Oman Fisheries Co. SAOG

Transcription

1 Oman Fisheries Co. SAOG Purpose of Report Equity coverage initiation Recommendation Hold MSM Ticker: OFCI Last Closing Price: RO Fair Value: RO Wk High-Low: RO RO Market Cap (RO mn) Dividend Yield (%) N/A Source: OABInvest & Bloomberg Source: MSM Website August 28, 2013 Investment Thesis We initiate coverage on Oman Fisheries Co. SAOG with a target price of RO at the end of next twelve months, a premium of 9% to the last closing price of RO 0.107, implying a P/B(x) multiple of We initiate coverage on the stock with HOLD rating. Strengths Oldest Fisheries Company in the Sultanate of Oman with a well-known brand-name all over the world. Government owns 24% of the Company through Ministry of Agriculture & Fisheries, hence giving the company an advantage of first-hand access to statistical and quality requirement information. Has been actively pursuing backward integration since 2006 in order to procure fish directly from the fishermen rather than having an intermediary in between, hence reducing costs. Concentrating on having own boats in the sea, in order to further reduce costs. Strong presence in the far-east as a supplier. Initiative to expand number of fish processing units. There are currently two new factories which are expected to come into operation by September, in Salalah and Shoqra. Two new factories have been planned in Duqm and Barka with processing capacity of 35Ton per day, and a dry warehouse has also been planned in Barka, which is expected to become operational within the next two years. Currently the company has one fish-processing unit in Buraimi. Initiative for Corporate Social Responsibility called the Blue Ocean Initiative, whereby the company is purchasing produce from local fishermen, has been providing a source of income to them, and at the same time the company is extending interest-free loans for purchasing boats to local fishermen in order to attract more people into the fishing business. Weaknesses The fishing business is a risky business; hence any quality issue or failure to deliver as per the customer s quality standards is a major weakness in the business model. Fish is procured before arrangement to sell has been made, hence introducing an inventory carrying cost, and subsequent sale price risk. Opportunities The company has started to explore possibility of forward integration, whereby it could enter the fish trading activity, for either re-exporting or selling its own produce. Currently, Oman has planned a fishing hub in its Special Economic Zone of Duqm, and the company forsees an opportunity to enter trading activity in that area. Fish farming is beginning to get approval in the country. The company has planned to go ahead with RO 3 Million investment in black tiger shrimps farming project. The company has got initial approval from government. The company is looking forward to having a strategic partnership for the said project. Oman has huge untapped supply of fish, which is not being exploited due to lack of resources, the major one being eager fishermen. There are some demographic issues like fishermen from one district of Oman cannot fish in another district for their own reasons of accustomedness, and hence in the areas where there is more supply available, there are fewer fishermen working there. Threats Fish-farming is a threat as long as the company does not enter this line of business. Threat of fish contamination, poor quality fish etc is inherent in the nature of the business. Threat of new entrants, even though not impending, but is ever-present. Changes in customer quality standards. Procurement of the company is purely depend on wild catch which is by nature prone to the influence of various parameters like landing patterns, fish migration pattern, etc. Due to the increased competition and more lucrative jobs offered by other sectors the company is facing difficulty in getting required number of Omani nationals (35%) for fishing and fish processing jobs. Ayisha Zia Research Analyst a.zia@oabinvest.com

