Best Ideas 2018, Hosted by MOI Global Bakkafrost (Oslo:BAKKA) Robert Leitz www.iolitepartners.com
TRADE IDEA: LONG EQUITY BAKKAFROST AT NOK320/SHARE Source: Bakkafrost Best in class, vertically integrated salmon farmer with a strong moat Licenses in geographic locations extraordinarily suitable for salmon farming State-of-the art production facilities Decades of technical know-how Shareholder-friendly and long-term-oriented owner-management (20% stake) Capex projects expected to increase production to 70,000 tgw (+30%) by 2021 Salmon farming industry benefits from strong tailwinds Demand growth driven by demographics, global development, and zeitgeist Supply restricted by suitable locations, politics, and biological hazards Good inflation pass-through As of December 2017, trading at a low valuation (LTM, NOK 320/share): P/E: 10.9x EV/EBITDA: 7.7x Dividend yield: 3.6% Harvest growth: 6% p.a. (average last 5 years) ROE: 31% p.a. (average last 5 years) EBITDA growth: 31% p.a. (average last 5 years) 2
08A 09A 10A 11A 12A 13A 14A 15A 16A 17G 18G 19G 20G 21G BAKKAFROST: KEY FACTS LTM Sep 2017 ($m) Turnover 600 EBITDA 250 Maintenance Capex 25 Market cap (at NOK 320) 1,900 Net debt 50 Working capital 300 Harvest volume (tgw) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Biggest salmon farmer of the Faroe Islands Harvest: 55,000 tgw = ca. 2.5% market share (Atlantic salmon) Focus on high-quality salmon (feed ingredients, size, animal health) Diverse customer base with large, long-standing contracts Capex budget expected to grow production by 30% (+6% p.a.) until 2021 Employees: 725 (FTE), average age 41, low turnover IPO: March 2010 in Oslo Assets 1 fish feed and fish oil production facility (self-sufficient) 6 smolt hatcheries (self-sufficient) 18 sea farming licenses in the Faroe islands 4 well boats 3 harvesting plants 2 processing facilities CEO: Regin Jacobsen (age: 51) CEO since 1989 (son of company s founder) Driving force behind company s success story Owns 10% of shares (his mother another 10%) 3
BAKKAFROST: SALES STRATEGY Product Premium product (size, quality) for high-end markets (sushi, retail) Fresh and frozen Mostly third-party label through customized packaging Markets 60/40 split between spot and contract market VAP products (40% of harvest, skinless and boneless portions of salmon) are sold on long-term contracts and the whole fish is sold on the spot market Diversified global footprint (EU=25%, USA=25%, Asia=25%, Other=25%) Off-cuts used in own fish feed factory Delivery Sea freight (economical delivery of large quantities) Air freight (fast delivery with freshness in mind) Customer base Large, long-term relationships with diversified base of customers Source: Bakkafrost 4
FAROE ISLANDS: KEY FACTS Source: Bakkafrost, CIA World Factbook About halfway between Iceland and Norway 18 islands, 1,393km 2 = 8x the size of Washington DC 50,000 inhabitants with a life expectancy of 80 years Total working force: 30,000; unemployment rate is 2.5% Autonomous region within the Kingdom of Denmark with a high degree of self-government. Not part of the EU but part of the Danish monetary union Danish krone (DKK) effectively pegged to the euro Total GDP: US$2.8 billion, per capita GDP: $40,000 at purchasing power parity Natural resources: fish, whales, hydropower, possibly oil and gas Exports: $1.2 billion, mainly fish and fish products. Export partners: UK 20%, Russia 20%, Germany 10%, China 10%, Denmark 5%, US 5% Imports: $1 billion (household consumption, machinery and equipment, cars). Import partners: Denmark 20%, Germany 10%, China 10%, Norway 10%, Poland 5% Denmark supplies the Faroe Islands with almost 1/3 of their public funds Taxes: 30% of GDP (corporate tax: 18%, farming revenue tax: 4.5%) Restriction on a single foreign ownership of 20% in farming companies One company may control a maximum of 50% of licenses in the Faroe Islands 5
