In depth fundamental analysis of SalMar

During the last couple of months, I was looking for growth at a reasonable price. In today’s environment, most companies which have a clean balance sheet, high margins and good future potential are very highly valued. I took the time to expand my analytical knowledge and the short summary below is the result. The analysis is divided into three parts, company profile, fundamental data/analysis and some of the uncertainties/risk/opportunities with the company. I gave a presentation pitching this stock and figured it would be interesting to share a summary of my analysis with you people as well as I already had put a lot of time and work into it.

I hope it’s an interesting read (especially as this is a company which isn’t often talked about in most investor communities) and may even inspire you a bit :slight_smile: This company isn’t currently available on T212.

What does SalMar do?
In short, SalMar is a Norwegian company who produces, processes and sells Atlantic salmon globally. Let’s take a quick look at how that sweet fries salmon actually gets onto your plate!


Source: my own presentation using Rutland Theme

The Atlantic salmon is a fish which hatches from an egg, with these fish that happens at an onshore hatchery. There the eggs hatch, from which the fish starts is live growing until its ready to transition from fresh to saltwater. When the fish is ready for that transition (smolt face) it’s transferred to inshore facilities to fully mature. The fish is then harvested and processed. SalMar then sells the fish trough it’s a global network of partners so that sweet fish can end up on your plate! As you may have noticed SalMar thus has a fully integrated chain from production to the sale of the fish.

SalMar is a truly global company as can be seen in the illustration below. Most of their sales come from Europe and Asia. In Europe Norway, Poland, Sweden and the Netherlands are it largest single markets while in Asia Japan, South Korea, and Taiwan represent it’s largest single markets.

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Source: SalMar 2019 annual report

The salmon Market
It might be interesting to take a short look at the market they operate in. The Salmon market is a growing market (see Market Distribution and Demand). Growth in the global population and a drive for less environmentally intensive methods of producing food keep bringing growth into this market (1.1kg of feed turns into 1 kg of fish which is really efficient in comparison to beef which requires 25kg of feed to produce 1 kg of beef).


Source: Mowi (a competitor) 2019 annual report, gwt = gutted weight in tonnes

With supply concentration in mainly two countries (see pie chart) this poses an interesting opportunity for SalMar. Chile mainly ships to the Americas while Norway mainly ships to Europe. SalMar has innovative plans to consolidate and become a company with a wide moat (if it already hasn’t one).
image
Source: location data from SalMar 2019 annual report

SalMar produces close to its end markets but due to the conditions in Asia it’s difficult to produce salmon there, as a result SalMar has built up interest in several associates in the region to become increasingly relevant in the region.

The case on SalMar
Let’s actually then take a look at why one could be interested in SalMar. SalMar has a market cap of €5 billion, making it a decent midcap. Looking at the numbers what initially got me interested was the high-profit margin, remember this is a company in the food industry. The most important thing to look at on this statement is the Operational EBIT margin and operational EBIT.

Why operational EBIT? Earnings before Interest and Taxes (Ebit) is the best measure to look at for underlying operations in a capital intensive industry (as this industry is, large fish farms etc.) because it doesn’t take out the deprecation.
EBITDA is a near meaningless metric in a capital intensive industry. The extensive amount of capital spending required means that EBITDA and cash flow will often be very far apart. In such a case, EBIT may be more appropriate, as the Depreciation and Amortization captures a portion of past capital expenditures. Operational EBIT is different from regular EBIT that the fair value adjustments aren’t included. Why leave them out? Fair value changes are for the biological assets aren’t operating expenses and thus don’t completely fit when looking at underlying operations.

With that out of t he way we can just admire those margins. They have been steadily increasing up until 2019, in 2019 SalMar (and some competitors as well) faced a supposedly one-off problem related to fish health which resulted in higher costs and lower realized prices. This has put pressure on the share price which hasn’t really moved ever since. I think that’s unjustified as margins are returning back to normal (even during covid as can be seen for the H1 2020 results). I’m confident that growth will return to SalMar.


Source: annual reports 2015-2019 and Q2 2020 quarterly report

But let’s first take how the previous growth came about, see the data provided below. Looking at the ratios it becomes apparent that management has been very prudent in keeping debt at reasonable levels while providing great growth in shareholder equity. The balance sheet looks very clean and I am just impressed. Having some debt gives tax benefits but too many can drown a company. SalMar has achieved growth in a capital intensive industry with very little debt and thus remains very resilient and flexible (covid didn’t have any meaningful impact on the balance sheet). A company with good margins, a clean balance sheet would probably be highly valued in today’s market but after some calculations, I found otherwise, let’s take a look!


