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 
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.
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).
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!
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).