THE PRODUCT: ATLANTIC SALMON Farmed Atlantic salmon constitutes a small high-end niche within the global seafood space Sold frozen and fresh (shelf life of about 3 weeks) Key category in retail on a global level due to High nutritional level (protein, Omega 3, vitamins, minerals) Consistent delivery throughout the year Pinkish-red color stands out compared to most other species Catch as a resource has been at capacity for years Aquaculture Increased biological problems and in turn escalating costs Largest producers: Norway, Chile, Scotland, Canada Source: Bakkafrost 6
SALMON VS MEAT Feed conversion 4.0-10.0 3.0 1.7 1.2 Energy retention 27% 14% 10% 27% Protein retention 15% 18% 21% 24% Edible yield 41% 52% 46% 68% Edible meat per 100kg feed 4.0-10.0 17.0 21.0 57.0 Fresh water usage 15,400l 6,000l 4,300l 1,400l CO 2 (per kg edible meat) 30kg 5.9kg 3.4kg 2.9kg High price (GBP/kg) Median price (GBP/kg) 36.50 21.00 15.00 5.84 19.00 10.54 50.00 17.80 Seafood beats meat in terms of feed conversion, energy and protein retention, edible yield, and CO 2 footprint Costs of producing inefficient protein sources expected to rise significantly with time Consumer awareness of environmental impact puts pressure on retail Cost of emission and water usage are becoming tangible and increasing Currently, the absolute price of salmon is significantly higher than pork and poultry products Currently, mid-range salmon products are slightly cheaper than cattle products Source: Bakkafrost, Sainsbury UK 28 May 2016 7
SALMON LIFE CYCLE Source: Bakkafrost Cycle of about 2-3 years Freshwater/hatchery (12 months): fertilization of eggs (roe) and fish is typically grown to approximately 100-150 grams in a controlled environment Seawater (14-21 months): the young fish (smolt) is transferred to seawater cages where it is grown to around 4-5kg (14-24 months) After harvest (2-6 months): site is fallowed before the next generation is put to sea at the same location Growth heavily dependent on the seawater temperatures (8-14C ideal) Harvest is spread evenly throughout most of the year Eggs Smolt Several suppliers to the industry Production can easily be scaled Majority produced in house by farmers Tendency to lengthen time at hatchery to shorten time at sea (Bakkafrost trying to grow smolt to 500g in hatcheries) = higher capacity and better control of biological risks 8
SALMON FARMING - VALUE CHAIN Source: Bakkafrost 9
MARKET DYNAMICS - DEMAND Source: Bakkafrost The global market for Atlantic salmon has, on average, increased by 7.3% over the last 20 years Volatility in growth has been driven by biological set-backs and financial constraints due to cyclical pricing Global growth drivers Growing world population Growth in real disposable income (progress) Zeitgeist ( the sushi generation ) Regional growth drivers (2007-2016) EU (1,000kt market, +5% CAGR) Population growth and per capita consumption USA (350kt market, +3% CAGR) High potential given lower per capital consumption Asia (300kt market, +11% CAGR) Population growth and increases in real economic wealth Key engine of global volume growth (has tripled in 10 years) Russia (140kt market, +2% CAGR) Potential for strong come-back (ca. 40% down from 2012 highs) - tied to commodity cycle and trade restrictions 10
MARKET DYNAMICS - SUPPLY Norway and Chile have provided the bulk of supply growth Total supply declined by 7% in 2016 due to biological conditions in both, Norway and Chile Supply growth expected to slow down going forward Biological boundaries are being pushed Best farming sites already occupied Source: Bakkafrost 11