Source: Q2 2020 quarterliy report and Simply Wall st visualisations

I did a Discounted cash flow (DCF) calculation on SalMar, I won’t go into detail as that’s probably boring for most people but I got different results for a fair value for SalMar stocks than for example Simply Wall st. Why is that? I used different risk-free rates (I took dutch 10y government bond while simply wall street took Norwegian 10y) and looked at a shorter time period (I looked forward 4 years while simply wall street looked until 2030). These fair values represent good margins of safety thus increasing my interest in this company (DCF is perfected, that’s why we looked at other fundamentals first).


Source: Own calculation and simplywall.st

The opportunities and risks
You may have noticed that I haven’t shown the organisational structure yet, well I made my own. This company with and approx. €5B market cap is surprisingly still mostly in hands of insiders, which makes for a good alignment between shareholder interests and insiders but also poses risks. The private company on the books holds 52% of SalMar while it’s almost fully owned by the current Ceo and founder.

Aside from that, we can easily see that SalMar has quite some subsidiaries (in black) and some joint ventures/associates (in white). Note that Icelandic Salmon AS recently did a private placement of shares to fuel further growth thus the percentage owned by SalMar might have changed.


Source: Made using Lucidcharts, 2019 annual report, Q2 2020 quarterly report and simplywall.st

Offshore fish farming
SalMar has some exiting project, the most exciting of them is the worlds first (and still only) offshore fish farm, Ocean farm 1 (see illustration below). This farm was a huge success and already went trough it’s second production cycle in august 2020 (we’ll see the results in the next quarterly report). Competitive margins continue to be achieved and with offshore farms a large growth window for SalMar has opened (they mentioned that with offshore farms disruption in supply regions like chile could be achieved). Currently another offshore farm is being developed, it’s called the Smart Fish Farm and will be twice as big as Ocean farm 1.

But aside from the exiting technological innovation in the offshore part SalMar is also a leading innovator in it’s more traditional business parts. They’re expanding capacity at some hatcheries and even planning on building new ones. Processing volumes will be greatly increased when InnovaNor starts operating somewhere in 2021 (see picture bellow of current construction progress). This will be northern Norway’s most efficient processing plant and might fuel additional growth for SalMar.

Shareholder of the last couple of years should be pretty happy and I think the next couple of years will be spectacular as well!
image

This stock isn’t currently available on T212 (no access to Norwegian markets) but maybe it’s german listing (Fra:jep) could be added.

Hope I provided some value!

Disclaimer:
I personally don’t own any shares of this company (would love to but sadly isn’t available on T212).
My parents have 20 shares of SalMar (~€800) bought trough the German listing trough the broker Flatex.
The presentation was given to a study investment club as a pitch (they have €2K AUM total incl cash and as of currently don’t have any position in SalMar).

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Hi @Etypsyno thanks for the detailed analysis. Would you mind sharing your personal positions and interests in the company?

Transparency will help others see the opportunity here more clearly.

Also, which exchange do you trade/buy SalMar yourself? Can you share the ticker and location?

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Completely forgot the disclaimer, my bad. Added it to the bottom. I personally don’t own any shares of this company (would love to but sadly isn’t available on T212), the presentation was given to a study investment club as a pitch (they have €2K AUM and as of currently don’t have any position in SalMar). My parents have 20 shares of SalMar (~€800) bought trough the German listing. The market cap of the company is €5B (54B NOK) if that is of any concern.

They have a German listing fra:jep, OTCMKTS: SALRF (otc US listing), LSE:0FWY (london listing) aside from their main oslo listing. The Oslo listing is the most liquid.

Do you mean 2000 EUR AUM for the investment club or 2000 shares of SalMar?

Also I checked most liquid is the home market, Oslo.

The study investment club has 2000 eur AUM in total (incl cash), no shares of SalMar.
More details for clarification: it’s a student association and most membership money goes to activities (as can be expected from a student association) but a part (2000 euro) is set aside for members to learn investing. That 2000 euro is managed by a team, I applied to be part of that team and was asked to pitch a stock, I pitched SalMar.

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Very interesting analysis Etypsyo, thank you for sharing it.

I like that it has sufficient current assets to cover all the liabilities (or close enough).

P/E ratio seems to be around 23.

I don’t know what is typical for the sector.

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Nice write up.