2 Industry Background Fisheries activities in the Sultanate of Oman can currently be classed as (a) traditional (artisanal), (b) coastal (c) industrial and (d) government-sponsored projects (aquaculture etc). According to Fisheries Statistics Book 2012, published by the Ministry of Agriculture & Fisheries, there are 42,553 fishermen utilizing 19,245 Fiber Glass boats and 698 Launch or dhow boats in the traditional or artisanal fishing sector, landing 188,817 tons of fish in 2012, which is 98.4% of the total landed tonnage of 191,728 in 2012.The coastal fishery landed tonnage was 1,450 tons, and industrial fishery landed 1,292 tons of fish, and finally Aquaculture yielded 168 tons of fish in There are no inland fisheries of commercial significance in Oman Fish Landed Value, Quantity, and Trend of Revenue Per Tonne, ( ) Quantity Landed, Tonnes Total Fish Landed (RO'000) Revenue Per Ton, (RO'000) Source: OABInvest, Ministry of Agri & Fisheries Fisheries Statistics Year Book, 2012 Over the last ten years, the industry has made significant progress. Production from the artisanal sector has been improved through government subsidy programs provided by the Fishermen Encouragement Fund, which provides subsidies are provided for fishermen to buy modern fishing boats, fishing gear and equipment, including depth finders, fish finders, communication systems, winches, longlines, traps, fish handling gear and fish preservation boxes. Development of the industry has been supported through the government-constructed ports, roads, radio communication network, and workshops, in addition to ice plants and other necessary facilities established throughout Oman. The fishing sector is considered second in importance in the Omani economy. Although Fishing and Agriculture s total contribution to GDP is just 1.1 percent 1, fisheries are considered as one of the main natural resources of the country and one of the important economic sectors, as it is estimated that more than one fifth of Oman s population depends on fisheries as a source of living. Fish is considered a major and growing food item. As the fisheries resources are renewable, they are capable of much greater exploitation to meet both local and export market demand. Not 1 National Centre of Statistics, July 2013, Statistical Bulletin Page 2 of 11

3 least, the fisheries sector is expected to absorb a greater proportion of the national workforce in future Value of Fish Landed and Exported, ( ) Total Fish Landed (RO'000) Total Fish Exported, (RO'000) Source: OABInvest, Ministry of Agri & Fisheries Fisheries Statistics Year Book, 2012 The largest share of fish export of Oman went to the UAE at 56,655 tons in 2012, followed by Saudi Arabia at 23,655 tons. Exports made to other countries amounted to less than 500 tons. If overall trend is observed, then export of fish to the above-mentioned countries has grown consistently over the last ten years. 50% Growth in Revenue Per Ton 40% Growth Rate, % 30% 20% 10% 0% Growth in Revenue Per Ton -10% % -30% Source: OABInvest, Ministry of Agri & Fisheries Fisheries Statistics Year Book, 2012 Page 3 of 11

4 As can be observed from the chart above, the revenue per ton which is realized by the country has fluctuated in the last ten years. Since global fish market prices determine the price that is realized for the country s catch, hence the country is prone to outside factors governing its revenue stream. Company Background Oman Fisheries Co. SAOG was formed by royal Decree no. 87/79 issued by His Majesty Sultan Qaboos bin Said by which Oman National Fisheries was merged with Oman Fisheries Co. Oman Fisheries Co. SAOG started its operation from 2nd April The paid up capital of the Oman Fisheries Co. SAOG is RO 12,500,000 consisting of 125,000,000 shares of RO each. The company has family of more than 15,000 shareholders and Government of Oman holds 24% stake through the Ministry of Agriculture & Fisheries. Subsidiary Name 1. Oman Fisheries Co. FZE Area 2. Al Ameen Stores & Refrigeration LLC Ownership Stake Activity UAE 100% Procurement and sale of fish and fish products Oman 100% Storage of fish, meat, chicken, vegetables & fruits Carrying Book Value, RO 16, ,000 Core Business There are five different types of products that the company has Demersal & Pelagic, Tuna, Cephalopods, Crustaceans, Fresh fish, Breaded & Battered Seafood. The company exports most of its procured fish, and local sales were only 10.9% of the total sales at 3,910 tons in Sales by Geographical Region, Europe Africa & 2% Others 23% GCC & Middle East 23% Far East 52% The core activities of the company are grouped into: 1. Fishing As per the concession agreement signed with the Government, the company has been allotted fishing quota of 20,000 Mt of bottom fishing and 30,000 Mt of large pelagic. However the company during the past periods could not exploit such quotas in the optimal use for one or another reason. With effect from June 2011, trawling has been banned in Oman. To overcome Page 4 of 11