RAW MATERIAL INPUT Fishmeal and fish oil originally extracted from wild catch (pelagic fish) Supply constraints make fish oil and fish meal costly ingredients Growing demand requires reduced inclusion rates Substitutes for fishmeal and fish oil: corn, vegetable oils, wheat Keeping the diet closer to the natural diet of wild salmon provides measurable benefits Healthier nutritional profile of end product (Omega-3, etc.) Superior meat structure Higher production efficiency due to animal welfare Feed cost Norway, Canada, Scotland, Chile: ca. 40% Bakkafrost: ca. 60% of finished product (higher quality) Sources: Bakkafrost, Holtermann Note: (1) Norway 12
WHAT MAKES FAROE ISLANDS SPECIAL? Ideal geographical conditions Steady temperature between 6-12 degrees Celsius gives a balanced growth and minimizes the biological risks Strong currents give a high level of water replacement which minimizes the biological risks Political autonomy Rarely part of recurring trade sanctions/embargos/dumping duties (e.g. Russia) Trade issues such as the Russia sanctions and strained relationship between Norway and China favor independent origins Source: Bakkafrost 13
WHAT MAKES FAROE ISLANDS SPECIAL? Liberal but long term-oriented legislation During 2001-2004 the Faroe Islands were severely struck by ISA (infectious salmon anemia virus) outbreaks New legislation and regulation was introduced in 2003, which has resulted in one of the most predictable fish production environments in the world Efficient production requires a high degree of cooperation in the waters, e.g.: Coordinated fallowing periods Coordinated lice treatment in direction of current Healthy fish keep cost down Low mortality Less treatments Better feed conversion Faster growth Fixed cost dilution with larger size Consistent large-sized fish forms baseline for price premium Source: Bakkafrost 14
WHAT MAKES FAROE ISLANDS SPECIAL? Farming licenses without volume restrictions Give the right to utilize a given area of fjords for farming fish Existing licenses are operated on a 12-year rolling lifespan basis Automatic renewal, unless Failure to fulfill the veterinary conditions Conflict with governmental or municipalities planning areas Conflict with animal welfare Conflict with environmental protection Source: Bakkafrost 15
WHAT MAKES FAROE ISLANDS SPECIAL? Good local raw material situation No need to import raw material from afar Optimal raw material availability Blue whiting Winter capelin Summer capelin Mackerel Herring Source: Bakkafrost 16
BAKKAFROST BENEFITS OF BEING VERTICALLY INTEGRATED Vertically integrated value chain (initial ingredients to final delivery) Total traceability from initial catch to final feed Special high-performance feed Higher content of marine ingredients compared with industry standard Locally caught fish used for the feed Especially rich in Omega-3 fatty acids Purified fish oil (free of toxins) from own pollutant cleaning facility Produced of fish from sustainable quotas Produced from off-cuts and fish which is not used for human consumption Large smolt in new hatcheries minimizes the biologically risks No use of antibiotics Environmentally friendly fresh water treatment for sea-lice Healthy salmon give Bakkafrost the possibility to have the salmon in the ocean for a longer time Gentle harvest with state-of-the art well boats Transportation in salt water tanks Short distance from farming sites to harvest plant Minimal stress Minimal carbon foot-print Efficient and quick harvest Source: Bakkafrost 17
