1 %
Volume farming (gw) Total Norway Chile Canada UK
103.5 15.5 54.5 26.5 7.0
100.1 22.8 47.9 22.0 7.3
111.6 30.6 47.7 25.2 8.1
123.3 36.0 53.1 25.2 9.0
136.8 39.6 61.2 26.1 9.9
157.5 45.0 73.8 27.9 10.8
Margins EBITDA EBIT Net profit margin
Source: Landsbanki
Cermaq announced 15 April the purchase through subsidiary Norgrain of an additional 20 % of the shares in Denofa (importer and processor of soybeans) for NOK 10.7 mill bringing total ownership to 60 %. This acquisition is not included in the forecast above, but its impact on valuation is negligible. The group has stated its intention to divest Norgrain.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
39
Increased ownership implies consolidation of a net depth of approximately 250 mill in Denofa in group balance from Q2 2008 if CEQ retains ownership.
Valuation Our DCF valuation indicates a value per share of NOK 88.2. However, based in part on considerations of short-term EPS, P/E and exposure to Chile, our target is NOK 75 on a 12months basis, which implies a discount from DCF value of approximately 18 %. Our target is based on a WACC of 9.4 % and terminal growth rate of 2.5 %. The company is currently trading at a P/E of 12.8 times 2008 earnings and 10.2 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 15. Table 15: Free Cash Flow 2007 746.9 -179.3 247.4 815.0 -520.5 95.6 390.1
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 601.5 -144.4 300.7 757.9 -700.0 -195.3 -137.4
2009E 749.7 -179.9 344.1 913.9 -500.0 -75.8 338.1
2010E 976.7 -234.4 358.4 1100.6 -385.0 -380.1 335.5
2011E 921.1 -221.1 375.3 1075.3 -565.0 -231.2 279.2
Source: Landsbanki
As illustrated in table 16, the DCF calculation is sensitive to changes in WACC and growth rate. Improved biological situation in Chile and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 16: DCF sensitivity to changes in WACC and growth rate
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
10.4 % 62.9 66.0 69.6 73.5 78.1 83.2 89.2
9.9 % 68.0 71.6 75.7 80.4 85.7 91.8 99.0
WACC 9.4 % 73.7 78.0 82.7 88.2 94.5 101.9 110.7
8.9 % 80.3 85.2 90.8 97.3 104.9 113.9 124.8
8.4 % 87.7 93.5 100.2 108.0 117.3 128.5 142.2
Source: Landsbanki
Although the feed operations are significant, the group`s DCF, EPS and PE are significantly affected by changes in EBIT per kg salmon produced, cf. table 17. If salmon prices increases more than anticipated in 2009 and 2010 this would increase valuation. If salmon prices increases by NOK 1 more than expected in 2008 EPS would increase from 4.3 to 5.1 NOK. Table 17: DCF, PE and EPS sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 42.3 -2.0 57.6 -1.0 72.9 0.0 88.2 1.0 103.5 2.0 118.8 3.0 134.1
PE Adj. 08 30.4 21.2 16.3 13.2 11.1 9.6 8.4
EPS Adj. 08 1.9 2.7 3.5 4.3 5.1 5.9 6.7
Source: Landsbanki
Enterprise Value of the group is currently approximately NOK 6300 mill. According to our estimate, the feed division, with EBIT of NOK 378 mill in 2007 and estimated increase in EBIT to over NOK 500 mill in 2013, should be valued at approximately NOK 4000 million. The group owns other assets with a fair value of NOK 400-500 million in addition to the
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
40
farming entity. We find that the farming operations of the group are undervalued at approximately NOK 17 per kg which is significantly lower than other companies.
Catalysts and news flow -
Financial calendar: Q1 2008 report 9 May 2008
-
Expecting weaker salmon spot prices in Norway during Q2
-
Increasing focus on MAB capacity limitations in Norway
-
Possibility for acquisitions
Risks to our rating The group`s farming operations are particularly exposed to biological problems in Chile, as almost 50 % of total salmon production is located in the region. The group has informed the market about these problems, but it has appeared less affected than other companies. CEQ has reported less mortality than other producers but has been affected through slower growth of biomass. The recent guiding of lower volumes from Chile implies that impacts are more significant than management had previously communicated to the market. According to Sernapesca (April 2008), 5 out of the 21 farms with a confirmed ISA outbreak in Chile belonged to CEQ, while none of 17 farms with a suspected outbreak belonged to the company. Of another 39 farms in quarantine, 3 also belong to Cermaq. There is a risk that the situation could escalate further in Chile, affecting the costs of the company and its harvest volumes. It could further take more time than we assume for the situation to improve in Chile. There is a risk that the group do not achieve the forecasted margins due to higher costs of production or lower prices. The group recently appointed a new CFO, which could imply increased risks for write downs in the near term. Further, we note that the COO of Mainstream Americas sold 83 350 shares of a total of 183 350 shares in March, and look at this as a negative short term signal. The Norwegian production of the group is located in the north, an area that is less exposed to problems related to PD than are areas further south, although there has been two incidents reported in recent months. Reference is further made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Cermaq is the world’s second largest producer of both Atlantic salmon (7% of production) and feed (through its ownership of Ewos). Furthermore, the company produces approximately 28,000 tons of Coho and trout in Chile. The company has a diversified salmon production in all the main salmon regions, but its main production base is in Chile (48 % of total production including Coho and trout). Production in Norway represents 23 % and Canada 22 %. The group has capacity for further growth, both in Chile and Norway. The group acquired Arctic Seafood (five licenses in Nordland and four in Troms and significant smolt production) in December 2007. The activity of Arctic in Troms (four licenses) has been sold to Salmar.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Cermaq ASA
41
Chart 47: Regional split of salmon production
UK
No rway
Canada
Chile
No rway
Chile
Canada
UK
Source: Landsbanki
The salmon feed industry is consolidated with the three largest companies (Skretting, Ewos/Cermaq and Biomar) serving approximately 92 % of the total market. Cermaq is a leading feed company investing significantly in R&D to improve feed performance and it appears well positioned to take its share of a growing feed market. The group has feed production in all producing regions with investment plans for significant increased capacity (approximately 25 %) in Norway. The new capacity will be operational in Norway from 2009 and 2011. (Final investment decision concerning latest capacity increase to be taken at a later stage). Cermaq also owns 72.5 % of Norgrain (importer and trader of grain and other commodities), but has stated that this part of the business will be divested.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
Reuters LSG.OL / Bloomberg LSG.NO Index: FTSE Euro First 300
Rating
Lerøy Seafood Group ASA 23 April 2008 - INITIATION OF COVERAGE
Reduce 380
- SMALL / MID-CAPS
FOOD PRODUCERS
Valuation is stretched Landsbanki initiates coverage with a reduce recommendation and a target of NOK 95. We find that valuation is stretched on current levels and that other companies in the sector represent better investment opportunities.
Target Price
Current Price
NOK95.00
NOK106.50
Market Cap
Free Float
NOK5.7bn
51%
Reduce
Year
EBIT
EBIT
Net
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
2006
5,616.6
683.8
12.2
651.9
13.72
7.7
8.6
1.3
9.2
10.4
0.0
2007
6,290.9
387.2
6.2
279.6
4.99
24.5
17.2
1.3
15.4
21.5
1.5
2008E
6,915.6
505.4
7.3
315.9
5.89
18.1
12.9
1.1
11.3
14.9
1.7
2009E
7,374.0
644.8
8.7
430.7
8.04
13.3
10.5
1.0
9.2
11.4
2.3
2010E
7,872.5
756.1
9.6
534.1
9.96
10.7
9.0
0.9
7.8
9.4
2.8
End Dec. 31
Sales
Previous
EPS
P/E
P/CF
NOK
106.50
5.7
bn
51
%
95.00
NOK
NOK
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield (%)
Shares O utstanding (m
54
Daily Trade Vol.(sh 00
35
-3.2%
NOK146.00/NOK89.00
52 W eek High/Low
Enterprise Value (NO K
7,542
Net Debt (NO Km)
1,836
Source: Landsbanki
Valuation of LSG is stretched The company is currently trading at a P/E of 18.1 times 2008 earnings and 13.3 times 2009 earnings and is the most expensive of the salmon companies listed in Oslo. On the basis of our DCF valuation and earning potential we can’t see that current valuation is justified. Disappointing Q4 report and operational challenges in main entities Lerøy recorded an EBIT before biomass of NOK 66 mill in Q4 2007 against our estimates of NOK 105 mill and consensus estimates of NOK 122 mill. Several of the main salmon producing entities of Lerøy such as Midnor and Hydrotech performed below expectations due i.a. to high costs. We expect high costs to impact Q1 2008 result significantly. Ler øy Seaf ood Gr oup A SA r el . FT SE E ur o Fi r st 300
Limited capacity for growth in production and biological problems in Lerøy Austevoll With the exception of Lerøy Austevoll, the group has limited capacity for growth in salmon production. Biological problems due to Pancreas disease (PD) is significantly impacting costs at Austevoll and could hamper growth in production from this entity for years. We expect growth to materialise through more acquisitions.