What’s neat about salmon farms imo is the barriers to entry - it takes a shit ton of capital and biomass licences to start a farm, even then it’s about 2-3 years getting from smolt to harvest. What’s more, salmon can only be farmed in ideal conditions (e.g. temperature), meaning it’s only possible to farm in Chile, Norway, Scotland, etc. All this wards off competitors beautifully, and has contributed to how cash generative Salmar is.

Salmar in particular is great in being owner-operated, vertically integrated, and having their breakthrough offshore project as you noted. I regret they don’t have a stake in a Chilean farm as the LatAm home market and Asia/USA export exposure would be awesome, but Chilean farmers have proved quite risky anyhow (red tide scandal, etc).

Land-based farming is the biggest/most disruptive long term threat imo (e.g. Atlantic Sapphire), but the barriers to entry are working against them nicely; most land farms are thusly loss making BUT if on-land farming takes off, it’s a game-changer: You can farm next to end markets to reduce transportation costs, monitor conditions (no sea lice, algal blooms, etc), and so on.

Plant based salmon alternatives (a la beyond meat) and Regulatory changes (revokation of licenses, etc) are also key risks in my view.

I’m still looking into SalMar, though. It’s definitely nowhere near my target price/estimate of fair value atm anyway, so my research has been academic. We’ll have to see how I feel if/when it ever trades around my target.

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I personally would look more at the forward PE of 16.53 (from yahoo finance) as 2019 results were exceptionally weak (not only for SalMar) and push up the pe quite a bit. Significant competitors are for example Mowi, P/F Bakkafrost, Leroy Seafood.
With corresponding PE’s of: 67.25, 28.48, 22.86
Forward PE’s of: 12.24, 15.82, 9.33.

So Salmar isn’t the cheapest based on forward PE but is roughly inline with the sector. Note that SalMar has some project coming online in 2021 which will show in the next couple of years (don’t know about all competitors to that depth) so maybe that or expected growth rates above estimates would explain the PE.

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I would also really like if the broke into the Chilean market, maybe with the offshore projects, it becomes easier for them to enter new markets (with climate change flexibility also becomes more important for the sector).

I personally hadn’t thought about complete onshore and plant-based farming, and don’t think I’m informed enough to form an educated opinion/prediction about those.

About the regulatory risks, the Norwegian government seems to be on their side for now (changed development licenses into production licenses for SalMar). The Norwegian government want to diversify away from oil, and is doing that through its aquaculture sector. I recall reading they dropped (for now) the proposal to enact a specific tax which could affect the aquaculture significantly.

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Also aren’t Ark invest into Aquabounty who can produce double the amount of salmon I think with genetic modification. They might out do your Salmar long term?

I work in the industry and Salmar, Mowi and Leroy are the main players. Wish I could buy shares from all 3 on T212

Yeah, do you mean the ‘resource rent tax’? I remember that too, it was scary to read because I think it was like a 40% tax. It would make land based farming even more attractive. Glad it’s been dropped but as you said it could pop up again.

I know they’re far from being the biggest players, but i’ve always liked Bakkafrost. They have a monopoly in the faroese market, and faroese waters (regulation, current, temperature, etc) are the best in the world for salmon farming imo. I firmly believe that’s why they have market leading margins.

More info about the resource rent tax (called economic rent tax by SalMar) from Salmar 2019 annual report.

In September 2018, the Norwegian government appointed
a commission to assess how taxation of the aquaculture
industry should be framed. The commission published its
report (NOU 2019: 18) in November 2019. A majority of
the commission’s members proposed the introduction of
an economic rent tax amounting to 40 per cent of the food
producers’ profits, in addition to corporation tax at the rate of
76 Report of the Board of Directors 2019
22 per cent. If the majority proposal were adopted, it would
have wide-ranging consequences for the Norwegian salmon
farming industry, suppliers and other industrial ripple effects
that this sector causes in Norway. Even though Norway’s
inshore coastal waters are well suited to the production of
Atlantic salmon, competition from other countries is increasing sharply. In many countries, the amount being invested in
inshore and onshore fish farming has reached unparalleled
levels, and a significant proportion of the salmon output that
Norway used to be alone in producing, now takes place in
other countries’ national waters. The use of new aquaculture
technology will enable salmon to be produced within what
are currently large export markets for Norwegian producers.
This applies to the USA, for example, where billions are being
invested in onshore fish farming facilities.