BAKKAFROST: CAPITAL ALLOCATION Bakkafrost recently completed a consolidation of its fragmented processing structure (growth through local M&A) 50% of investment up to 2021 will focus on enhancing the smolt production on land and in hatcheries Increase size of smolt produced on land to 500g each Reduce production time in the sea by about 5 months (30%) Reduce biological risks New hatchery (photo) Larger smolt will reduce time of cycle in farming Expected to start mid 2018 At full operation in 2019/2020 the hatchery is expected to produce 7 million smolt of 500g each Bakkafrost is guiding towards harvest of 70,000 tgw in 2021 Company s stated financial targets Equity target: >50% Dividend: 30-50% of adj. EPS Source: Bakkafrost 18
SHAREHOLDER STRUCTURE Regin Jacobsen CEO since 1989 Son of founder Hans Jacobsen Owns 10% of company (his mother another 10%) Born 1966 (age: 51) Bakkafrost was originally founded in 1968, but its impressive growth story really started under the leadership of Regin Jacobsen Source: Bakkafrost 19
INCOME STATEMENT strong and consistent volume growth Bakkafrost USDm (DKKm) FY FY FY FY FY FY FY FY FY LTM LTM Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Sep-17 Sep-17 CAGR Harvest tgw 14,178 18,685 21,626 36,343 44,341 41,268 44,013 50,565 47,542 56,085 56,085 16% Growth n.a. 32% 16% 68% 22% -7% 7% 15% -6% Smolt release 000 6,400 8,200 8,600 10,700 9,500 10,400 11,261 10,985 9,837 9,837 Income statement 0.1600 Revenue 366 597 820 1,321 1,856 2,491 2,683 2,850 3,203 3,732 597 31% Purchase of goods (176) (214) (301) (451) (835) (1,065) (913) (1,201) (802) (853) (137) Change in inventory 39 (33) 76 20 76 82 97 424 (59) (209) (33) Salary (61) (78) (118) (168) (210) (233) (264) (281) (328) (392) (63) Other (78) (93) (187) (319) (483) (602) (672) (684) (715) (702) (112) Depreciation (19) (21) (42) (67) (80) (87) (97) (108) (133) (181) (29) Operational EBIT 71 158 247 335 323 587 834 1,001 1,165 1,396 223 42% FV adj on biological assets - - 84 (46) 91 115 (12) (28) 608 73 12 Onerous contracts - - (3) 3 (46) (25) 71 (51) (16) 2 0 Associates (0) 0 1 (2) (6) 24 (1) 7 15 9 1 Revenue tax - - - - - - - - (108) (132) (21) Other - - (13) 111 (18) - - - 10 - - EBIT 71 159 316 401 344 701 892 929 1,674 1,347 216 48% Net financial - - (8) (31) (20) 26 7 (4) (41) (19) (3) Tax - - (48) (47) (56) (138) (252) (114) (294) (239) (38) Net earnings 71 159 260 323 268 589 647 810 1,339 1,090 174 44% Adj. EBITDA 90 180 287 403 351 673 1,001 1,064 1,297 1,587 254 40% Adj. EBITDA Margin 25% 30% 35% 31% 19% 27% 37% 37% 40% 43% Growth 57% 100% 60% 41% -13% 92% 49% 6% 22% Price / kg (revenue / harvest) 25.79 31.93 37.93 36.35 41.85 60.36 60.97 56.37 67.37 66.55 10.65 13% COGS / kg 20.79 23.45 26.52 27.13 34.56 46.14 42.02 36.58 42.86 41.66 6.67 9% EBIT / kg 5.00 8.48 11.41 9.22 7.29 14.22 18.94 19.79 24.50 24.89 3.98 22% EBITDA margin increase: price, scaling benefits and efficiencies 20
CASH FLOW STATEMENT cash flow mirrors story of income statement Bakkafrost USDm (DKKm) FY FY FY FY FY FY FY FY FY LTM LTM Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Sep-17 Sep-17 CAGR Cash flow OCF (incl. interest and tax) 49 189 195 410 286 518 877 768 850 1,269 203 Delta W/C (41) 9 (82) 56 (51) (173) (20) (224) (187) (198) (32) Adj. OCF 90 180 277 354 337 690 897 992 1,036 1,467 235 36% Capex (34) (21) (68) (98) (114) (200) (237) (608) (687) (680) (109) Owner earnings 56 158 209 256 222 490 660 385 350 787 126 Assumed maintenance capex (20) (20) (20) (25) (30) (50) (75) (100) (125) (125) (20) Adj. owner earnings 70 160 257 329 307 640 822 892 911 1,342 215 38% Tax paid - - - (32) (73) (47) (81) (148) (155) (155) (25) Dividend paid - - (18) (191) (49) (98) (218) (291) (401) (423) (68) Dividend / share (DKK) 3.91 1.00 2.00 4.47 5.96 8.20 8.65 1.38 I believe maintenance capex is just a fraction of total capex I believe the benefits of capex spent in 2016 and 2017 will only start to truly show in 2018/2019 high excess cash despite organic growth investments 21