Ler øy Seaf ood Gr oup A SA 160
FT SE E ur o Fi r st 300
150 140 130 120 110
Significant production of trout The company produces a significant volume of large rainbow trout i.a. in Fossen and Hydrotech. Although the group will reduce its production of trout over time, the earnings in 2008 will be impacted by the current weak trout market. Upside potential We expect Lerøy to make further acquisitions which could be value enhancing for the group There is further upside potential in the share price if Austevoll Seafood decides to increase its holding in Lerøy. Start up of operations in Chile could also be a value driver. Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
100 90 80 A pr 07
Jul 07
Oct 07
Jan 08
A pr 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Lerøy Seafood Group ASA
Landsbanki
43
Key financials Company profile Lerøy is one of the largest producers of farmed Atlantic salmon in Norway and a large exporter of seafood products from Norway. Lerøy owns 50 % of Norskott Havbruk with significant production of salmon in Scotland.
Production split – Geographical 100.0% 90.0%
Norskot t (LSG share) 13%
80.0%
Aust evoll 15%
70.0% 60.0% 50.0%
Top shareholders Austevoll Seafood Ole-Eirik Lerøy Fidelity Management Skagen AS
Events calendar
Fossen 10%
Aurora 19%
40.0%
33.3% 15.4% 4.0% 3.6%
30.0%
Hydr ot ech 23%
20.0% Midnor 33% 10.0% 0.0%
Incom e statem ent (NOKm ), Dec
2007
2008E
2009E
2010E
6,290.9 541.1 -153.8 387.2 -34.2 15.8 368.8 -89.3 26.8% 0.0 279.6 0.0 279.6
6,915.6 664.8 -159.5 505.4 -80.1 0.0 425.3 -109.4 28.0% 0.0 315.9 0.0 315.9
7,374.0 803.7 -158.9 644.8 -63.7 0.0 581.1 -150.4 28.0% 0.0 430.7 0.0 430.7
7,872.5 914.4 -158.4 756.1 -37.0 0.0 719.1 -185.0 28.0% 0.0 534.1 0.0 534.1
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
279.6 153.8 -484.0 -51.3 -102.0 607.9 -709.83
315.9 159.5 -176.8 -34.5 264.0 155.0 108.99
430.7 158.9 -83.5 -44.0 462.0 155.0 307.04
534.1 158.4 -83.3 -58.5 550.7 155.0 395.72
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na na 709.8
na na 191.2 na na na 82.2
na na 129.2 na na na -177.8
na na 160.2 na na na -235.5
2007
2008E
2009E
2010E
Per share (NOK)
12.0% -29.6% -43.4% -57.1% 25.3% 8.6% 6.2% 4.4%
9.9% 22.9% 30.5% 13.0% 22.7% 9.6% 7.3% 4.6%
6.6% 20.9% 27.6% 36.4% 23.8% 10.9% 8.7% 5.8%
6.8% 13.8% 17.3% 24.0% 24.4% 11.6% 9.6% 6.8%
EPS adjusted EPS reported CFPS BVPS DPS
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
46.4% 3.2 9.2% 7.9% 50.3% 29.9%
47.0% 2.8 8.3% 8.5% 52.7% 29.7%
39.4% 2.1 10.7% 10.6% 55.8% 29.0%
31.1% 1.6 12.2% 12.3% 59.1% 28.2%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
-1.6% 9.7% -11.3% 395.1% 36.0%
3.8% 2.2% 1.6% 97.2% 30.0%
6.3% 2.1% 4.2% 97.6% 30.0%
7.0% 2.0% 5.0% 97.9% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Ratios Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
Balance sheet (NOKm ), Dec. 31
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
537.7 800.7 1,869.1 3,207.6
155.5 933.6 1,988.9 3,078.1
133.4 995.5 2,042.7 3,171.6
168.9 1,062.8 2,097.7 3,329.4
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
2,052.3 780.0 1,149.1 317.1 4,298.5
2,052.3 780.0 1,144.7 351.6 4,328.6
2,052.3 780.0 1,140.8 395.6 4,368.7
2,052.3 780.0 1,137.4 454.1 4,423.8
Short-term debt Accounts payable Other current liabilities Current liabilities
566.6 550.0 239.9 1,356.5
400.0 625.9 239.9 1,265.8
300.0 658.0 239.9 1,197.9
300.0 697.0 239.9 1,236.9
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
1,724.7 0.0 646.1 2,370.8
1,591.3 0.0 646.1 2,237.4
1,491.3 0.0 646.1 2,137.4
1,291.3 0.0 646.1 1,937.4
Shareholders' equity Minority interest Total shareholders' equity
3,758.0 20.8 3,778.8
3,882.7 20.8 3,903.5
4,184.1 20.8 4,204.9
4,558.0 20.8 4,578.8
Net debt Net working capital Capital employed Total assets
1,753.6 1,879.9 5,861.4 7,506.1
1,835.8 2,056.8 6,033.7 7,406.6
1,657.9 2,140.3 6,113.4 7,540.3
1,422.4 2,223.6 6,193.3 7,753.1
2007
2008E
2009E
2010E
4.99 5.22 7.13 70.11 1.80
5.89 5.89 8.22 72.44 1.77
8.04 8.04 10.18 78.06 2.41
9.96 9.96 11.83 85.04 2.99
Year-end nb of shares(m) Av. diluted nb of shares(m)
53.6 48.2
53.6 53.6
53.6 53.6
53.6 53.6
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
24.5 1.7 17.2 1.5% na
18.1 1.5 12.9 1.7% na
13.3 1.4 10.5 2.3% na
10.7 1.3 9.0 2.8% na
1.32 15.4 21.5 1.7
1.09 11.3 14.9 1.3
1.00 9.2 11.4 1.2
0.91 7.8 9.4 1.2
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Lerøy Seafood Group ASA
44
Why the stock is a reduce We initiate coverage with a reduce recommendation and a target of NOK 95. While the values of other listed salmon producers have decreased significantly recently, the share price of LSG has held up well. However, we find that valuation is stretched on current levels and that other companies in the sector present better investment opportunities.