5 the aforementioned, the company had submitted its five-year plan to Ministry of Fisheries to own and operate a fleet of fishing vessels and coastal fisheries, which will enable the exploitation of quota granted to the company to catch both demersal and pelagic fish. The Ministry has already approved first two phases of coastal fishing boats of 24 licenses. The company bought 9 vessels in this financial year and these have started operating from the end of third quarter. This coastal fishing will help the company in securing raw material for its processing plant and make fish available for local consumption. 2. Fish Procurement from Local fishermen The premiere slogan of the company s business growth plan is Procurement is the Name of Game and therefore it used its Blue Ocean Strategy as tool towards achieving this objective. The result of the successful implementation of the Blue Ocean Strategy is the continuous increase in purchases from local fishermen and the achievement of Procurement Strategy of 20% growth successfully for the past 3 years, since the inception of the business plan. Some quality concerns in the products this year has resulted in emphasis of quality from the procurement level itself. 3. Value Added Products The sale of breaded products in FY has decreased by 16% from RO 770,681 in to RO 645,288 in However, the company has got a positive response in the fairs it has participated and is looking forward to foraying into other Value Added Products in the market. The company continued its participation in the International Sea Food fair such as Brussels and Boston which are considered to be the largest gathering of manufacturers and producers of fish and seafood in the world. 4. Sale of Fish and Fish Products The sales quantity continued showing an encouraging growth of 41% from 24,015 Mt in to 33,795 Mt in , but a proportionate sales value was not realized owing to international price competition and some quality concerns in particular segment of its products. However, the increased quantity clearly indicates the capability to achieve more volumes, and with quality being given due importance as part of the business plan this year, the company should positively return to its run of continuous growth. 5. Storage and Logistics During , the company had set up new subsidiary company namely Al Ameen Stores and Refrigeration LLC. This Company is mainly involved in 3rd Party Logistic (3PL) service with a Warehouse capacity of 6,000 metric tons of storing frozen and chilled food products like fish, fish products, chicken, meat, vegetables and fruits. It achieved an operating profit of RO 106,462 in its first year of operations, mainly owing to its business from the parent company and going ahead is expecting to increase its business outside through other auxiliary services like transportation, etc. This year the company has invested in additional processing plant facilities at Salalah and Shoqra to increase their capacities, and has also purchased a few additional boats. A Glance at Performance The company made a net operating loss of RO 223,000 because of problem with its supply of cuttlefish, which is the company s largest source of income, due to soaking by some fishermen or suppliers. Hence, the company had to sell the large inventory at a reasonable discount, hence translating into a poor bottom-line performance. Page 5 of 11

6 40,000 Revenue, Quantity Purchased, Revenue per Ton, and Operating Profit/(Loss), , RO'000 30,000 25,000 20,000 15,000 10, RO'000 Revenues Fish Purchase, Qty Tons Revenue Per tonne 5,000 0 FY 2010 FY 2011 FY 2012 FY Operating profit/ (loss) Competition There are currently two public listed Fisheries in the Sultanate of Oman, including Oman Fisheries, with several smaller fisheries also operational under private ownership. The other listed company is Dhofar Fisheries. Corporate Social Responsibility On the Social front, the company had sponsored and supported many social events, local communities on their various initiatives. It has been supportive to fishermen through providing them with interest free loan for procurements of boats, engines and other fishing support requested by them. The loan is then adjusted against the fish supplied by them. The company also supplies ice and bait to the fishermen. Page 6 of 11