BALANCE SHEET Bakkafrost USDm (DKKm) FY FY FY FY FY FY FY FY FY LTM LTM Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Sep-17 Sep-17 CAGR Balance sheet Intangibles - - 136 370 294 295 295 295 377 377 60 PP&E 231 231 356 829 813 917 1,041 1,531 2,118 2,448 392 Associates 2 3 6 34 89 114 100 106-58 9 Other 15 24 21 2 2 3 27 25 72 - - Non-current assets 248 258 519 1,234 1,198 1,328 1,463 1,957 2,567 2,883 461 Inventory 247 248 511 880 990 1,201 1,281 1,482 2,214 1,770 283 Receivables 57 80 146 171 358 401 314 379 402 365 58 Cash 0 35 9 17 25 182 405 102 235 347 56 Current assets 305 363 665 1,067 1,373 1,784 2,000 1,963 2,851 2,483 397 Total assets 553 621 1,185 2,302 2,571 3,112 3,463 3,920 5,418 5,365 858 33% Equity 242 389 902 1,061 1,263 1,665 2,064 2,580 3,549 3,662 586 40% Tax 24 57 120 256 258 311 414 350 546 661 106 Debt 87 34 7 734 732 685 505 448 827 256 41 Other - - 0-0 0 0 0 0 - - Non-current liabilities 111 91 157 990 990 1,071 1,036 926 1,474 917 147 Debt 156 98 42 100 100 100 100 - - 395 63 Payables 43 42 83 151 218 276 128 195 395 280 45 Tax - - - - - - 125 155 - - - Provisions - - - - - - - 51 - - - Other 0 0 - - - - 10 12-111 18 Current liabilities 200 141 125 251 318 376 363 414 395 787 126 Total equity and liabilities 553 621 1,185 2,302 2,571 3,112 3,463 3,920 5,418 5,365 858 33% Growth in equity n.a. 61% 132% 18% 19% 32% 24% 25% 38% book equity has grown at 40% p.a. 22
KPI AND VALUATION rock solid balance sheet Bakkafrost USDm (DKKm) FY FY FY FY FY FY FY FY FY LTM LTM Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Sep-17 Sep-17 CAGR Valuation Net current assets excl. debt 261 321 582 916 1,156 1,508 1,737 1,549 2,456 2,091 335 Net debt 243 97 40 817 807 603 200 346 592 304 49 Diluted shares out (000) pre IPO 48,858 48,858 48,858 48,858 48,858 48,858 48,858 Price / share (NOK) 320.00 NOKDKK 0.7600 Share price (DKK) 243 39 stable share count Market cap 11,882 1,901 EV 12,187 1,950 ROE 29% 41% 29% 30% 21% 35% 31% 31% 38% 30% ROCE 15% 33% 28% 17% 13% 26% 29% 28% 32% 27% EV / Adj. EBITDA 7.7 x 7.7 x Market cap / Adj. EBITDA 7.5 x 7.5 x Market cap / Adj. EBIT consistent ROE & ROCE of 30% 8.4 x 8.4 x Market cap / Adj. owner earnings 8.9 x 8.9 x P/E 10.9 x 10.9 x P/B 3.2 x 3.2 x Dividend yield 3.6% 3.6% very low valuation metrics for a best in class company with economic tailwinds, organic volume growth, and high free cash generation 23
Multiple Multiple VALUATION SCENARIOS Low Case Base Case High Case (USDm) FY17E FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22 Harvest volume tgw 54,500 51,230 54,048 57,020 60,156 63,465 51,230 55,585 60,309 65,436 70,998 51,230 56,865 63,120 70,064 77,771 Volume assumption -6.0% 5.5% 5.5% 5.5% 5.5% -6.0% 8.5% 8.5% 8.5% 8.5% -6.0% 11.0% 11.0% 11.0% 11.0% Price $ / kg 10.88 8.70 8.88 9.06 9.24 9.42 8.70 8.97 9.23 9.51 9.80 8.70 9.05 9.41 9.79 10.18 Price assumption -20.0% 2.0% 2.0% 2.0% 2.0% -20.0% 3.0% 3.0% 3.0% 3.0% -20.0% 4.0% 4.0% 4.0% 4.0% Revenue 593 446 480 516 556 598 446 498 557 622 696 446 515 594 686 792 Cost (353) (360) (374) (389) (405) (421) (348) (365) (383) (403) (423) (348) (369) (391) (414) (439) Cost assumption 2.0% 4.0% 4.0% 4.0% 4.0% 2.0% 5.0% 5.0% 5.0% 5.0% 2.0% 6.0% 6.0% 6.0% 6.0% EBITDA 240 86 105 127 151 177 98 133 173 220 273 98 146 203 272 353 margin 40% 19% 22% 25% 27% 30% 22% 27% 31% 35% 39% 22% 28% 34% 40% 45% Cash interest (3) - - - - - - - - - - - - - - - Tax (incl. revenue tax) -22.5% (54) (19) (24) (29) (34) (40) (22) (30) (39) (49) (61) (22) (33) (46) (61) (79) Fund