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SeaDragon — Update 30 November 2015

SeaDragon — Update 30 November 2015

SeaDragon

Analyst avatar placeholder

Written by

SeaDragon

Omega-3 plant is all go

H116 results

Food & beverages

1 December 2015

Price

NZ$0.01

Market cap

NZ$31m

Net debt (NZ$m) at 30 September 2015

5.8

Shares in issue

3,128m

Free float

37%

Code

SEA

Primary exchange

NZX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

44.4

18.2

(38.9)

Rel (local)

42.4

11.3

(42.8)

52-week high/low

NZ$0.024

NZ$0.007

Business description

SeaDragon (SEA) is a manufacturer of specialist fish oils for the global dietary supplements market. Its main products are omega-2 known as squalene (from shark livers) and from CY Q416 omega-3 oils. The company is based in Nelson, New Zealand.

Next event

FY16 results

May 2016

Analysts

Moira Daw

+61 2 9258 1161

Finola Burke

+61 2 9258 1161

SeaDragon is a research client of Edison Investment Research Limited

SeaDragon (SEA) is a final-stage fish oil processor based in Nelson, New Zealand. Its existing 300 tonne (t) capacity plant produces omega-2 oils for the global dietary supplements market. A new 5,000t omega-3 plant has been commissioned and the first production of omega-3 will begin in late December 2015. A NZ$10m capital raise (completed on 2 October 2015), double H115-on-H116 sales and confirmation that the FY16 EBITDA target of NZ$0.144m should be achieved are positive indicators. We see entry into the omega-3 market as a game-changer for SEA because the market is ~50 times larger (by volume) than the omega-2 market and the new factory is capable of allowing SEA to produce more value-added products.

Year end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/14

3.1

0.4

0.0

0.0

N/A

N/A

03/15

6.3

(2.8)

(0.2)

0.0

N/A

N/A

03/16e

12.3

(0.7)

0.0

0.0

N/A

N/A

03/17e

27.5

4.6

0.1

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

H116 results show turnaround

The H116 results showed the benefit of an improvement in the supply of omega-2 raw materials, increased factory throughput and improvements to the refining process. Revenue doubled to NZ$5.3m, the gross profit margin increased by 330bp to 32.2% and operating cash flow improved from a loss of NZ$2.144m in H115 to positive operating cash flow of NZ$0.758m in H116. This result underpins the confidence we have in our forecasts for FY16 EBITDA of NZ$0.195m compared to the company’s forecast of NZ$0.144m.

Omega-3 developments

The plant commissioning has been conducted without a hitch and the investment to date is in line with SEA’s NZ$9.2m budget. The company reports that good progress has been made in putting together supply agreements with local fishermen.

Valuation: Dependent on production ramp-up

Our DCF valuation of NZ$0.0205 is based on unchanged operating assumptions. It assumes that omega-3 production will reach capacity by FY19 and that omega-2 production will increase to 460t by FY19. The current share price is assuming that omega-3 production will be a moderate success. It is pricing in production reaching a maximum of ~23% of capacity. We think that the achievement of SEA’s fundamental value using a DCF valuation will depend on production levels reached by the omega-3 plant rather than on issues with demand. Volume demand is forecast by Frost & Sullivan (2013) to grow by a CAGR of 6.1% through to 2020. We think that SEA has the capacity to win market share, because it has a quality product sourced from sustainable, traceable fisheries.

H116 results

The key messages from the H116 results include:

■

Demand for fish oil products remains strong.

■

The 100% increase in revenue results from higher average sales prices and increased throughput because SEA had been able to secure the supply of omega-2 raw materials.

■

Increased sales prices, more throughput and more cost effective refining processes resulted in the gross margin improving from 28.9% in H115 to 32.2% in H116.

■

The operations were still loss-making but the EBITDA loss of NZ$0.147m was less than half the loss of H115 of NZ$0.320m.

■

Net working capital in H116 reduced from NZ$3.5m in H115 to NZ$2.7m; this change of NZ$0.873m in working capital is one of the reasons that receipts from customers less payments to suppliers and employees improved from a loss of NZ$2.2m to positive operating cash flow in H116 of NZ$0.996m (a turnaround of NZ$3.2m).

■

A successful capital raise of NZ$10m was completed on 2 October 2015. Priced at NZ$0.008, it is sufficient to complete the omega-3 plant.

■

Net debt of NZ$5.8m does not include the proceeds of the 2 October 2015 capital raise of NZ$10m less offer costs.

Exhibit 1: SEA – H116 results

NZ$m

H116

H115

Variance (%)

Revenue

5.30

2.57

106.8

Cost of sales

(3.60)

(1.82)

97.1

Gross profit

1.71

0.74

130.6

Other income

0.03

0.13

(74.0)

General and administration

(1.89)

(1.19)

59.0

EBITDA

(0.15)

(0.32)

(54.2)

Depreciation

(0.29)

(0.28)

3.2

EBITDA

(0.43)

(0.60)

(27.5)

Interest

(0.25)

0.02

(1160.4)

Tax

NPAT

(0.69)

(0.57)

19.9

Source: Company data. Note: Percentages affected by rounding.

Forecasts

We have not made any change to our earnings forecasts other than to reflect the correct number of shares in issue. Shares in issue post the capital raise total 3,128m compared with our previous estimate of 3,003m shares.