7 Valuation Because of fluctuation in earnings of the company in the previous years, we have used multiple techniques to come up with the target price of RO per share, which is at premium of 9% to the last closing price of RO on 28 th August Firstly, our key assumptions include growth in quantity procured according to the company s 5 Year Business plan to reach a target of 40,000 mt. by We have assumed risk-free rate of 4%, a risk premium of 13% and ten-year adjusted daily beta of The following sensitivity analysis indicates target price sensitivity to +/-1% change in weighted-average cost of equity. DCF Analysis: EBITDA Multiple Method Total Enterprise Value Total Equity Value Terminal EBITDA Multiple Terminal EBITDA Multiple 10.0x 11.0x 12.0x 10.0x 11.0x 12.0x Discount 12.7% Discount 12.7% Rate 13.7% Rate 13.7% (WACC) 14.7% (WACC) 14.7% Implied Perpetuity Growth Rate Total Price Per Share Terminal EBITDA Multiple Terminal EBITDA Multiple 10.0x 11.0x 12.0x 10.0x 11.0x 12.0x Discount 12.7% -0.8% 0.3% 1.2% Discount 12.7% Rate 13.7% 0.1% 1.2% 2.1% Rate 13.7% (WACC) 14.7% 1.0% 2.1% 3.0% (WACC) 14.7% DCF Analysis: Perpetuity Growth Method Total Enterprise Value Terminal Perpetuity Growth Rate Total Equity Value Terminal Perpetuity Growth Rate 1.0% 2.1% 3.0% 1.0% 2.1% 3.0% Discount 12.7% Discount 12.7% Rate 13.7% Rate 13.7% (WACC) 14.7% (WACC) 14.7% Implied Terminal EBITDA Multiple Terminal Perpetuity Growth Rate Total Price Per Share Terminal Perpetuity Growth Rate 1.0% 2.1% 3.0% 1.0% 2.1% 3.0% Discount 12.7% 11.7x 13.1x 14.5x Discount 12.7% Rate 13.7% 10.8x 11.9x 13.1x Rate 13.7% (WACC) 14.7% 10.0x 11.0x 12.0x (WACC) 14.7% (1) Assumes net debt of mm as of 31/3/2013. (2) Assumes outstanding diluted shares of 125 Million shares We have also used Price to Book (P/B) ratio and average Book Value per Share (BVPS) to corroborate our analysis shown above. We took average P/B over last five years as and multiplied it with the BVPS 13 to arrive at a price of 0.114, and then we added a dividend yield of 6.8% and arrived at a total return of 13% on the current market price, to reach a target of RO per share. In order to be conservative, we have used the target price of DCF to set our target price for the next twelve months. Page 7 of 11

8 Balance Sheet FY 2010 FY 2011 FY 2012 FY 2013 FY 2014F For the period ending 3/31/2010 3/31/2011 3/31/2012 3/31/2013 3/31/2014 Assets Cash & Near Cash Items 577 2,223 1,700 2,879 1,195 Short-Term Investments 2,109 2,015 1, Accounts & Notes Receivable 879 1,005 2,861 3,015 3,930 Inventories 1,377 1,767 2,616 2,851 3,439 Other Current Assets 2,818 4,321 6,500 2,400 2,947 Total Current Assets 7,760 11,330 15,583 12,097 12,463 LT Investments & LT Receivables 1,105 1,103 1,102 1,100 1,594 Net Fixed Assets 863 1,040 3,503 5,804 7,205 Total Long-Term Assets 8,970 6,271 4,610 6,934 8,830 Total Assets 16,730 17,601 20,194 19,031 21,293 Average Assets 15,910 17,166 18,898 19,612 20,162 Liabilities & Shareholders' Equity Current Portion of Longterm Loan Trade & Other Payables ,099 1,030 1,228 Short-Term Borrowings 0 0 2, ,500 Other Short-Term Liabilities Total Current Liabilities ,389 1,230 3,178 Long-Term Borrowings 0 0 1,800 1,800 Other Long-Term Liabilities Total Long-Term Liabilities ,988 1,989 Total Liabilities 1,105 1,105 3,576 3,218 5,167 Share Capital 12,500 12,500 12,500 12,500 12,500 Retained Earnings & Other Equity 3,125 3,996 4,117 3,312 3,625 Total Equity 15,625 16,496 16,617 15,812 16,125 Average Equity 14,882 16,061 16,557 16,215 15,969 Total Liabilities & Equity 16,730 17,601 20,194 19,031 21,292 Page 8 of 11