from operations 183 67 82 98 117 137 76 103 134 170 211 76 113 158 211 273 Maintenance capex (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) Owner earnings 158 42 57 73 92 112 51 78 109 145 186 51 88 133 186 248 Growth capex (85) (35) (35) (20) (15) (15) (35) (35) (20) (15) (15) (35) (35) (20) (15) (15) Excess cash 73 7 22 53 77 97 16 43 89 130 171 16 53 113 171 233 Total return at various exit multiples (based on owner earnings, including excess cash) Total return 15.0 x 1.0 x 1.7 x 2.3 x 20.0 x 1.3 x 2.2 x 2.9 x 25.0 x 1.6 x 2.7 x 3.6 x 30.0 x 1.9 x 3.2 x 4.2 x IRR at various exit multiples (based on owner earnings, including excess cash) IRR 15.0 x 0% 12% 18% 20.0 x 6% 18% 25% 25.0 x 10% 22% 30% 30.0 x 14% 27% 34% 24
REASONS TO INVEST - SUMMARY Strong industry tailwinds Strong demand outlook in real and nominal terms with short-term headwinds (arguably priced in) Structural supply constraints: limited sites suitable for farming, biological hazards Seafood has a better environmental footprint than beef, pork and poultry - likely to result in improving relative cost competitiveness going forward Bakkafrost is a best in class player Faroe Islands = ideal location for salmon farming and fewer trade restrictions Premium product: bigger size and better quality given high-quality feed mix and geological conditions Licenses allow for higher volumes at no extra cost and better protection against biological hazards Prudent, owner-manager with proven track record of operational excellence and high return on investment Further growth driven by growing more fish in the same number of fjords to be accomplished with fish spending more time in hatcheries vs at sea (capex projects in progress) Low valuation reflects weak short-term momentum despite outstanding long-term prospects 2018 likely to see decline in production due to biological conditions and weaker prices Current capex projects enable harvest capacity of 70,000 tgw in 2021 (+30%) Bakkafrost looks very cheap at a P/E ratio of 10.9x with earnings growth likely to exceed 10% p.a. for the foreseeable future (>20% possible given scaling benefits, synergies, and price increases) Management has a track record of underpromising and overdelivering 25
KEY RISKS Biological hazards (diseases, sea lice, etc.) Operational gearing: producers are price takers and prices are subject to high volatility Weather conditions (storms, etc.) FX cost base (labor) = pegged to the EUR Loss of farming licenses Cost and availability of labor (Bakkafrost is largest employer in the Faroe Islands) Cost and availability of marine raw material Delays and cost overruns of capex projects Taxation 26
CONTACT INFORMATION Robert Leitz is iolite s sole owner and managing director. Before founding iolite in 2008, he held positions at various financial institutions, including TPG Credit (a hedge fund), Goldman Sachs European Special Situations Group, and KPMG Corporate Restructuring. Robert graduated from the University of St. Gallen (HSG), Switzerland, with a Master of Science in Business Administration and Economics, and wrote his master s thesis under the guidance of Prof. Eli Noam at Columbia University, New York. iolite Partners Zug, Switzerland +41 79 2272908 robert.leitz (at) iolitepartners.com www.iolitepartners.com 27
DISCLAIMER This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Past results are no guarantee of future results and no representation is made that an investor will or is likely to achieve results similar to those shown. All investments involve risk, including the loss of principal. The author and funds he manages are long Bakkafrost (as of January 2018). 28