Ownership change

MerSea Holdings (held 25.71%) was placed in voluntary, solvent liquidation by its shareholders on 28 October 2015. As part of the process of liquidation, MerSea made an in-specie distribution and transfer of shares in SeaDragon to its shareholders SDMO Trustee (14.09%) and Merinova, (11.46%) as well as transfers of the balance of the MerSea Holdings shareholding in SeaDragon to Darrell James Crozier and Murray Ross Keeley. These transactions were all completed on 17 November 2015.

Relationship with Comvita

In our view, the company's relationship with Comvita is strategically significant because it joins two New Zealand food production companies that both have a focus on sourcing clean, green, pure sustainable products and selling them to a global market, in particular to Asian markets. Comvita's ex-CEO has joined SEA's board as a non-executive director. Brett Hewlett has a track record of building an international presence for NZ-sourced added-value primary products.

The agreement with Comvita includes:

■

working with the NZ fishing community to maximise the value of locally harvested products; and

■

an option to invest a further NZ$3.0m subject to approval at a special shareholder meeting to be held on 17 December 2015. The option is priced at NZ$0.008 and must be exercised by Comvita before 1 October 2017.

Omega-3 plant – a game-changer

We see the production of omega-3 oil from the new factory, built at a cost of NZ$9.2m, as a game-changer for SEA. While omega-2 remains an important product, supply continues to be an issue. Sourcing of deep-sea fish livers (DSFL) for the production of squalene is dependent on re-signing ongoing supply contracts. SEA plans to source increasing amounts of unrefined fish oil for omega-3 production from local New Zealand fisheries. Supply certainty and proximity, together with certification from New Zealand’s Ministry for Primary Industries, should provide SEA with a significant competitive advantage.

Opportunity – go up the value chain

Currently, SEA sits at the low end of the fish oils value chain. The dietary supplements market, while large, is a low-value market on a per tonne basis. In the case of omega-3, the dietary supplement market will pay an average of US$13,350/t. However, omega-3 for infant nutrition can command over US$86,000/t1. The difference is largely due to the amount of processing and quality of the final product.

Markets and Markets, 2014

As indicated in its 2015 annual report, SEA plans to move into further processing to enable it to manufacture products for functional foods and to produce omega-3 concentrate for both the dietary supplement and the pharmaceutical markets. This will require further investment in plant and equipment. The company currently has not provided any timing about when this plan may be executed, so it does not feature in our projections.


Exhibit 2: Financial summary

NZ$000s

2014

2015

2016e

2017e

Year-end 31 March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

3,058

6,322

12,298

27,536

Cost of Sales

(2,260)

(5,815)

(7,103)

(16,615)

Gross Profit

798

507

5,195

10,921

EBITDA

 

 

1,021

(2,185)

195

5,846

Operating Profit (before amort. and except.)

 

 

470

(2,749)

(611)

4,708

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

470

(2,749)

(611)

4,708

Net Interest

(39)

(60)

(72)

(66)

Profit Before Tax (norm)

 

 

431

(2,809)

(682)

4,642

Profit Before Tax (FRS 3)

 

 

431

(2,809)

(682)

4,642

Tax

0

(29)

218

(1,486)

Profit After Tax (norm)

431

(2,838)

(464)

3,157

Profit After Tax (FRS 3)

431

(2,838)

(464)

3,157

Average Number of Shares Outstanding (m)

1,506.8

1,870.4

3,128.0

3,128.0

EPS - normalised (c)

 

 

0.03

(0.19)

(0.01)

0.10

EPS - (IFRS) (c)

 

 

0.03

(0.15)

(0.01)

0.10

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

26.1

8.0

42.2

39.7

EBITDA Margin (%)

33.4

-34.6

1.6

21.2

Operating Margin (before GW and except.) (%)

15.4

-43.5

-5.0

17.1

BALANCE SHEET

Fixed Assets

 

 

3,915

6,641

11,238

11,783

Intangible Assets

0

0

0

0

Tangible Assets

3,915

6,641

11,238

11,783

Investments

0

0

0

0

Current Assets

 

 

8,254

5,396

9,452

13,662

Stocks

1,903

1,906

3,051

4,374

Debtors

1,182

2,974

2,480

4,627

Cash

5,161

500

3,905

4,645

Other

8

16

16

16

Current Liabilities

 

 

(1,393)

(4,099)

(4,207)

(5,805)

Creditors

(1,393)

(1,105)

(1,213)

(2,811)

Short term borrowings

0

(2,994)

(2,994)

(2,994)

Long Term Liabilities

 

 

0

0

0

0

Long term borrowings

0

0

0

0

Other long term liabilities

0

0

0

0

Net Assets

 

 

10,776

7,938

16,483

19,640

CASH FLOW

Operating Cash Flow

 

 

(1,524)

(4,273)

(348)

3,974

Net Interest

(39)

(60)

(72)

(66)

Tax

(8)

(8)

218

(1,486)

Capex

(726)

(3,314)

(5,403)

(1,683)

Acquisitions/disposals

2,469

0

0

0

Financing

5,974

0

9,009

0

Dividends

0

0

0

0

Net Cash Flow

6,146

(7,655)

3,405

740

Opening net debt/(cash)

 

 

985

(5,161)

2,494

(911)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(5,161)

2,494

(911)

(1,651)

Source: Company data, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Healthcare

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