Sparebank1 upgrades salmon stocks: “Classical overreaction. Upgrade sector to Buy”

Aslak Berge

Sector now looks attractive again from a risk-reward perspective.

“This is buying opportunity in our view,” according to Sparebank 1 Markets’ salmon analyst, Tore A. Tonseth.

“Price development in EU has been much weaker than we expected this autumn, but since we downgraded our sector view 18. August, the salmon sector has fallen 13.7% relative to Stoxx 600 and as much a s 16.2% relative to OSEBX. This is a classical overreaction in our view as the market puts too much focus on short term factors that will gradually be solved going into 2020,” Tonseth wrote in a financial bulletin on Monday.

Four factors
The weaker than expected prices this autumn have been a result of several factors working in the wrong direction explained the analyst. “We have written about this before, but there are primarily four factors affecting the price development negatively. 1.) Impressive production growth in Norway. 11-13% higher net growth YoY in July and August. 2.) Supply from UK and Faroe Islands significantly up. EU supply ex. Norway up ~20% in the third quarter. Combination of 1 + 2 leads to double digit consumption growth in EU in Sept and Aug. 3.) It takes some time to trigger demand.

“We have previously measured this to be 2-3 months. Retail prices in France are still relatively stable 4.) Different buying pattern. Due to the low forward prices for the fourth quarter, there has been less incentives to build inventory early this year. Price have to fall well below NOK 50s, before it becomes attractive to buy”.

Chart: Sparebanks1

Tonseth added that with more supply this autumn, the bank has adjusted its estimates slightly down, but due to the large share price drop, it has upgraded its sector view to Buy (Neutral), as it believes “the sector now looks attractive again from a risk-reward perspective”.

With the exception of Bakkafrost, all of Sparebank 1 Markets’ salmon farmers now have a Buy recommendation, including SalMar Buy/NOK 450 (Neutral/NOK 460) and Mowi Buy/235 (Neutral/NOK 240).

Not here for long
He believes the fall in prices is a transient phenomenon: “So, looking at the factors behind the spot price fall this autumn, majority of them are temporarily of nature. We do not expect supply in EU to be this high in 2020 and the weak spot prices will gradually trigger and build demand for more salmon. We have lifted our supply forecast in Norway to 5.8% this year (+0.8%p), but with stable 2020 forecast (in abs. terms), expected growth in 2020 is now seen at 4.5%, down 1.0%p. With Chile expected to grow only 2% (unchanged) next year, global growth is now seen at 4.5% (-0.5%p) compared to 6.9% this year,” wrote Tonseth.

At the same time, as Tonseth backed up the recommendations for salmon farmer shares, lowering both salmon prices and earnings estimates.

“Supply growth this autumn has been stronger than we forecasted, and we have cut our 2019 price forecast to NOK 56.5/kg (58.0). This is the price for the farmers, so it equals around NOK 58/kg in Nasdaq FY equivalent, close to current forward.

“We are still bullish for 2020 and expect NOK 60.0/kg. This is NOK 1.5/kg down from our previous forecast, as we believe there will be some inventory build-up having a negative impact on 2020, but it is still well above current expectations in the market, which is probably around NOK 57-58/kg at the moment.

“Our EBIT estimates for 2019-2020 are down 3-5% for majority of the farmers. This is just minor correction relative to the massive share price drop we have seen over the past few weeks. This is buying opportunity in our view”.


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