Cell Aquaculture: Commercial Harvesting to Pave Way for Profits

May 19, 2011 10:28

Cell Aquaculture Limited (CAQ) is an Australian based aquaculture company focused on breeding, growing, fabricating and marketing fish products. The company functions under a unique „Hatch to Dispatch‟ business model encompassing the entire value chain of the aquaculture industry, reports www.megafishnet.com with reference to Cell Aquaculture.

Currently focused on the Australian barramundi species, the company aims to extend its activities to other species. With projects at the development or planned stages in different geographies such as Thailand, Malaysia, Singapore and South Africa, the risk profile is attractive. Its hatchery operations are located in Australia‟s James Cook University. The company prides itself on having a proven and superior hatchery technology and re-circulating grow-out facility, which was even hailed by EU officials as a model modern aquaculture production farm. The company will begin commercial harvesting from its Thailand facility in June 2011 with an initial capacity of 150 tons and eventually reaching 1,000 tons. At full capacity, we expect EBITDA and net profit margins of ~50% and ~35% respectively from this facility as the output will be shipped for value-added processing in Australia, thus enabling higher prices. Hence, at full capacity, expected by FY13, the Thailand facility will contribute strongly to free cash flows. The second facility, in South Africa, is expected to be developed via a JV in KwaZulu Natal and would have a higher capacity at 2,000 tons. CAQ‟s stake in the JV is 40% and the output would initially be sold locally as whole fishes. Hence, EBITDA and net profit margins for this facility are expected to be slightly lower at ~44% and ~31%, respectively. Nonetheless, it would be free cash flow positive as the terms of this JV are very lucrative with limited initial cash outflow from CAQ. At the current share price of A$0.083, we find CAQ to be an attractive investment opportunity with strong upside and limited downside risk. As such, we initiate coverage with a target price of A$0.25/share. The company used a discounted cash flow model to value the expected cash flows from the Thailand and South Africa facilities.

Investment Arguments

Aquaculture Growing Strongly: Fish supply from traditional fishing is dwindling, putting significant pressure on traditional fisheries. About 30% of marine captured fisheries are fully exploited while per capita consumption is increasing incessantly. While traditional fisheries contracted 0.5% annually in 2004-2009, aquaculture grew by 5.6% p.a. The macro-economic factors definitely favor the aquaculture industry with growth intensifying even further as aquaculture gradually replaces traditional fishing

Superior Technology: CAQ‟ hatchery technology and grow-out facilities are superior to other such systems in the industry. The hatchery facility located in Australia has increased efficiency five-fold over the last five years, and tests are underway for its use in other species. In addition, its re-circulating grow-out system used in Thailand has proven to produce the highest quality fishes while lowering mortality rates

Commercial Harvesting Imminent: Its facility in Thailand will begin commercial harvesting as early as June 2011. At full capacity of 1,000 tons p.a., it is expected to contribute ~A$17.5 million to annual revenues and A$8.75 million to annual net profit. The second facility in South Africa is also in advanced stages and will contribute over A$2.2 million to annual net profit upon completion. At the current market capitalization of A$17.06 million, CAQ appears considerably undervalued.

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