Did the pandemic kill the salmon farm hype?
Maybe some of you saw the pretty harsh decline of salmon farm stock prices during the pandemic, one could think that the pandemic killed the trend but did it?
First of all let’s check the fundamentals: According to the WWF (https://www.worldwildlife.org/industries/farmed-salmon) salmon aquaculture is the fastest growing food production system in the world while the development of the global average fish consumption is growing steadily. Mainly developing countries catching up with the consumption levels of North America and Europe. By 2027, per capita fish consumption is estimated to be 21.3 kg (vs. 9.9kg in the 1960s and 20.8kg in 2018) as reported by MOWI (https://ml.globenewswire.com/Resource/Download/1766f220-c83b-499a-a46e-3941577e038b).
Salmon has a 4.4% share of the global seafood supply, and the wild supply is decreasing since 2009 while farmed salmon is growing strong.
In addition to that the main macro trends positively influencing the farmed salmon demand are climate change and more nutritionally conscious eating habits in developed countries (move from meat to fish), overfishing and a growing middle class in developing countries.
So long-term trends are looking great but why is COVID-19 impacting the spot price that much then?
As a lot or restaurants and hotels closed during Q1/Q2 and some still didn’t reopen, demand dropped significantly and shifted to retail clients. China banning salmon imports claiming it to be responsible for transmitting the virus didn’t help the situation: https://www.scmp.com/economy/china-economy/article/3089404/coronavirus-chinas-freeze-imported-salmon-stirs-concern-about
Now the spot prices are down around 10% and slowly recovering: http://www.fao.org/in-action/globefish/market-reports/resource-detail/en/c/1296665/ The lower prices may have a positive medium/long-term effect caused by new retail consumer habits.
So let’s have a look at the salmon price per kg in Euro over the last 10 years (source: https://fishpool.eu/price-information/spot-prices/history/) to get a feeling for the existing trend:
- 2019 - 6,01
- 2018 - 6,33
- 2017 - 6,54
- 2016 - 6,8
- 2015 - 4,7
- 2014 - 4,82
- 2013 - 4,82
- 2012 - 3,56
- 2011 - 4,10
- 2010 - 4,66
We see an increase over 22% over the last 10 years, a price increase of 2.26% y-o-y.
What if we assume a price per kg of 6,63 € in 2025, a continuation of the previous growth rate and look at the Q2 reports of Grieg Seafood, a Norwegian salmon producer?
Grieg reached a EBIT/kg of 0,90 € over the last 5 quarters at a cost of 4,11€/kg. Although the harvesting targets were cut from 100 000 to 95 000 tonnes, the vision of 150 000 tonnes in 2025 is still valid.
If the costs increase a bit to 4,16€/kg (completely ignoring cost reducing scale effects), we end up with a profit of 2,47€/kg, resulting in a very conservatively calculated EPS of 2€ (including a 40% cost buffer for taxes etc.). Keeping in mind a price/earnings ratio of 10 is a fair valuation for this industry we are looking at a price target of 20 € per share.
What does that mean for you?
122% in 5 years / 24,4% y-o-y / + an additional dividend of 0.38 € per share (3-4%)
No financial advise, but as everybody knows if there’s blood on the streets…you know the story! The author owns Grieg Seafood shares.