Established in Saldanha Bay in 1964, Sea Harvest is one of South Africa’s largest and best recognised fishing groups. This year it listed on the JSE. As a vertically integrated company, the business owns its own trawling vessels and processing facilities and distributes its branded frozen seafood products around the globe.
The bulk of its operations are in South Africa, focused on the catching, processing and marketing of Cape hake, found along the Southwest coast of southern Africa. Last year, the group expanded its geographic presence with the acquisition of a controlling stake in Australian-listed business Mareterram, which catches and markets prawns. Brimstone Investment Corporation holds a 55% majority share in Sea Harvest, contributing to the group’s strong BEE credentials, which are important for securing fishing rights in South Africa.
Sea Harvest operates a sustainable fishing business and has made significant recent capital investments to improve efficiencies and increase its export capabilities. We believe the group is well positioned to benefit from demand for wild-caught seafood in both local and international markets.
A sustainably managed resource
Hake is a white fish found along parts of the Atlantic and Pacific Ocean coastlines. Cape hake accounts for roughly 29% of global hake supply, with around 50% of it sourced from South Africa and 50% from Namibia.
Since 2004, South Africa’s hake fishing industry has been certified by the Marine Stewardship Council (MSC) – a rigorous sustainability standard which requires, among other criteria, that annual catch volumes are kept to a renewable threshold. South Africa is one of the few sustainably-managed hake fisheries worldwide, but historically this was not the case.
In the 1960s, South Africa’s productive waters attracted many international fishing fleets. Hake catch volumes swelled to more than double the limits of today, and falling population levels threatened the industry’s future. In 1977, the UN’s Exclusive Economic Zone regulation gave coastal nations sole exploitation rights over their natural resources, and foreign fishing activity along South African shores was phased out. Since then, an annually revised total allowable catch (TAC) has been enforced based on scientific guidance to ensure sustainability and stocks have significantly recovered.
Successful fishing right applicants are granted a 15-year right to a proportion of the annual TAC. Commercial fishing companies are granted fishing rights mainly based on the applicant’s transformation credentials, capacity, past performance and employment-creation track record. Sea Harvest currently has access to 28% of the hake TAC (see chart), which reflects the company’s strong BEE credentials and employment track record. The group is a significant job creator in the rural areas of Saldanha Bay and Mossel Bay where it employs more than 2 400 people. The next fishing-rights allocation assessment will be held in 2020, for which we believe the group is well positioned.
In addition to protecting the industry’s sustainability, MSC-certification provides access to sophisticated markets where eco-labelling detailing a product’s sustainability credentials is a requirement. Eco-labelled fish products trade at a premium, which is evident in the price differences achieved between Namibian (non-certified) and South African hake.
Industry dynamics result in premium pricing
Global fish consumption has reached all-time highs. According to the Food and Agriculture Organization, seafood currently accounts for roughly 17% of all animal protein consumed globally and is as much as 50% in some countries. Demand for fish is expected to continue to climb as a result of population growth, shifting dietary patterns in favour of higher protein consumption, international trade providing wider consumer choices, and growing awareness of the perceived health benefits of seafood. However, while demand has grown, the supply of wild-caught fish has been stable for the last three decades at around 90 million tonnes a year (see graph), with 32% of fish sources overfished and most of the rest optimally fished.
Commercial fish farming, known as aquaculture, has grown rapidly and is responsible for the growth in the supply of fish (today accounting for 44% of global seafood production and more than 50% of fish for human consumption). However, hake aquaculture is not a commercially viable practice and hake supply remains limited to wild-caught volumes.
This strong growth in demand for a resource with limited supply will enable producers to continue to command strong prices. Sea Harvest has well-established long-term relationships with an international customer base, and is positioned to benefit from this price dynamic.
In South Africa, Sea Harvest is an iconic brand with a leading 37% retail market share in frozen fish. It has consistently achieved above-inflation price increases in recent years. The retail price for frozen hake has grown at an impressive 9.2% per annum since 2008. An exclusive agreement to pack frozen Cape hake and kingklip for Woolworths adds a further 7% to the group’s domestic retail market share. Frozen fish penetration in the SA retail sector remains low relative to global levels and other proteins, with higher LSM-consumers the primary buyers of frozen fish.
There is therefore significant scope for growth in retail hake consumption in SA. This indicates that the sector is positioned for growth over the long term as disposable income levels increase and consumers become more health-conscious. Sea Harvest’s strong brand, and its ability to bring innovative products to the market, perfectly places the group to benefit from a step-up in local consumer demand.
Improved profitability expected
Over the past three years, Sea Harvest has made significant capital investments into profit enhancing projects for its fleet and manufacturing facilities. This includes the addition of two new factory freezer trawlers, which increase the group’s capacity for frozen-at-sea products. These products are targeted at the export market, predominantly Europe and Australia, and are more profitable due to the higher pricing in these markets.
Cape hake is well-recognised internationally and is priced as a premium fish. Sea Harvest currently exports around 40% of its volumes and has a target to increase this to 50%, while reducing its current proportion of sales to the local foodservice industry which attracts lower margins. This shift towards higher margin export sales should be accompanied by higher profitability.
A further factor likely to enhance the group’s profitability is an expected improvement in hake catch rates following a reduction in the TAC in 2015 and 2017. Catch rates refer to the volume of fish caught per vessel per fishing day and are correlated to fish population levels. Higher catch rates are therefore more efficient and result in reduced trawling costs per kilogram of fish caught. From a peak in 2011, catch rates declined to a low point in 2015.
With a reduction in the TAC and a recovery of the population, catch rates are expected to increase, in turn reducing average trawling costs and improving profitability.
Platform for growth in Australia
Mareterram primarily catches prawns in Western Australia, the most widely consumed seafood in Australia. The fishery is MSC-certified and, in contrast to South Africa, Australian fishing rights are allocated in perpetuity and treated like a property right. It holds a 5% market share in the wild-caught prawn industry in Australia. Similarly to Sea Harvest’s SA operations, it is a vertically integrated group and has its own food service segment that provides a pathway to the market for Mareterram-caught products and other imported frozen seafood and potato products.
This acquisition allowed Sea Harvest to diversify its product offering and earnings and serves as a platform to potentially consolidate the fragmented Australian fishing sector through further acquisitions. With its proximity to the growing Asian markets, Australia is an attractive market in which to operate.
Further upside expected
Sea Harvest’s recent investments position it for ongoing growth and higher profitability in the coming years. The group has exciting opportunities for both organic and acquisitive growth in South Africa and Australia, and its strong balance sheet and experienced management team give it robust capacity to act.
Lizelle van Rooyen is an associate analyst with Kagiso Asset Management.