Constructing the forecast Our assumptions for the forecasts is included in table 18 below. We expect EBIT margins to improve from 2008 to 2010 as we expect salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. We further expect some improvements in the biological situation in Lerøy Austevoll and improved margins from poor levels in 2007 in this unit. We expect a limited growth in salmon production due to operating entities producing close to full capacity. We have used a tax rate of 28 % in our forecast. Margins in the Sales & Distribution (S&D) unit is expected around 2 % during the next years. Table 18: Assumptions for the forecast P&L in NOK mill. 2006 Revenues 5616.6 EBITDA 768.5 EBIT 683.8 Pre tax profit 858.4 Net profit 652.4
2007 6290.9 541.1 387.2 368.8 279.6
2008E 6915.6 664.8 505.4 425.3 315.9
2009E 7374.0 803.7 644.8 581.1 430.7
2010E 7872.5 914.4 756.1 719.1 534.1
2011E 8289.2 726.5 568.6 522.7 386.6
13.7 % 12.2 % 11.6 %
8.6 % 6.2 % 4.4 %
9.6 % 7.3 % 4.6 %
10.9 % 8.7 % 5.8 %
11.6 % 9.6 % 6.8 %
8.8 % 6.9 % 4.7 %
EBIT margin (kg gw) Average Midnor Hydrotech Aurora Fossen Austevoll Norskott
2006 9.5 13.2 6.6 9.6 7.3 0.0 10.5
2007 3.5 6.4 2.0 4.7 2.8 -3.5 5.9
2008E 4.1 5.3 3.5 5.0 3.8 1.0 4.0
2009E 5.1 6.0 4.8 5.8 4.0 3.0 4.8
2010E 5.9 7.0 5.5 6.3 5.0 4.0 5.8
2011E 3.8 4.5 3.5 4.5 2.5 2.5 3.5
EBIT margin S&D
2.1 %
2.0 %
2.0 %
2.1 %
2.0 %
2.1 %
63.4 27.2 8.5 13.7 4.9 0.0 10.1
88.9 29.2 20.1 17.1 9.1 13.4 11.9
99.0 30.0 23.0 20.0 7.5 18.5 13.0
103.0 31.0 24.0 20.0 9.0 19.0 13.5
107.0 32.0 25.0 20.0 10.0 20.0 14.5
110.0 33.0 25.0 20.0 10.0 22.0 15.0
Margins EBITDA EBIT Net profit margin
Volume farming (gw) Total (excl associates) Midnor Hydrotech Aurora Fossen Austevoll Norskott (LSG share) Source: Landsbanki
Valuation Our target is based on DCF valuation (DCF value of NOK 95.8 per share) with a WACC of 8.7 % and perpetuity growth rate of 2.5 %. The company is currently trading at a P/E of 18.1 times 2008 earnings and 13.3 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 19.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Lerøy Seafood Group ASA
45
Table 19: Free Cash Flow 2007 387.2 -108.4 153.8 432.6 -607.9 -484.0 -659.3
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 505.4 -141.5 159.5 523.3 -155.0 -176.8 191.5
2009E 644.8 -180.5 158.9 623.1 -155.0 -83.5 384.6
2010E 756.1 -211.7 158.4 702.7 -155.0 -83.3 464.4
2011E 568.6 -159.2 157.9 567.3 -155.0 -38.0 374.3
Source: Landsbanki
Share of associated company Norskott is valued at approximately NOK 475 mill (NOK 8.9 per share). As illustrated in table 20, the DCF calculation is sensitive to changes in WACC and terminal growth rate. Improved biological situation in Norway and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 20: DCF sensitivity to changes in WACC and terminal growth
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
9.7 % 66.3 69.9 74.0 78.6 84.0 90.2 97.5
9.2 % 72.1 76.3 81.1 86.6 93.0 100.5 109.4
WACC 8.7 % 78.7 83.6 89.3 95.8 103.6 112.8 124.0
8.2 % 86.3 92.1 98.8 106.8 116.2 127.8 142.0
7.7 % 94.9 101.9 110.0 119.8 131.6 146.3 165.0
Source: Landsbanki
Although LSG is a significant Norwegian exporter of seafood products, an investment in the group is mainly an exposure to salmon prices. As illustrated in table 21, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). Table 21: Sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 24.6 -2.0 48.3 -1.0 72.1 0.0 95.8 1.0 119.6 2.0 143.3 3.0 167.1
PE Adj. 08 79.3 37.7 24.7 18.4 14.7 12.2 10.4
EPS Adj. 08 1.37 2.88 4.38 5.89 7.40 8.91 10.42
Source: Landsbanki
Based on a valuation of the S&D unit of approximately NOK 1500 mill the farming division of the company is currently trading at EV/kg 55 NOK, cf. chart 48, which is more expensive than other groups with the exception of Salmar. Chart 48: EV/KG 80.0 70.0 60.0 50.0
NOK
Landsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Salmar
Landsbanki
Lerøy Seafood Group ASA
46
Catalysts and news flow -
Financial calendar: Q1 2008 report on 8 May
-
Salmon price developments during Q2 in Norway
-
Biological developments in Norway
Risks to our rating Margins could be higher than we anticipate due to higher prices or lower cost. Harvest volumes from current licenses could further be higher than we forecast. This would have positive effects on valuation. If performance at Lerøy Austevoll improves significantly in a shorter period of time than we have anticipated this would increase valuation somewhat. Austevoll Seafood is currently the largest shareholder, with 33.34 % of total shares. There is upside share price potential if an acquisition by Austevoll Seafood materialises. Start up of operations in Chile could further represent an upside in terms of valuation. Reference is further made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background The group has a considerable production of Atlantic salmon in Norway, and some in Scotland through an affiliated company Norskott Havbruk, which owns 100% of Scottish Sea Farms Ltd., the second-largest salmon farmer in the UK with production capacity in excess of 30,000 tonnes gutted weight. Lerøy has some production of trout in Norway (mainly Hydrotech and Fossen). Lerøy through subsidiary Lerøy Midnor recently acquired 3 licenses for producing salmon in Norway from Villa Organic for NOK 130 mill. The acquisition is subject to findings in due diligence and is not included in our forecasts. Lerøy was the largest exporter of seafood from Norway in 2006, and has traditionally had a strong focus on sales and processed products. Chart 49: Lerøy production in different regions
12 % 29 %
12 %
8% 21%
18 %
M idno r
Hydro tech
A uro ra
Fo ssen
A ustevo ll
No rsko tt (LSG share)
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
Reuters SALM.OL / Bloomberg SALM.NO Index: FTSE Euro First 300
Rating
SalMar ASA
Hold 380
23 April 2008 - INITIATION OF COVERAGE
- SMALL / MID-CAPS
FOOD PRODUCERS
A well run company but limited upside We initiate coverage with a hold recommendation and a price target of NOK 40. Salmar is a well run salmon company, but based on our valuation, limited capacity for growth in production, and the risk of PD spreading in Mid-Norway, we find that risk/reward is less attractive than other alternatives.
Target Price
Current Price
NOK40.00
40.20
Market Cap
Free Float
NOK4.1bn
44%
Hold
Year
Sales
EBIT
End
Previous
EBIT
Net
Margin
Profit
EP S
P/E
P/CF
NOK
40.20
4.1
bn
44
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield
Shares O utstanding (m
Dec. 31
(NOKm)
(NOKm)
(%)
(NOKm)
(NOK)
(%)
2006
1,248.6
447.4
35.8
445.1
3.96
na
na
na
na
na
na
2007
1,679.2
411.4
24.5
351.8
2.75
14.6
14.9
2.9
10.6
12.0
2.7
2008E
1,826.1
431.5
23.6
305.3
2.96
13.6
12.7
2.7
10.4
11.6
2.2
2009E
1,943.2
478.7
24.6
347.0
3.37
11.9
11.1
2.6
9.2
10.4
2.5
2010E
2,060.0
555.5
27.0
420.5
4.08
9.8
9.4
2.3
7.6
8.6
3.0
%
40.00
NOK
Year End Dec . 31 2006 2007
Sales
EBIT
EBI T Margin
Net Profit
EPS
(NOKm) 1 ,248.6
(N OKm) 447.4
(% ) 35.8
(NOKm) 445.1
(N OK) 3.96
411.4
24.5
351.8
2.75
52 W eek High/Low
2.2
10 .4
2.5
7.6
8.6
3.0
5,008 867
FT SE E ur o Fi r s t 300
50 48 46
Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
44 42 40 38 36 34 Feb 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Merrion Landsbanki: Ireland
(%) na
11 .6
9.2
2.3
62
Nov 07
Di v. Yield
na
10.4
2.6
9.4
Sal M ar A SA
A ug 07
EV/ EBIT
2.7
11.1
9.8
Sal M ar A SA r el . FT SE E ur o Fi r st 300
M ay 07
na 10.6
12.7
11.9
4.08
NOK44.00/NOK35.00
Net Debt (NO Km)
EV/ EBITDA
13.6
3.37
420.5
103
Enterprise Value (NO K
na 2.9
2.96
347.0
27.0
A well run company, but upside in terms of valuation is limited We like the group’s strong production base in Norway and traditions of low production cost and high margins in Salmar Mid Norway. We expect margins to be significantly improved also at Salmar North in the coming years. However, our DCF valuations suggest a fair value of NOK 40.4 per share and the share is currently trading at NOK 40.2 at P/E of 13.6 times 2008 earnings and 11.9 times 2009 earnings. On such basis we see only limited upside, and we initiate coverage with a hold recommendation.
Risk of diseases in main producing region of Mid-Norway The salmon production of the group remains concentrated in Mid-Norway (Trøndelag and north of Møre and Romsdal), a region that traditionally has not been exposed to problems related to Pancreas Disease (PD). However, PD is increasingly a problem in the neighbouring county of Møre og Romsdal and there is a significant risk of spreading of this disease to the main production region of Salmar. Recently there has been an incident reported also in the north of Møre and Romsdal. If PD should spread in Mid-Norway and affect Salmar’s activities in the region, this could have a significant negative impact on the valuation of the company.
14.9
EV/ Sal es
305.3
24.6
555.5
-8.6%
Daily Trade Vol.(sh 00
52
14.6
na
23.6
478.7
Source: Landsbanki
Limited capacity for growth in production Salmar has limited capacity for growth in production based on the current number of licenses. We expect the group to continue targeting growth through the acquisition of small to medium-sized farmers in Norway, possibly also expanding in other salmon producing regions. The company has a strong balance sheet and could make significant acquisitions.
