The fishing sector, a constituent of the food producers index, has been a rotten investment since 2017.
The share prices of Oceana Group and Sea Harvest have declined by about 40%, whereas the JSE all share index has, in the same period, risen more than 80%.
The unpredictability of conditions at sea means that wild-catch fishing is highly cyclical. This, alongside the disruption of global economies and supply chains due to Covid and the Russian war with Ukraine, has battered the domestic fishing sector.
Despite a slew of hefty acquisitions in the domestic and Australian sector, the underlying returns have simply not met the ambitions of Sea Harvest’s empire-building exercise. About R3bn of shareholder funds was sucked into expanding the company’s interests in hake, pelagic fishing, aquaculture and prawns and its acquisition of Ladismith Cheese Company.
With group debt having ballooned to R2.8bn and year-end headline earnings slumping 45% to 55c a share in the most recent results period, ended December 2024, earnings are at their weakest point since their peak of 157c in financial 2021. The share price dived, bottomed in March and then trended sideways until mid-May. Investors in Sea Harvest naturally began to question the capital allocation talents of the company and its business mix.
IM admits it has been utterly wrong in its recommendations regarding Sea Harvest for some years. Just as the bad news seemed to be over and it could not get any worse, it did. Our latest recommendation was in March 2024, at 861c, under the headline “Primed to deliver a better catch”. That results period was the worst yet. But we are now confident of a better recommendation, hence this review.
Portfolio refining needs to occur but improved cash flow and earnings may unwind some of the hefty debt
Just as quickly as a rough sea can occur, calm waters can return. This has been the tale in the domestic fishing sector over the past month as, after four years of abysmal wild-catch fishing rates, substantial improvement in catch rates and prospects have materialised, especially at Sea Harvest, where wild-caught fish bring in the largest percentage of revenue and earnings.
A recent buoyant first-half 2025 trading update signalled a recovery in prospects and earnings, and the share rallied 30% to 850c. At the Sea Harvest AGM in May management confirmed that fishing rates have recovered, yields have improved and that a tight rein on costs will bring enhanced results for 2025.
Globally, demand for wild-caught fish continues to rise, but supplies remain finite. With sanctions having been imposed on large fish exporter Russia and the total allowable catch rates for cod, a European staple fish, having been cut sharply, white fish prices have risen. This has brought about strong demand for Cape hake, a product key to Sea Harvest.
The second-highest cost in fishing is marine fuel oil. Year on year that price is down $20 a barrel, further aiding costs and boosting margins. IM forecasts a rebound in fish earnings for the period ahead, but with the warning that there are some concerns around Sea Harvest that still need to be addressed.
Debt is one, and that may necessitate a placatory asset sale. The bankers seem satisfied with the Sea Harvest balance sheet, but investors need appeasing and wish to see a streamlining of the business. It looks as if this might occur in the next 12 months. The toss seems to be between exiting the dairy operations of Ladismith — which is an odd fit in a primarily fisheries-type business — or selling off the underperforming Australian businesses.
A left-field sale could be the large aquaculture business, anchored in abalone. Sea Harvest is now a major producer of the luxurious shellfish. But the key export market of China has been in decline since Covid, and consumers are continuing to tighten their belts.
However, taking a longer-term view of the Chinese economy must lead one to believe abalone will recover. But the timeline is difficult to determine. What is clear is that Sea Harvest has turned the fisheries corner. Portfolio refining needs to occur, but improved cash flow and earnings may unwind some of the hefty debt. With the share price having run in May on an earnings recovery scenario, IM has seen the easy money made.
At 850c, IM sees further upside, especially if 2025 earnings and the turn in the fishing cycle are confirmed. On any weakness, we would place a buy recommendation on Sea Harvest.
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