ABG Sundal Collier: “We are confident that the industry is less cyclical than it has been”

Andreas Witzøe

Analyst Vidar Strat, from the investment bank ABG Sundal Collier, believes it is unlikely that the industry can effectively kill the market with more growth in the short term.

“The supply growth seems to have stabilized at a reasonable low level, relative to history. This means that we are more confident that the price wont get very bad in 2019. And we are more confident that this is an industry that is less cyclical than it has been,” said Strat to SalmonBusiness when we met him at ABG Sundal Collier’s premises in Vika, Oslo.

But it’s hard to say whether that’s a 100 prosent correct, Strat adds.

“We know that because of the environmental impact, based on regulations in Norway and Chile, it’s not easy to grow over five percent somewhere. But then, paradigm changes are hard to predict,” said Strat.

He draws up potential success in land-based and offshore facilities as an example of such changes.

“Much of the perception that the industry is cyclical or not will pend upon whether these are working or not. And then on how easy it is to recreate projects elsewhere in the world,” said Strat.

Estimates much lower than its competitors
ABG Sundal Collier has a price estimate of salmon for 2019 of NOK 58.50 (EUR 5.9) per kg. It is significantly lower than both Pareto Securities and Handelsbanken Capital Markets, both of which believe in record prices in 2019.

“I’m not ashamed of it. The rule of thumb in the price estimation is that if you have a supply growth of less than eight percent, the price will rise year after year, but it’s not always the case,” Strat said.

He believes the market overestimates how much price increases can be obtained on salmon. Especially because 2018 has been a year with periods of extremely unstabilty and at times, extremely high prices.

“If you make an estimate for 2019 compared to a fantastic 2018. You assume offer growth of 3-4 percent, because og that you say that the price will be a lot higher. But it turns out, that all the times that have been done from such a high price level, it´s been wrong, and that is why we are at a lower price level,” said Strat.

Salmon may not be so expensive anyway
He said that they have noticed an increased interest from investors who are not Norwegian.

“Foreigners put the salmon sector in a slightly different perspective than the Norwegians do. In Norway, we look back and look at this as a sector that is cyclical. The average multiple in the sector have been around 11-12 times P/E. Now, on our numbers, Marine Harvest is at about 13 times, so it’s by definition expensive for Norwegians,” explained Strat.

He further explains that if you look at salmon compared to other shares in Global Consumers Staples (the market that includes products most people need to live), the conclusion on whether it is expensive or not, is another.

“In the group Global Consumers Staples the P/E multiples are around 17. That means, if you look at salmon in a slightly larger perspective, the multiple expansion we have seen in the last year probably is a results from salmon not really being expensive when you look at it in a slightly larger perspective,” said Strat.

Do not exclude bids on Marine Harvest
And it is not only smaller investors who look at the salmon sector, according to Strat. He says there are many big investors out there who look to the industry and want exposure to it. Norway, as the global volume leader, is a natural place to look for exposure.

“I think soon we can see a bid for Marine Harvest from, for example, an Asian conglomerate or a rich American. $ 11.5 billion (the value of Marine Harvest’s equity) is not that much money in an international context,” said Strat.

However, if the owners want to sell is another story.

“We have seen that the conglomerates look after investments in the salmon industry. Though, they might belive Marine Harvest is too big, or another problem might be that no one wants to sell,” concluded Strat.


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