P/CF
na
431.5
1 ,943.2 2 ,060.0
2008E
1 ,679.2
P/E
1 ,826.1
2009E 2010E
Landsbanki Securities: UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
12 .0
2.7
SalMar ASA
Landsbanki
48
Key financials Company profile Salmar is one of the largest producers of Atlantic salmon in Norway with production in the regions of Trøndelag and Tromsø. The group owns 50 % of Norskott Havbruk with significant production in Scotland.
Production split – Geographical and divisional 100.0% 90.0% Norskot t 19% 80.0% 70.0% 60.0%
Top shareholders Kverva Holding Odin Forvaltning Pareto Forvaltning ABN Amro Kapitalforvaltning
Events calendar
50.0%
55.8% 8.8% 6.0% 1.0%
Salmar Nort h 11%
40.0% 30.0% 20.0%
Salmar Mid 70%
10.0% 0.0%
Incom e statem ent (NOKm ), Dec
2007
2008E
2009E
2010E
1,679.2 463.6 -52.2 411.4 -24.4 94.2 481.2 -129.4 28.8% 0.0 351.8 0.0 351.8
1,826.1 483.3 -51.8 431.5 -19.7 0.0 411.8 -106.5 28.0% 0.0 305.3 0.0 305.3
1,943.2 543.9 -65.2 478.7 -12.4 0.0 466.4 -119.4 28.0% 0.0 347.0 0.0 347.0
2,060.0 630.8 -75.2 555.5 7.6 0.0 563.2 -142.7 28.0% 0.0 420.5 0.0 420.5
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
351.8 52.2 -137.5 -125.8 140.7 93.8 46.90
305.3 51.8 -82.4 -31.5 243.2 100.0 143.22
347.0 65.2 -33.5 -40.0 338.7 210.0 128.68
420.5 75.2 -29.1 -53.5 413.2 75.0 338.18
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na na -46.9
na na 204.9 na na na 61.7
na na 104.1 na na na -24.6
na na 126.1 na na na -212.0
Ratios
2007
2008E
2009E
2010E
Per share (NOK)
34.5% -4.5% -8.1% -21.0% 52.0% 27.6% 24.5% 21.0%
8.7% 4.2% 4.9% -13.2% 48.0% 26.5% 23.6% 16.7%
6.4% 12.5% 10.9% 13.6% 49.1% 28.0% 24.6% 17.9%
6.0% 16.0% 16.0% 21.2% 50.9% 30.6% 27.0% 20.4%
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
60.9% 1.7 31.9% 20.4% 45.7% 53.2%
61.0% 1.8 22.3% 18.1% 45.8% 53.5%
50.6% 1.5 22.5% 18.8% 50.0% 52.0%
32.2% 1.0 23.2% 21.0% 56.3% 50.4%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
8.4% 5.6% 2.8% 179.7% 40.0%
13.3% 5.5% 7.8% 193.2% 30.0%
17.4% 10.8% 6.6% 322.2% 30.0%
20.1% 3.6% 16.4% 99.7% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
Balance sheet (NOKm ), Dec. 31
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
47.8 124.3 1,025.7 1,197.8
56.1 161.4 1,113.5 1,331.1
50.7 171.8 1,148.6 1,371.1
112.8 182.1 1,173.6 1,468.4
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
90.0 988.5 348.2 269.8 1,696.5
90.0 988.5 396.4 301.3 1,776.2
90.0 988.5 541.2 341.3 1,961.0
90.0 988.5 541.0 394.8 2,014.3
88.4 240.1 16.0 344.5
130.0 282.7 16.0 428.7
130.0 294.6 16.0 440.6
130.0 300.9 16.0 446.9
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
764.7 0.0 463.7 1,228.4
793.1 0.0 463.7 1,256.8
763.1 0.0 463.7 1,226.8
613.1 0.0 463.7 1,076.8
Shareholders' equity Minority interest Total shareholders' equity
1,320.8 0.6 1,321.4
1,421.2 0.6 1,421.8
1,664.1 0.6 1,664.7
1,958.4 0.6 1,959.0
Net debt Net working capital Capital employed Total assets
805.3 893.9 2,320.6 2,894.3
867.0 976.3 2,451.2 3,107.3
842.4 1,009.8 2,629.5 3,332.1
630.3 1,038.8 2,658.3 3,482.7
2007
2008E
2009E
2010E
EPS adjusted EPS reported CFPS BVPS DPS
2.75 3.42 2.70 12.82 1.10
2.96 2.96 3.16 13.80 0.89
3.37 3.37 3.61 16.16 1.01
4.08 4.08 4.29 19.01 1.22
Year-end nb of shares(m) Av. diluted nb of shares(m)
103.0 101.5
103.0 103.0
103.0 103.0
103.0 103.0
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
14.6 3.1 14.9 2.7% na
13.6 2.9 12.7 2.2% na
11.9 2.5 11.1 2.5% na
9.8 2.1 9.4 3.0% na
2.94 10.6 12.0 2.4
2.74 10.4 11.6 2.1
2.56 9.2 10.4 2.0
2.32 7.6 8.6 1.8
Short-term debt Accounts payable Other current liabilities Current liabilities
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
SalMar ASA
49
Why the stock is a hold We like the strong production base in Norway and traditions of low production cost and strong margins in Salmar Mid Norway. We further expect margins to be significantly improved at Salmar North (Senja Sjøfarm) in the coming years. Compared to other salmon companies Salmar has limited capacity for growth in production, although the group has good availability of smolt over the year, and is well positioned to exploit the current regulatory regime (MAB) in Norway. The salmon production of the group remains concentrated in Mid-Norway (Trøndelag and north of Møre and Romsdal), a region that traditionally has not been exposed to significant problems related to Pancreas Disease. However, PD is increasingly a problem in the neighbouring county of Møre og Romsdal and there is a significant risk of spreading of this disease to the main production region of Salmar. According to the National Veterinary Institute in Norway the number of reported incidents of PD in Møre og Romsdal increased significantly in 2007. PD is also recently reported north of Hustadvika in Møre og Romsdal which has been the barrier (in terms i.a. of regulative initiatives) to prevent the disease from spreading further north. If PD should spread in Mid-Norway and affect Salmar’s activities in the region, this could have a significant negative impact on the valuation of the company. Based on our valuation, limited capacity for growth in production, the risk of PD spreading to Mid-Norway and a share price that has held up well through recent turbulence, we find that the risk/reward is unattractive compared to other alternatives in the sector. However, the company’s profitability over the years is impressive and a strong production base in Norway is positive as supply from Chile is limited.
