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Winners in the dining boom

Winners in the dining boom

By Tony Featherstone 04.12.2017


Stories about the so-called “dining boom” mostly focus on Australia’s potential to export more fruit, vegetables and meat to Asia. Exporting seafood to emerging markets gets less attention from stockmarket investors, even though fish is a key part of Asian diets. 

Unlike most developed countries, Australia exports a large proportion of its seafood. Asia consumes about 70 per cent of our seafood, such as tuna, abalone, rock lobster and other high-value products. We import canned tuna, frozen fillets and other lower-value seafood.

Production of Australian seafood has been stable over two decades. Within that, a sharp increase in aquaculture production is offsetting a decline in fish netted in wild capture. Aquaculture refers to fish bred and reared for farming.

It’s no surprise that more aquaculture stocks are emerging in Australia. The coming middle-class boom in Asia will boost demand for Australian produce as diets are upgraded. Another 2 billion Asians are expected to join the middle class by 2030, on OECD forecasts.

ASX has a handful of aquaculture stocks: Tassal Group is the largest, followed by Huon Aquaculture Group, New Zealand King Salmon Investments, Ocean Grown Abalone and Murray Cod Australia. Recent float Ocean Grown Abalone has interesting prospects. 

Clean Seas Seafood (in tuna) and Seafarms Group (prawns) are others.  

Aquaculture has had its share of controversy. Critics argue that aquafarms are bad for the environment because some discharge waste, pesticides and other chemicals into ecologically fragile waters. The ABC’s Four Corners did an expose on salmon farming last year.

Some ethical funds have divested their aquaculture stocks and exclude the sector from their investable universe. Australian Ethical Investments divested Tassal earlier this year because of concerns about the sustainability of farmed salmon feed supply.

Australian Ethical also noted that aquaculture can reduce over-fishing and help move towards more sustainable seafood production by substituting feedstock with plant-based protein. 

Aquaculture has long-term growth potential, provided it can lift its collective sustainability performance. The world will need millions of extra tonnes of seafood to feed an extra 2.4 billion people by 2050 and aquaculture must be part of that mix.

ASX-listed aquaculture stocks have been improving performance. Huon has delivered a one-year total return (including dividends) of 28 per cent, after a tough few years. Tassal’s return over that period is 10 per cent and over five years it has returned an annualised 28 per cent.

My preference has been New Zealand King Salmon Investments. I wrote favourably on the salmon producer for The Bull in February 2017 at $1.30. The stock is now $2.

NZ King Salmon, due for price consolidation after stellar gains this year, has solid long-term prospects. The company upgraded its earnings guidance in the latest full-year results. 

Ocean Grown Abalone has caught my eye. The ASX newcomer sought $10 million through a float and listed on ASX this month. Its 25-cent issued shares fell to 22 cents.

The company owns and operates an abalone “sea ranching” operation in Western Australia. Ocean Grown buys juvenile abalone and places them on purpose-built abalone ranches (termed “abitats”). 

Ocean Grown says it has developed a unique process to farm abalone with a minimal environmental impact or need for feed or power inputs. This is potentially valuable intellectual property and a marketing asset to promote environmentally friendly farmed abalone.

Ocean Grown is targetting the quick-frozen meat market in Hong Kong and had its first export sales from its production facility in Augusta, WA, in September 2016. The company plans to construct an abalone production facility, two new sea-ranching farms in WA and possibly another at Port Lincoln in South Australia.

Ocean Grown, at an early stage and still loss-making, suits experienced investors comfortable with micro-cap stocks with limited history as a listed entity. 

Aquaculture stocks can be volatile, regulatory risk is higher and Ocean Grown’s revenue depends heavily on the price of greenlip abalone. Growing aquaculture competition from Asia is another risk, as is construction/partnering risk as Ocean Grown Abalone expands its production capability through the development of several new sea ranches.

Risks aside, abalone is a highly sought delicacy in Asia. Demand for it should rise as middle-class consumption in Asia expands and more people there seek better-quality seafood. Hong Kong imported about $74 million worth of Australian abalone in FY15. Japan, China, Singapore and Vietnam import much less abalone, suggesting potential to grow these markets. 

The industry has some barriers to entry given the long lead times in seeding and harvesting abalone, challenges in finding and funding suitable sea-ranching sites, and regulatory barriers. It takes about seven years from site identification to harvesting an abalone crop.

Ocean Grown needs to show the market it can lift revenue from its maiden abalone ranch through export sales to Hong Kong and progress construction of other ranches on time and on budget. If it does, Ocean Grown will be worth more in the next few years.

Chart 1: Ocean Grown Abalone
Source: The Bull



• Tony Featherstone is a former managing editor of the BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at Nov 28, 2017.



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