9 Income Statement FY 2010 FY 2011 FY 2012 FY 2013 FY 2014F For the period ending 3/31/2010 3/31/2011 3/31/2012 3/31/2013 3/31/2014 Procured from fishermen 7,321 11,530 20,779 21,541 26,938 Purchased from Bahrain center ,785 1,078 1,207 Purchased from Yemen center 1,758 3,157 1,665 1,716 1,853 Breaded products Frozen fish purchased from outside Oman Purchased from Saudi Arabia center Received from trawler companies under fish Received from operations of own boats Revenue 11,830 17,641 26,312 26,154 32,048 Other operating income Total operating income 11,958 17,915 26,592 26,310 32,206 Opening stock of fish 1,527 1,236 1,549 2,315 2,385 Purchases 6,758 12,161 19,487 17,974 22,113 Processing charges ,145 1,415 Packing material consumed Hire charges of cold store Closing stock of fish (1,236) (1,549) (2,315) (2,385) (2,384) Cost of goods sold (7,663) (12,907) (20,456) (19,871) (24,561) Gross Profit 4,167 4,734 5,856 6,282 7,488 Staff costs (1,186) (1,674) (1,960) (2,315) (2,884) Other operating expenses (1,980) (2,516) (2,998) (3,709) (3,846) Fishing levy (406) (59) (12) 0 0 Depreciation (227) (223) (285) (591) (721) Written-off/loss on disposal of PP&E (18) (46) Contribution to Agriculture & Fisheries Develo (51) (7) (2) 0 Operating profit/ (loss) (223) 194 Investment income (loss) -net 645 (6) (78) Foreign Exchange gains -net Finance income (3) (3) Finance costs (18) (88) (154) Profit/(loss) before taxation 1, , Taxation (107) (109) (126) 34 (77) Profit/(loss) for the year 1, EPS Page 9 of 11

10 Key Ratios FY 2010 FY 2011 FY 2012 FY 2013 Du Pont Analysis Return on Average Assets, A 9.33% 5.07% 5.26% 0.35% Leverage Ratio (Avg Assets/Avg Equity), B ROAE, A*B 9.97% 5.42% 6.00% 0.43% Du Pont Analysis (Five Levels) Net Income / Pretax income (1) Pretax income / EBIT (2) EBIT / Sales (3) Sales / Assets (4) Assets / Equity (5) (1)*(2)*(3)*(4)*(5) 9.97% 5.42% 6.00% 0.43% Profitablity Ratios Gross Margin % 35% 26% 22% 24% EBITDA Margin % 11% 4% 5% 3% EBIT Margin % 9% 3% 4% 0% PBT Margin % 13% 5% 4% 0% Net Profit Margin % 12% 5% 4% 0% Return on Avg Equity % 10% 5% 6% 0% Return on Avg Assets % 9% 5% 5% 0% Efficiency measurements Current Ratio Quick Ratio Inventory Turnover (x) Receivables turnover Payables / Creditor turnover Inventory days Account receivables days / Collection period Account payable days Cash Conversion Cycle Per share measurement EPS Basic (RO) YoY growth (%) -41% 14% -93% DPS (RO) BV per share Page 10 of 11

11 Recommendation Based on the range for the upside/downside offered by the 12-month target price of a stock versus the current market price Strong Buy Greater than 20% Hold/Accumulate Between +10% and +20% Hold Between +10% and -10% Hold/Reduce Between -10% and -20% Sell Lower than -20% Oman Arab Bank - Investment Management Group (IMG) PO Box 2010, Ruwi, 112, Muscat-Oman. Tel: Fax: Web site research@oabinvest.com Disclaimer: This report has been prepared and issued by the IMG Oman Arab Bank SAOC on the basis of publicly available information and other sources considered reliable. While the utmost care has been taken to ensure that the facts stated are accurate and the opinions given are reasonable, neither Oman Arab Bank SAOC nor any of its employees shall be in any way responsible for the contents. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as an offer to buy or sell any securities. Page 11 of 11