Constructing the forecast Landsbanki assumptions for the forecasts is included in table 22 below. We expect EBIT margins to improve from 2008 to 2010 as we expect Norwegian salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. We expect EBIT margins to improve significantly in Salmar North from a level of NOK 3.5 per kg gw in 2008 to NOK 6 per kg gw in 2010, and average margins for the company should increase in the period. We have used a tax rate of 28 % in our forecast. Estimated growth in salmon production will be limited from 2008 to 2010 due to operating entities producing close to full capacity. Table 22: Assumptions for forecast 2006 Revenues 1248.6 EBITDA 485.3 EBIT 447.4 Pre tax profit 577.3 Net profit 445.1
2007 1679.2 463.6 411.4 481.3 351.8
2008E 1826.1 483.3 431.5 411.8 305.3
2009E 1943.2 543.9 478.7 466.4 347.0
2010E 2060.0 630.8 555.5 563.2 420.5
2011E 1993.5 522.2 447.0 443.7 328.4
EBITDA EBIT Net profit margin
39% 36% 36%
28% 24% 21%
26% 24% 17%
28% 25% 18%
31% 27% 20%
26% 22% 16%
EBIT margin (kg gw) Average
14.2
8.4
7.0
7.6
8.7
6.8
Volume farming (gw) Total (excl. associates) Salmar Mid Salmar North Norskott
32.0 29.8 2.2 10.1
52.1 45.1 7.0 11.9
60.0 47.0 13.0 13.0
63.0 49.0 14.0 13.5
65.0 50.0 15.0 14.5
67.0 51.0 16.0 15.0
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
SalMar ASA
50
Valuation Landsbanki initiates coverage with a hold recommendation and a price target of NOK 40. Our target is based on a DCF valuation (DCF value of NOK 40.4 per share), a WACC of 9.1 % and terminal growth rate of 2.5 %. The company is currently trading at a P/E of 13.6 times 2008 earnings and 11.9 times 2009 earnings. The Free Cash Flow used for valuation is included in table 23. Table 23: Free Cash Flow 2007 411.4 -110.6 52.2 353.0 -93.8 -137.5 121.7
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 431.5 -120.8 51.8 362.5 -100.0 -82.4 180.1
2009E 478.7 -134.0 65.2 409.9 -210.0 -33.5 166.4
2010E 555.5 -155.6 75.2 475.2 -75.0 -29.1 371.2
2011E 447.0 -125.2 75.2 397.1 -75.0 -2.4 319.6
Source: Landsbanki
Share of associated company Norskott is valued at approximately NOK 475 mill (NOK 4.6 per share). As illustrated in table 24, the DCF calculation is sensitive to changes in WACC and growth rate. Improved biological situation in Norway and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 24: DCF sensitivity to changes in WACC and terminal growth
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
10.1 % 30.1 31.4 32.8 34.4 36.2 38.4 40.8
9.6 % 32.2 33.7 35.3 37.2 39.4 41.9 44.9
WACC 9.1 % 34.6 36.3 38.2 40.4 43.0 46.1 49.7
8.6 % 37.2 39.2 41.5 44.2 47.3 51.1 55.7
8.1 % 40.3 42.6 45.4 48.6 52.5 57.2 63.0
Source: Landsbanki
As illustrated in table 25, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). If salmon prices increases more than anticipated in 2009 and 2010 this would increase valuation. If salmon prices increases by NOK 1 more than expected in 2008 EPS would increase from 3.0 to 3.5 NOK. Table 25: DCF, PE and EPS sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 17.4 -2.0 25.1 -1.0 32.7 0.0 40.4 1.0 48.1 2.0 55.8 3.0 63.5
PE Adj. 08 28.5 21.1 16.7 13.8 11.8 10.3 9.1
EPS Adj. 08 1.44 1.95 2.46 2.96 3.47 3.98 4.49
Source: Landsbanki
The company is currently trading at EV/kg of NOK 75, cf. chart 50, which is significantly higher than other groups that are trading in the range 17-55 NOK. We find that it is reasonable that Salmar is trading on a premium as margins per kg produced is higher than for other groups. However, on current levels we see only limited upside.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
SalMar ASA
51
Chart 50: EV/KG 80.0 70.0 60.0 50.0
NOK
Landsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Catalysts and news flow -
Financial Calendar: 29 April 2008 – presentation of Q1 2008
-
Developments in Norwegian salmon prices during Q2 2008
-
Developments in the biological situation for salmon farmers in Mid Norway
Risks to our rating There is an upside potential in valuation if operating margins increases more than we foresee or if the company manages to increase production more than we expect. There is further upside potential if the company decides to start up operations in Chile. Reference is made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Salmar owns 52 licences for producing salmon in Norway, 39 of which are located in the company's principal producing region in Mid-Norway and 13 in Troms (Senja Sjøfarm). Senja Sjøfarm was previously an affiliated company but 100 % of shares were acquired in October 2006. Salmar processes a significant share of its production at its VAP facilities in Mid Norway and will construct a new processing plant “Innovamar” that will be operational from 2009. Salmar recently acquired two licenses in Mid Norway and four licenses in Troms from Cermaq. The company also owns 50 % of Norskott Havbruk AS, which owns 100 % of Scottish Sea Farms Ltd., the second-largest salmon farmer in the UK, with production capacity in excess of 30 000 tonnes gutted weight.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
SalMar ASA
52
Chart 51: Salmar production in different regions
19 %
12 % 69 %
Salmar M id
Salmar No rth
No rsko tt
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Kjetil Lye
Landsbanki
+47 926 16 478 [email protected]
,
Reuters GSF.OL / Bloomberg GSF NO Index: FTSE Euro First 300
Rating
Grieg Seafood ASA 23 April 2008 - INITIATION OF COVERAGE
Hold 380
- SMALL / MID-CAPS
FOOD PRODUCERS
Upside potential but high operational and financial risks We expect Grieg Seafood to increase production significantly and improve margins during 2008-2010. However, GSF has operational challenges in most producing regions and the financial gearing is significant. We advice investors to be cautious in the short term as the risk is high.
Target Price
Current Price
NOK14.00
NOK12.60
Market Cap
Free Float
NOK964.1m
39%
Hold
Year
EBIT
EBIT
Net
(NOKm)
(NOKm)
Margin (%)
Profit (NOKm)
(NOK)
2006
543.5
125.7
23.1
104.5
0.89
na
na
na
na
na
na
2007
1,026.8
79.6
7.8
51.4
0.73
27.6
9.0
2.6
17.5
33.6
0.0
2008E
1,559.1
180.5
11.6
65.0
0.85
14.8
5.5
1.5
8.3
13.3
0.0
2009E
1,691.4
249.3
14.7
106.3
1.39
9.1
4.2
1.4
6.4
9.6
0.0
2010E
1,943.6
348.8
17.9
183.3
2.38
5.3
3.1
1.2
4.9
6.7
5.7
End Dec. 31
Sales
Previous
EPS
P/E
P/CF
NOK
12.60
964.1
m
39
%
14.00
NOK
NOK
EV/
EV/
EV/
Div.
YTD Abs. Perf.
Sales
EBITDA
EBIT
Yield (%)
Shares O utstanding (m
77
Daily Trade Vol.(sh 00
37
-20.3%
52 W eek High/Low
NOK24.50/NOK10.25
Enterprise Value (NO K
2,401
Net Debt (NO Km)
1,437
Source: Landsbanki
Potential for growth in production and reduced costs We like the significant potential for increased production in the group and the scope for reduced production costs due to economies of scale and (over time) an improved biological situation in Norway. The group recently received approval for exports to Russia from its operations in Finnmark, which will be important in the development of the group’s activity in the north of Norway. The group does not have any production in Chile and their Canadian operations should benefit from higher prices in the US market in 2008–2010, as Chilean supply is reduced due to the biological problems. Significant operational and financial risks. The Q4 report was in line with our estimates, but biological issues in most producing regions remain a concern. The company has high capex and working capital requirements to achieve the targeted growth, and the financial gearing is significant. Operational and financial risks appears significant in the short term.
Gr i eg Seaf ood A SA r el . FT SE E ur o Fi r st 300
Gr i eg Seaf ood A SA 26
FT SE E ur o Fi r s t 300
24 22 20
Valuation and recommendation - be cautious in the short term Our DCF calculation suggests a share value of NOK 14. The share is currently trading at 14.8 times 2008 earning and 9.1 times 2009 earnings. Landsbanki forecasts EPS of NOK 1.4 in 2009 and 2.4 in 2010 based on our salmon market expectations and lower cost levels in GSF. Although GSF appears an attractive investment based on outlook for 2009 and 2010 we advice investors to be cautious in the short term due to high risk.
18 16 14 12 10 M ay 07
A ug 07
Nov 07
Feb 08
Source: Landsbanki
Published by: Landsbanki This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it. Landsbanki Research Group:
Landsbanki Kepler: Continental Europe
Landsbanki: Iceland and Scandinavia
Merrion Landsbanki: Ireland
Landsbanki Securities (UK): UK
AMSTERDAM • CORK • DUBLIN • EDINBURGH • FRANKFURT • GENEVA • H E L S I N K I • LONDON • MADRID • MILAN • NEW YORK • O S L O • PARIS • REYKJAVÍK • ZÜRICH
Grieg Seafood ASA
Landsbanki
54
Key financials Company profile Grieg Seafood is a producer of farmed Atlantic salmon with production in Norway, Canada and the UK.