Against this backdrop, therefore, there can be no doubt that
jobs and investments in salmon production will to a greater
extent end up in countries other than Norway, and in other
sectors, if we impose additional taxation on Norwegian food
producers that compete in world markets. Norway’s aquaculture sector is one of the largest contributors to value creation
and tax revenues along the Norwegian coast. In 2018, it
contributed approx. NOK 4 billion to coastal municipalities
and central government through the Aquaculture Fund in
consideration for new capacity growth. Fish farming licences
in Norway have largely been acquired at the prevailing market
price, to a large extend through their purchase and sale in the
market, as well as through payments to the public authorities.
In both 2018 and 2019, SalMar companies and employees
contributed over NOK 1.1 billion in direct and indirect taxes
to central and municipal authorities. SalMar wishes to remain
a major contributor to society, as a taxpayer and as an entrepreneur that creates employment opportunities up and down
the Norwegian coast.

SalMar’s board of directors is pleased that members of the
Norwegian Confederation of Trade Unions (LO), Confederation of Norwegian Enterprise (NHO) and the Norwegian
Association of Local and Regional Authorities (KS) have joined
forces to oppose the proposal to introduce an economic rent
tax. Statements by the Norwegian Labour Party in February
2020 also indicate that there is a parliamentary majority
against an economic rent tax in the shape presented by the
commission. SalMar’s board of directors hopes that this can
form the basis of a broad majority, such that the aquaculture
industry can be assured of stable, acceptable and predictable framework conditions, in the same way as the rest of
Norway’s business community.

More info on the drop of that tax

Opposition to the “salmon tax” has spread widely in the Storting. However, the committee that investigates such a tax will continue its work, says the Minister of Finance.

In recent weeks both the country’s liberal and conservative parties voted down proposals for a tax, the likes of which is already imposed on the hydropower and oil industries.

It is not only in the Liberal Party, the Conservative Party and the Green Party that opposition to a ground rent tax is strong. It is also in the Center Party.

https://www.undercurrentnews.com/2019/03/26/norway-rules-out-resource-rent-tax-on-aquaculture/
https://e24.no/naeringsliv/i/K3MMAy/parti-etter-parti-sier-nei-til-grunnrenteskatt-paa-oppdrett-lakseskatt-utvalget-fortsetter-som-foer (link from the undercurrentnews article, used google translate as I don’t know Norwegian). I don’t know anything about Norwegian politics but it seems that most parties from the entire spectrum are against the introduction of this tax.

They indeed have very good margins (if I’m correct even the highest out of SalMar, Leroy and Mowi). I really need to look deeper into them as there’s nothing wrong with buying multiple companies in the same sector imo.

I would imagine the Bakkafrost result will now be weakened after taking on the Scottish Salmon Company

All this sounds like a great opportunity for a Salmon Pie…
:yum:

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Bakkafrost Q3 result announced tomorrow, LSG on Weds and Salmar on Thursday

seems that SalMar and Mowi got added. For SalMar it seems they only added the unsponsored ADR so I need to look into that as I don’t fully understand the implications behind that (yet) on dividend taxation and how many shares it actually represents or how it works.

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interesting - do let us know what you find out…

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Some information about ADRs

Summary

An ADR is a negotiable certificate that evidences an ownership interest in American Depositary Shares (“ADSs”) which, in turn, represent an interest in the shares of a non-U.S. company that have been deposited with a U.S. bank. It is similar to a stock certificate representing shares of stock. The terms ADR and ADS are often used interchangeably by market participants.

An ADR may represent the underlying shares on a one-for-one basis, or may represent a fraction of a share or multiple shares.

ADRs are created by a depositary bank when the non-U.S. company, or an investor who already holds the underlying non-U.S. securities, delivers them to the bank or its custodian in the non-U.S. company’s home country. The bank will issue ADRs to the investor in the U.S. and the investor will be able to re-sell the ADRs on a U.S. exchange or the over-the-counter market. ADR holders may also surrender ADRs in exchange for receiving the shares of the non-U.S. company. These transactions are generally performed by brokers and other types of investors who are active in foreign securities markets.

There’re 3 levels of ADRs
The important takeaway is that level 1 is unsponsored (issued by a depositary bank without the involvement, participation, or consent of the foreign company behind the ADR) and thus is traded only OTC.

Mowi ratio is 1:1 (found in edit link, Mowi btw is a sponsored ADR)
SalMar Ratio is 1:4
https://depositaryreceipts.citi.com/adr/guides/unspresource.aspx?pageId=5&subpageid=173


Anyone know what rate we’re charged? I literally don’t know which of the three sequences applies. In order the net tax rates (incl fees) are ~8%, ~23% and ~32%

Edit: https://www.adrbnymellon.com/directory/dr-directory directory including other banks