Shark harvest key to SeaDragon's future, says Edison International research

The success of a newly signed contract with a Portuguese fishing vessel to catch sharks in the south-west Pacific Ocean is the most important risk to the plans by Nelson-based fish oils processor SeaDragon [NZX: SEA], says Edison International research.

Compiled at the company's request, Edison puts a fair value of 2.7 cents per share on the company, compared with 1.8 cents in trading on the NZX today, an increase of 5.9 percent since the release of the research note from Edison, which undertakes independent analysis paid for by the target company.

SeaDragon listed in 2012 and has raised $6.1 million from shareholders to build new processing plant.

Edison said it could justify a valuation of 5.4 cents per share on an unadjusted discounted cashflow basis, but that it had set an "execution discount of 50 percent to 2.7 cents per share to take account of the risks around raw material deliveries, particularly for deep sea shark liver oil (DSSLO)", which is used to produce squalene, a raw material in cosmetics and dietary supplements.

"If the company secures delivery of the raw materials and successfully starts delivering on the contracts, then the execution discount will reduce and our valuation will rise accordingly," said Edison analysts Victoria Buxton and Neil Shah.

They note "SeaDragon has a history of under delivery on projections due in no small part to the unpredictable nature of raw material supplies."

However, new contracts signed for the use of a vessel owned by Portuguese fishing company Pescarias Cayon & Garcia to target sharks in sustainable fisheries specifically to meet SeaDragon's needs "should eliminate most of this risk, although the fish still have to be caught and deliveries made to the company" over the next eight months. In the past, Sea Dragon has sourced shark livers from by-catch from other fisheries.

Renewal of the contract, the first time the company has contracted for a material quantity of shark from a supplier, was expected if the Pescarias Cayon vessel succeeded in catching the contracted volumes. Deliveries are scheduled next month, and then in December and March, with some 50 percent of projected production pre-sold through two major contracts. A risk-reducing feature of the fishing vessel contract is that payments will be tied to the quantities of squalene produced, rather than total tonnage of fish delivered.

Assuming projected volumes are achieved and prices remain stable or rising, Edison expects the company to move from losses in the 2015 financial year to a pre-tax profit of $5.6 million, compared with a normalised loss in the 2014 financial year of $1.9 million. This also assumes the new processing facility in Nelson goes into production from the start of the 2016 financial year.

Production costs per kilo are expected to fall by more than 80 percent from $3.95 in the 2014 financial year to around 74 cents in 2016, as the new plant comes on stream.

Edison also notes the company is exposed to exchange rate movements, with a 3 US cent movement in the New Zealand dollar exchange rate having a 2.6 percent impact on revenues, but an impact on net earnings of 10.3 percent.

(BusinessDesk)