Sales split – Geographical and divisional 100.0% 90.0%
UK 23%
80.0% 70.0%
Canada 23%
60.0% 50.0%
Top shareholders Grieg Holding Halde Invest Hakon Volden
Events calendar
Chile 21%
40.0%
40.6% 20.5% 2.5%
30.0%
Nor way 32%
20.0% 10.0%
Tot al 100%
0.0%
Incom e statem ent (NOKm ), Dec
Balance sheet (NOKm ), Dec. 31
2007
2008E
2009E
2010E
Cash and equivalents Account receivables Other current assets Current assets
24.3 111.9 1,187.1 1,323.3
13.1 173.8 1,303.7 1,490.6
62.7 188.6 1,357.3 1,608.5
80.8 216.7 1,447.8 1,745.2
Goodwill Other intangible assets Property, plant & equipment Financial assets Fixed assets
138.7 851.5 637.4 24.2 1,651.8
138.7 851.5 817.9 24.2 1,832.3
138.7 851.5 842.9 24.2 1,857.3
138.7 851.5 817.9 24.2 1,832.3
471.4 191.1 43.6 706.1
471.4 193.4 43.6 708.4
471.4 200.0 43.6 715.0
471.4 224.1 43.6 739.1
Long-term debt Pension provisions Other long-term liabilities Long-term liabilities
698.1 0.0 304.8 1,002.9
978.6 0.0 304.8 1,283.4
1,008.6 0.0 304.8 1,313.4
968.6 0.0 304.8 1,273.4
Shareholders' equity Minority interest Total shareholders' equity
1,214.5 0.0 1,214.5
1,279.5 0.0 1,279.5
1,385.8 0.0 1,385.8
1,513.4 0.0 1,513.4
Net debt Net working capital Capital employed Total assets
1,145.2 1,064.3 2,691.8 2,975.1
1,436.9 1,240.5 3,048.6 3,322.8
1,417.3 1,302.3 3,135.4 3,465.8
1,359.2 1,396.8 3,204.8 3,577.5
2007
2008E
2009E
2010E
0.73 0.68 2.24 16.55 0.00
0.85 0.85 2.28 17.40 0.00
1.39 1.39 3.02 18.79 0.00
2.38 2.38 4.02 20.45 0.71
Year-end nb of shares(m) Av. diluted nb of shares(m)
76.5 76.5
76.5 76.5
76.5 76.5
76.5 76.5
Valuation
2007
2008E
2009E
2010E
P/E P/BV P/CF Dividend yield FCF yield
27.6 1.2 9.0 0.0% na
14.8 0.7 5.5 0.0% na
9.1 0.7 4.2 0.0% na
5.3 0.6 3.1 5.7% na
2.61 17.5 33.6 1.3
1.54 8.3 13.3 0.8
1.41 6.4 9.6 0.8
1.20 4.9 6.7 0.7
2007
2008E
2009E
2010E
1,026.8 153.2 -73.6 79.6 0.4 -44.0 36.0 16.1 -42.5% 0.8 51.4 0.0 51.4
1,559.1 290.1 -109.5 180.5 -87.7 0.0 92.9 -27.9 30.0% 0.0 65.0 0.0 65.0
1,691.4 374.3 -125.0 249.3 -97.4 0.0 151.9 -45.6 30.0% 0.0 106.3 0.0 106.3
1,943.6 473.8 -125.0 348.8 -88.4 0.0 261.4 -78.1 29.9% 0.0 183.3 0.0 183.3
2007
2008E
2009E
2010E
Adj. net earnings D&A Change in W C Other adjustments Operating cash flow Capex Free cash-flow
51.4 73.6 -457.7 46.7 -286.0 416.9 -702.93
65.0 109.5 -176.3 0.0 -1.7 290.0 -291.72
106.3 125.0 -61.8 0.0 169.6 150.0 19.56
183.3 125.0 -94.5 -1.0 212.8 100.0 112.82
Disposals Financial investments Dividends Share buy-backs Equity issued Others Net debt change
na na 0.0 na na na 702.9
na na 0.0 na na na 291.7
na na 0.0 na na na -19.6
na na 54.7 na na na -58.1
2007
2008E
2009E
2010E
Per share (NOK)
Sales growth (%) EBITDA growth (%) EBIT growth (%) Net earnings growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net earnings margin (%)
88.9% -9.8% -36.6% -50.8% 47.4% 14.9% 7.8% 5.0%
51.8% 89.3% 126.7% 26.5% 43.6% 18.6% 11.6% 4.2%
8.5% 29.0% 38.1% 63.6% 46.3% 22.1% 14.7% 6.3%
14.9% 26.6% 39.9% 72.3% 47.6% 24.4% 17.9% 9.4%
EPS adjusted EPS reported CFPS BVPS DPS
Net debt/equity (%) Net debt/EBITDA (x) ROE (%) ROCE (%) Equity/total assets (%) Net WC/sales (%)
94.3% 7.5 5.8% 3.9% 40.8% 103.7%
112.3% 5.0 5.2% 6.3% 38.5% 79.6%
102.3% 3.8 8.0% 8.1% 40.0% 77.0%
89.8% 2.9 12.6% 11.0% 42.3% 71.9%
Operating CF/sales (%) Capex/sales (%) FCF/sales (%) Capex/D&A (%) Dividend pay out (%)
-27.9% 40.6% -68.5% 566.4% 0.0%
-0.1% 18.6% -18.7% 264.8% 0.0%
10.0% 8.9% 1.2% 120.0% 0.0%
11.0% 5.1% 5.8% 80.0% 30.0%
Sales EBITDA adjusted Depreciation & amortisation EBIT adjusted Net financial & associates Non recurring items PBT Income tax Tax rate (%) Minorities Reported net earnings Adjustments Adj. net earnings (group) Cash-flow statem ent (NOKm )
Ratios
Short-term debt Accounts payable Other current liabilities Current liabilities
EV/sales EV/EBITDA EV/EBIT EV/capital employed
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Grieg Seafood ASA
55
Why the stock is a hold We initiate coverage with a hold recommendation and target NOK 14. The share price has come down significantly recently, due to increased biological risks, higher costs in Norway, lower salmon prices and the general market downturn. We like the significant potential for increased production in the group and the scope for improvement in production costs resulting from economies of scale and (over time) an improved biological situation. However, the group has biological challenges related to PD in Norway, particularly in Rogaland but also in Finnmark, in Canada with algeas and oxygen levels and sea lices in the UK. These problems could reduce margins and cash flow for a longer period of time than anticipated. There is further regulatory issues to be resolved in Canada for the group to utilise its production capacity in the region. The current gearing of the group is significant (7.5 times EBITDA) and the group will have utilise most of its credit facility (1.430 mill out of 1.500 mill in December 2008) in order to grow production. If salmon prices are significantly lower than expected or costs higher than expected this could impact the interest rates paid by the group and also its ability to honour its obligations towards the bank. Although the group faces operational challenges to its ability to expand production and reduce costs, GSF could an attractive investment based on the outlook for 2009 and 2010. Due to high risks we advice investors to be cautious in the short term until the company delivers progress in operations.
Constructing the forecast Our assumptions for the forecast is included in table 26 below. We expect EBIT margins to improve from 2008 to 2010 as we expect Norwegian salmon prices to increase from a level of NOK 24.5 in 2008 to NOK 26 in 2010. Production costs should come down approaching 2009 due to improved biological situation particularly in Norway, and economies of scale. We expect production to increase from 36 000 tons in 2007 to 72 000 tons in 2010, which is below company guiding of 75-80 000 tons in 2010. Table 26: Assumptions for forecast 2006 Revenues 543.5 EBITDA 169.8 EBIT 125.7 Pre tax profit 139.1 Net profit 107.9
2007 1026.8 153.2 79.6 36.1 52.2
2008E 1559.1 290.1 180.5 92.9 65.0
2009E 1691.4 374.3 249.3 151.9 106.3
2010E 1943.6 473.8 348.8 260.4 182.3
2011E 1835.8 321.5 198.4 116.6 81.6
Margins EBITDA EBIT Net profit margin
31.2 % 23.1 % 19.9 %
14.9 % 7.8 % 5.1 %
18.6 % 11.6 % 4.2 %
22.1 % 14.7 % 6.3 %
24.4 % 17.9 % 9.4 %
17.5 % 10.8 % 4.4 %
2006 8.0 3.0 7.3 12.7 9.5
2007 2.4 -0.5 4.5 3.4 2.5
2008E 2.4 2.5 3.3 3.6 3.0
2009E 4.2 3.7 3.6 4.0 3.9
2010E 5.5 5.8 3.6 4.5 4.8
2011E 3.0 3.5 1.5 2.5 2.6
28.7 8.6 1.9 6.5 11.8
36.2 11.6 7.6 8.5 8.5
60.0 10.0 17.0 17.0 16.0
64.5 13.5 19.0 15.0 17.0
72.0 14.0 22.0 19.0 17.0
75.0 15.0 23.0 19.0 18.0
EBIT margin (kg gw) Norway Rogaland Norway Finnmark Canada UK Average Volume (gw) Total Norway Rogaland Norway Finnmark Canada UK Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Grieg Seafood ASA
56
Valuation We initiate coverage with a hold recommendation and target NOK 14. Our target is based on DCF valuation (DCF value of NOK 14 per share) and a WACC of 8.9 % and a terminal growth rate of 2.5 %. The company is currently trading at a P/E of 14.8 times 2008 earnings and 9.1 times 2009 earnings. Our valuation is based on i.a. the Free Cash Flow included in table 27. Table 27: Free Cash Flow 2007 79.6 35.6 73.6 188.9 -416.9 -457.7 -685.7
EBIT Tax on EBIT Depreciation Cash flow from operations Investments Change in Working Capital FCF
2008E 180.5 -54.2 109.5 235.9 -290.0 -176.3 -230.3
2009E 249.3 -74.8 125.0 299.5 -150.0 -61.8 87.7
2010E 348.8 -104.6 125.0 369.1 -100.0 -94.5 174.7
2011E 198.4 -59.5 123.1 262.0 -123.0 -10.5 128.5
Source: Landsbanki
As illustrated in table 28, the DCF calculation is sensitive to changes in WACC and terminal growth rate. Improved biological situation and a lower WACC and/or a higher terminal growth rate implies higher valuation. Table 28: DCF sensitivity to changes in WACC and growth rate
Terminal growth
1.0 % 1.5 % 2.0 % 2.5 % 3.0 % 3.5 % 4.0 %
9.9 % 5.9 6.9 8.0 9.3 10.8 12.5 14.5
9.4 % 7.5 8.7 10.0 11.5 13.3 15.4 17.8
WACC 8.9 % 9.3 10.7 12.3 14.1 16.2 18.7 21.7
8.4 % 11.4 13.0 14.9 17.1 19.6 22.8 26.6
7.9 % 13.8 15.7 18.0 20.6 23.8 27.7 32.7
Source: Landsbanki
An investment in the group is mainly an exposure to salmon prices. As illustrated in table 29, DCF, EPS and PE are significantly affected by changes in EBIT per kg (due to changes in salmon prices or costs). Our price assumptions of NOK 25 and NOK 26 in 2009 and 2010 from Norwegian operations could prove to be conservative. In such a scenario, valuation of the group is likely to rise significantly. Table 29: Sensitivity to changes in EBIT per kg gw Δ EBIT margin (kr) DCF -3.0 -15.2 -2.0 -5.4 -1.0 4.3 0.0 14.1 1.0 23.8 2.0 33.6 3.0 43.3
