Eco Investor November 2016

Initial Public Offerings

New Zealand Aquaculture Listing on ASX

The listed aquaculture sector has another player with New Zealand King Salmon Investments Ltd listing on the NZX and ASX on 18 October in a tightly held IPO backed by private equity.

The float has been successful with the shares issued at NZ$1.12 and opening on the ASX at $1.15. They have since traded between $1.15 and $1.02.

New Zealand King Salmon is a welcome addition for environmental investors as it broadens the coterie of listed fish farmers and adds momentum to the important trend towards sustainable food production.

King salmon is a Pacific salmon that comprises about 0.7 per cent of the world's total aquacultured salmon production and wild catch. New Zealand King Salmon has been established for over 30 years and is the world's largest farmer of king salmon with over 50 per cent of its global aquaculture production.

The company's brands are Ora King, Regal, and Southern Ocean, and also New Zealand King Salmon. Ora King is the premium brand. The strategy is to increase sales under the three key brands rather than under the New Zealand King Salmon label.



The company has eight fish farming sites in the Marlborough Sounds at the northern end of NZ's South Island. It also has three hatcheries, and a processing facility at Nelson. Annual production is over 6,000 tonnes. It says it controls the entire value chain from breeding and growing to harvesting and processing.

Its products are whole fresh fish, fillets and portions, and cold smoked and wood roasted products.

New Zealand King Salmon is well established in New Zealand and also sells to Australia, North America, Asia and Europe. Offshore sales by volume are about 40 per cent of production and the aim is to increase this to 55 per cent by 2020-21. The increased volume will come from greater production at its new seafarms. It recently won consents to operate three additional seafarms in the Marlborough Sounds, and by 2020-21 the total harvest is expected to be 9,300 tonnes. Opportunities for new and improved water spaces at other locations are being investigated.

The company said feed is its largest cost - about one third of its revenue - and the prices for the raw materials to make feed including fish meal and fish oil are a key driver of its profitability. It undertakes research to improve the diet and manages feed costs by using multiple manufacturers and foreign exchange hedges.

It is also looking at improved automation of its operations.

Post IPO, the company has 138,157,843 shares on issue and a market capitalization of $142 million. 69,228,085 shares were offered in the IPO but most were sell down shares and 26,785,715 new shares were issued.

The purpose of the IPO was to raise capital to repay debt and fund investment and working capital. It also enabled private equity group Direct Capital to realize its investment and sell up to 40,201,237 shares. Its remaining shares are held by a custodian on behalf of investors including New Zealand King Salmon directors John Ryder and Mark Hutton. Direct Capital first invested in the company in 2008.

Another investor, Oregon Group, sold a parcel of shares and was also diluted by the IPO, to around 40 per cent. Oregon Group is an investment holding company of the Tiong family in Malaysia and first invested in New Zealand King Salmon in 1996.

Through the institutional offer, China Resources Ng Fung received 10 per cent of the company's shares. China Resources Ng Fung is a large food business owned by China Resources Enterprise, Limited.

New Zealand King Salmon's post IPO financials look sound. It has net assets of NZ$132 million, cash of NZ$12 million, and debt is low at NZ$10 million. 2015-6 revenue was NZ$114 million and its net profit was NZ$2.6 million, down from NZ$6.3 in 2014-15.

Its dividend policy is a payout ratio of 50 per cent of pro forma operating net profit after tax for FY2017 and FY2018. It expects the dividends to be fully imputed, and to pay them in equal instalments in March and September.

According to the Product Disclosure Document, the total dividend for 2016-17 is forecast to be NZ$5 million at NZ 3.62 cents per share, with the first payment in March 2017. Until that dividend is declared, Eco Investor will classify New Zealand King Salmon as a pre-dividend security.

On the environmental front, chairman John Ryder said "The planet's resources need careful management, at the same time as the world's growing population is crying out for increased nutritious food production. Farmed salmon in particular represents an efficient and sustainable way of meeting those needs. The New Zealand King Salmon IPO has provided us with a strong platform for investing in aquaculture growth, something the New Zealand government strongly supports with a goal of increasing revenue from the aquaculture industry to more than NZ$1 billion by 2025."

He says the New Zealand salmon farming industry is recognized as a global leader in sustainable seafood with New Zealand's ‘Best Choice' accreditation in 2015 and in the Monterey Bay Aquarium's consumer guide Seafood Watch.

He also says that farmed salmon are an efficient form of protein production relative to other animal proteins. The feed conversion ratio (FCR) measures the efficiency of different protein production methods based on the kilograms of feed needed to increase the animal's bodyweight by one kilogram. New Zealand King Salmon has had an FCR over the last five years of 1.7 times, which outperforms alternatives such as pork, sheep and beef.

Interestingly, king salmon has a less efficient FCR than Atlantic salmon due in part to its higher fat content.

King salmon's feed has evolved. In 1990, fish meal and fish oil were 83 per cent of the global salmon aquaculture feed, but New Zealand King Salmon's feed currently comprises just 31 per cent of these, with the remainder now substituted by vegetable and land animal by-products.

The company says it is firmly committed to sustainability and managing its resources for the long term. "Quality and sustainability are achieved through managing several key factors: maintaining a clean rearing environment; ensuring healthy salmon using proactive aquaculture management; sourcing sustainable and nutritious feed ingredients; and practicing careful and humane harvesting methods."

The company together with the Marlborough District Council, the NZ Ministry for Primary Industries and other stakeholders and experts have developed the Best Practice Guidelines for salmon farming in the Marlborough Sounds. (ASX: NZK)

 

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