Norwegian fish stocks: like shooting fish in a barrel

The Oslo Stock Exchange's fish producer index, OBSFX.OL, fell 6% from Friday, February 21 to Tuesday, February 25, when the corona unrest finally affected the stock markets seriously. However, already in the second half of Tuesday, the index has recovered half the case. Precisely food production is usually considered a good investment in turbulent times, so we take a closer look at the Norwegian fish companies today.

Mowi dominates the Norwegian stock lists for fish production. The market value of NOK 112 billion for Mowi is in the same order of magnitude as the three largest companies besides Mowi, ie SalMar, Bakkafrost and Leröy. And the next three, Austevoll, Grieg and Norway Royal Salmon, with their combined NOK 42 billion, are only slightly larger than Leröy (35 billion) and Bakkafrost (40 billion) respectively.

When this is written on February 25, 2020, Leröy is up almost 8 percent on the day, which also makes Leröy the week's winner with + 5.5%. Austevoll is up 6.5% today but only + 3% in a week, which is still enough for a second place in a week's term. At the bottom of the week we find the giant Mowi having lost 3%, but Bakkafrost (-2.8%) and SalMar (-2.2%) have been about as weak.

If we zoom out to the past year, Bakkafrost is the superior winner with + 46% share price. On what may be called divided fifth place is the quartet Norway Royal Salmon (+ 15%), Grieg Seafood (+ 11%), the industry giant Mowi (+ 8%) and SalMar (+ 7%). And in the absolute bottom, only volatile Leröy (-9%) and Austevoll (-19%) remain. Leröy and Austevoll can probably be trotted out, but that does not seem to be the right way to go for long-term returns and the kind of calm and stable consumer products that food is meant to provide.

The question is whether the market really knows anything extra about Bakkafrost, when it pushed up the share almost 50% during the past year, to a P / S rating of 8 and P / E of about 50. This has also resulted in a direct return on low 1 percent. On the surface, Bakkafrost thus looks about twice as expensive as the other fish producers without any simple explanation, for the acquisition of Scottish Salmon last fall represents only a fraction of the overvaluation.

It is rarely a productive strategy to hope for a new paradigm, but in this case it is safest to put Bakkafrost aside and focus on the rest of the companies. If you are speculative, perhaps Leröy and Austevoll may continue to rush upwards for a little while, but as a more long-term value investor, I would rather choose between Salmar and Mowi. They may feel a little plain and smooth with P / S numbers of 3-4 and P / E's around 20 plus direct returns of about 5%, but that's exactly what I'm looking for when I want to buy fish. In the past year, such a strategy was rewarded with 13% total return in SalMar and Mowi, which is enough for me. They are long after Bakkafrost's bull rush, but the question is really how it can be repeated and rather the risk is high for setbacks.

The small company Norway Royal Salmon (market value SEK 10bn) is the joker in this context, especially after the more than doubled dividend to NOK 10 per share this week. While the stock is fairly volatile, it is currently the cheapest in the sector together for a number of key ratios. If you believe in higher salmon prices and that NRS does not suffer from lice, bacteria, algal blooms or salmon tax to a greater extent than its competitors, it is probably Norway Royal's share that will be the winner of the coming year. The salmon tax is being debated lively in Norway. For example, a flat tax of 40% has been proposed, just as for the energy sector, but the Labor Party would rather base the tax on the area utilized or the amount of production. Investments in the sector clearly involve some unique risks, but Norway's legislators hardly knowingly consciously harm the industry - especially if companies are simultaneously suffering from natural disasters. Nevertheless, the valuation of most of the companies, in relation to growth and return, has already taken reasonable account of the risk picture.

In summary, SalMar, Mowi and NRS are the most attractive. Of course, they will also fall a great deal if the stock exchanges continue to fall seriously, but unless fish suddenly becomes completely out of date, the success story of the last ten years for the swimming rosé gold can be repeated. The companies are not very cheap, but there is a structurally strong demand growth for salmon, which over time more than compensates for temporary biological setbacks.