PE Adj. 08 -15.4 -48.3 42.8 14.8 9.0 6.4 5.0
EPS Adj. 08 -0.8 -0.3 0.3 0.8 1.4 2.0 2.5
Source: Landsbanki
GSF is currently trading at EV/kg NOK 35 which is more expensive than CEQ but lower priced than MHG, LSG and SALM cf. chart 52. However, the net debt of GSF will increase significantly in 2008 as GSF increase production capabilities, which will impact EV/KG negatively. There is further high risk to estimates for the group.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Grieg Seafood ASA
57
Chart 52: EV/Kg based on 2008 figures 80.0 70.0 60.0 50.0
NOK
Landsbanki
40.0 30.0 20.0 10.0 0.0 Cermaq
Grieg Seafo o d
M arine Harvest Gro up
Lerøy Seafo o d Gro up
Salmar
Source: Landsbanki
Catalysts and news flow •
Financial calendar: Q1 2008 report on 22 May 2008
•
Biological developments in Norway, UK and Canada
•
Developments in Norwegian salmon prices in Q2 2008
•
Increased attention regarding capacity limitations in Norway
Risks to our rating The group could increase margins and volumes more than we anticipate which would increase earnings and valuation of the group. Approximately 29 % of group production in 2007 was in Rogaland, where the group have problems with PD. PD has also recently been a problem in Finnmark for Grieg. We expect costs to come down gradually as 2009 approaches, but there is a risk that these problems will continue for a longer period. Also biological problems in UK and Canada may impact earnings more than anticipated. The group will expand production but controls only approximately 50 % of its smolt requirement for yearly releases. The rest is acquired through partners and contracts in the market. There is a risk related to the future availability of the required quantity and the quality of the available smolt although the group is expending its own production of smolt. According to the group, the release in 2007 went according to plan. Reference is made to the risks included in section 6 for a description of the general risks involved in investing in salmon farming.
Company background Grieg Seafood has significant production of Atlantic salmon in Norway, Scotland and Canada. Production in Norway is located in Rogaland (15 licenses producing 11,600 tons in 2007) and Finnmark (23 licenses producing 9,600 tons in 2007) and represented approximately 48.5 % of total group production in 2007. Canada represented 19.5 % and Scotland 32 % of total production. With capacity for significant growth in all producing regions, particularly in Norway and Canada, the group estimates current production capacity at 77,000–80,000 tons and intends to exploit this capacity by 2010. In April 2008 the group acquired additional licenses and 3000 tons of production capacity in the UK.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
Grieg Seafood ASA
58
Chart 53: Grieg production in different regions
27 %
29 %
21%
No rway Ro galand
23 %
No rway Finnmark
Canada
Source: Landsbanki
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
UK
59
Landsbanki
Disclosures Disclosure checklist - Potential conflict of interests Stock Cermaq ASA Grieg Seafood ASA Lerøy Seafood Group ASA Marine Harvest Group ASA Nutreco SalMar ASA
ISIN
Disclosure (See Below) nothing to disclose nothing to disclose nothing to disclose nothing to disclose nothing to disclose nothing to disclose
NO0010365521 NL0000375400
Currency NOK NOK NOK NOK EUR NOK
Price 54.75 12.60 105.50 2.83 46.61 41.50
Source: Factset closing prices of $DatePrice$ Key: 1. Landsbanki Islands hf. (Landsbanki) or its affiliate(s)* hold or own or control 5% or more of the issued share capital of this company. 2. The company holds or owns or controls 5% or more of the issued share capital of Landsbanki or its affiliate(s)*. 3. Landsbanki or its affiliate(s)* are or may be regularly doing proprietary trading in equity securities of this company. 4. Landsbanki or its affiliate(s)* have been lead manager or co-lead manager in a public offering of the issuer’s financial instruments during the last twelve months. 5. Landsbanki or its affiliate(s)* are a market maker in the issuer’s financial instruments. 6. Landsbanki or its affiliate(s)* are a liquidity provider in relation to price stabilisation activities for the issuer to provide liquidity in such instruments. 7. Landsbanki or its affiliate(s)* act as a corporate broker or a sponsor or a sponsor specialist (in accordance with the local regulations) to this company. 8. Landsbanki or its affiliate(s)* and the issuer have agreed that Landsbanki or its affiliate(s)* will produce and disseminate investment research on the said issuer as a service to the issuer. 9. Landsbanki or its affiliate(s)* have received compensation from this company for the provision of investment banking or financial advisory services within the previous twelve months. 10. Landsbanki or its affiliate(s)* may expect to receive or intend to seek compensation for investment banking services from this company in the next three months. 11. The author of, or an individual who assisted in the preparation of, this report (or a member of his/her household), or a person who although not involved in the preparation of the report had or could reasonably be expected to have access to the substance of the report prior to its dissemination has a direct ownership position in securities issued by this company. 12. An employee of Landsbanki or its affiliate(s)* serves on the board of directors of this company. 13. As at the end of the month immediately preceding the date of publication of the research report Landsbanki Kepler Inc. or its affliates beneficially owned 1% or more of a class of common equity securities of the subject company. 14. Landsbanki Securities (UK) Limited acts as nominated adviser to the Company on the Alternative Investment Market in the UK. *: affiliates: Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited. We have [or have not] discussed this report with the company and the recommendation has not been [or has been] amended as a result of these discussions.
Rating ratio Landsbanki Kepler Q1 2008 Rating breakdown
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
Rating ratio Merrion Stockbrokers Limited Q1 2008 A
B
61.9% 10.8% 22.0% 5.3% 100.0%
0.0% 0.0% 0.0% 0.0% 0.0%
Source: Landsbanki Kepler A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
A
B
46.4% 53.6% 0.0% 0.0% 100.0%
0.0% 0.0% 0.0% 0.0% 0.0%
Source: Merrion Stockbrokers Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
Rating ratio Landsbanki Islands hf. Q1 2008 Rating breakdown
Rating breakdown
Rating ratio Landsbanki Securities (UK) Limited Q1 2008 A
B
75.0% 9.0% 13.0% 3.0% 100.0%
5.0% 19.0% 0.0% 76.0% 100.0%
Source: Landsbanki Islands hf. A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
Rating breakdown
Buy Hold Reduce Not Rated/Under Review/Accept Offer Total
A
B
57.7% 29.7% 9.3% 3.3% 100.0%
70.4% 24.0% 1.4% 4.2% 100.0%
Source: Landsbanki Securities (UK) Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied
From May 9th 2006, Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited and Landsbanki Islands hf.’s rating system consists of three recommendations: Buy, Hold and Reduce. For a Buy rating, the minimum expected upside is 10% in absolute terms over 12 months. For a Hold rating the expected upside is below 10% in absolute terms. A Reduce rating is applied when there is expected downside on the stock. Target prices are set on all stocks under coverage, based on a 12-month view. Equity ratings and valuations are issued in absolute terms, not relative to any given benchmark. Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited and Landsbanki Islands hf.’s strategy teams’ sector allocations rate each sector Overweight, Underweight or Neutral. Job titles: The functional job title of the person/s responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover Compensation: The research analyst (s) primarlily responsible for the preparation of the content of the research report attest that no part of the analyst’ (s’) compensation was, is or will be, directly or indirectly, related to the specific recommendations expressed by the research analyst’ (s’) in the research report. The research analyst’ (s’) compensation is, however, determined by the overall economic performance of the relevant Landsbanki affiliate and the Landsbanki Group. Analysts own views: The research analyst (s) primarlily responsible for the preparation of the content of the research report attest that the views expressed in the research report accurately reflect the analyst’ (s’) personal and current views about all of the subject securities or issuers. Stock prices: Prices are taken as of the previous day’s close (to the date of this report) on the home market unless otherwise stated.
Regulators Location
Landsbanki Kepler France Landsbanki Kepler España Landsbanki Kepler Germany Landsbanki Kepler Italia Landsbanki Kepler Nederland Landsbanki Kepler Switzerland Landsbanki Securities (UK) Merrion Stockbrokers Limited Landsbanki Helsinki Branch Landsbanki Norway Landsbanki Islands hf.
Regulator
Abbreviation
Autorité des Marchés Financiers Comision Nacional del Mercado de Valores Bundesanstalt für Finanzdienstleistungsaufsicht Commissione Nazionale per le Società e la Borsa Autoriteit Financiële Markten Swiss Federal Banking Commission The Financial Services Authority The Irish Financial Services Regulatory Authority The Finnish Financial Supervision Authority The Financial Supervisory of Norway The Financial Supervisory Authority
AMF CNMV BaFin CONSOB AFM SFBC FSA IFSRA FIN-FSA FSAN FME
Source: Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited and Landsbanki Islands hf. Landsbanki Kepler is authorised and regulated by both Banque de France and Autorité des Marchés Financiers. Landsbanki Securities (UK) Limited is authorised and regulated by the Financial Services Authority, and is entered in its Register under Firm Reference Number 186677. Landsbanki Securities (UK) Limited is also a member of the London Stock Exchange Plc. Merrion Stockbrokers Limited ('Merrion Landsbanki') is a member firm of the Irish Stock Exchange and the London Stock Exchange and is regulated by the Irish Financial Services Regulatory Authority.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
60
Landsbanki
Landsbanki Islands hf. is authorised by Fjármálaeftirlitið (The Financial Supervisory Authority, Iceland). Landsbanki Islands hf. is member firm of the OMX Nordic Exchange and the Oslo Børs. For further information relating to research recommendations and conflict of interest management please refer to www.landsbanki-kepler.com, www.landsbanki.co.uk, www.merrion-capital.com and www.landsbanki.is.
This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
61
Landsbanki
Legal information The information contained in this publication was obtained from various sources believed to be reliable, but has not been independently verified by Landsbanki or its affiliate(s)*. Landsbanki or its affiliate(s)* does not warrant the completeness or accuracy of such information and does not accept any liability with respect to the accuracy or completeness of such information, except to the extent required by applicable law. This publication is a brief summary and does not purport to contain all available information on the subjects covered. Further information may be available on request. This report may not be reproduced for further publication unless the source is quoted. This publication is for information purposes only and shall not be construed as an offer or solicitation for the subscription or purchase or sale of any securities, or as an invitation, inducement or intermediation for the sale, subscription or purchase of any securities, or for engaging in any other transaction. Any opinions, projections, forecasts or estimates in this report are those of the author only, who has acted with a high degree of expertise. They reflect only the current views of the author at the date of this report and are subject to change without notice. Landsbanki or its affiliate(s)* has no obligation to update, modify or amend this publication or to otherwise notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The analysis, opinions, projections, forecasts and estimates expressed in this report were in no way affected or influenced by the issuer. The author of this publication benefits financially from the overall success of Landsbanki or its affiliate(s)*. The investments referred to in this publication may not be suitable for all recipients. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and Landsbanki or its affiliate(s)* accepts no liability for any such loss or consequence. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Some of the investments mentioned in this publication may not be readily liquid investments. Consequently it may be difficult to sell or realize such investments. The past is not necessarily a guide to future performance of an investment. The value of investments and the income derived from them may fall as well as rise and investors may not get back the amount invested. Some investments discussed in this publication may have a high level of volatility. High volatility investments may experience sudden and large falls in their value which may cause losses. International investing includes risks related to political and economic uncertainties of foreign countries, as well as currency risk. To the extent permitted by applicable law, no liability whatsoever is accepted for any direct or consequential loss, damages, costs or prejudices whatsoever arising from the use of this publication or its contents. The Landsbanki Group of Companies have written procedures designed to identify and manage potential conflicts of interest that arise in connection with its research business. The Group’s research analysts and other staff involved in issuing and disseminating research reports operate independently of the Group’s Investment Banking business. Chinese Wall procedures are in place between the research analysts and staff involved in securities trading for the account of Landsbanki Group companies or clients to ensure that price sensitive information is handled according to applicable laws and regulations. *: affiliates: Landsbanki Kepler, Landsbanki Securities (UK) Limited, Merrion Stockbrokers Limited. United Kingdom: This document is for persons who are Eligible Counterparties or Professional Clients only and is exempt from the general restriction in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the United Kingdom only to persons of a kind described in Articles 19(5) (Investment professionals) and 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. Any investment to which this document relates is available only to such persons, and other classes of person should not rely on this document. 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Nothing herein excludes or restricts any duty or liability to a customer that LKI has under applicable law. Investment products provided by or through LKI are not FDIC insured, may lose value and are not guaranteed by the entity that published the research as disclosed on the front page or LKI. Investing in non-U.S. Securities may entail certain risks. The securities of non-U.S. issuers may not be registered with or subject to SEC reporting and other requirements. The information available about non-U.S. companies may be limited, and non-U.S. companies are generally not subject to the same uniform auditing and reporting standards as U.S. companies. Securities of some non-U.S. companies may not be as liquid as securities of comparable U.S. companies. Analysts employed by non-U.S. broker-dealers are not required to take the FINRA analyst exam. France: This publication is issued and distributed in accordance with art. L 544-1 and seq of the Code Monétaire et Financier and with the articles 321-122 to 321-138 of the General Regulations of the Autorité des Marchés Financiers (AMF). Italy: Information is for institutional clients only as defined by art. 31 of CONSOB reg. 11522/98. Reports on companies listed on the Italian exchange are approved and distributed to over 500 clients in accordance with art. 69 of CONSOB Regulation 11971/1999 for enforcement of the Consolidation Act on financial brokerage (legislative decree 24/2/1998). According to this article Landsbanki Kepler, branch of Milano warns on potential specific interests in securities mentioned. Equities discussed are covered on a continuous basis with regular reports at results release. Reports are released on date shown on cover and distributed via print and e-mail. Landsbanki Kepler, branch of Milano analysts are not affiliated with any professional groups or organizations. All estimates are by Landsbanki Kepler unless otherwise stated. Spain: Reports on Spanish companies are issued and distributed by Landsbanki Kepler, branch of Madrid, registered in Spain by the Comisión Nacional del Mercado de Valores (CNMV) in the foreign investments firms registry (member of the Madrid exchange). Reports and any supplemental documentation or information have not been filled with the CNMV. Neither verification nor authorization or compliance revision by the CNMV regarding this document and related documentation or information has been made. Switzerland: This publication is intended to be distributed to professional investors in circumstances such that there is no public offer. This publication does not constitute a prospectus within the meaning of Articles 652a and 1156 of the Swiss Code of Obligations. Norway: This publication is issued and distributed in accordance with section 3-10 of the Norwegian Securities Trading Act of 29 June 2007 and applicable regulations. 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This report is subject to important disclosures and disclaimers which can be found at the end of this report and which form an integral part of it.
Landsbanki
About Landsbanki With solid foundations and more than 120 years of history as the main provider of financial services for individuals and corporations in Iceland, Landsbanki now operates in all Europe´s leading centres. Our focus is on providing quality service to medium-sized international companies. We offer corporate advisory services, debt facilities as well as brokerage and investment advice to a broad base of international institutional investors in the UK and Continental Europe. Our research department is among the most comprehensive in Europe, including some 100 analysts covering 800 European stocks locally. Landsbanki also provides wealth management and private banking services, as well as offering UK savers a consistently competitive rate on its Icesave online deposit account. Our unique combination of short communication channels, continental reach and a proactive approach to business that fosters entrepreneurial leadership, provides Landsbanki with the means to meet the needs of its clients – and help them succeed.
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