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Bakkafrost – quality salmon from the Faroe Islands

Bakkafrost is by its own account the leading producer of “top quality” salmon from the Faroe Islands. The medium-sized company offers a wide variety of salmon products. The salmon (Atlantic salmon) is obtained from aquaculture. The Faroe Islands (residents of the Faroe Islands) have one of the longest value chains in the industry. Bakkafrost controls the entire production chain from fish feed to the processed products (value added products). Since the company has settled in the premium segment, it can ensure consistently high quality.

This analysis is a gift from Andreas & Daniel from Bavarian Value to the readers of Aktienfinder.Net. We thank you and wish you a profitable entertainment.

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(Bakkafrost overview; see Bakkafrost: https://www.bakkafrost.com/en/investor-relations/reports-and-presentations/)

The market

The global demand for fish is continuously increasing:

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(Amount of fish consumed worldwide from 2009 to 2020 (in millions of tons); Source: Statista.

One driver is certainly the growing world population. According to the Fish to 2030 report by the Food and Agriculture Organization of the United Nations (FAO) is from a World population of 9 billion people in 2050 went out. Fish is increasingly perceived as part of a healthy and balanced diet. Salmon is very popular here, but the increasing demand is causing a major problem: overfishing of the world’s oceans.

According to Fish Forward (WWF) are already 29% of the world’s fish stocks are overexploited and 61% at the maximum. To solve both the increasing demand for fish and the problem of global overfishing is coming Aquafarming in the game:

“Aquaculture or” Aquafarm / Aquafarming “is the controlled rearing of aquatic organisms, i.e. organisms living in water, especially fish, Mussels, crabs and algae. Common to all organisms produced in aquaculture is the assignment to an owner. This is how aquaculture differs from classic fishing in public waters. Aquaculture is particularly winning increasingly important because of overfishing.

The main worldwide activities in the field of aquaculture can be divided into three
Subdivide areas:

  • Fish, mussel, shrimp farming and other (fattening) for the food industry, e.g. B. Oyster farming
  • Seedling cultivation for fish farming, for species conservation or for stocking fishing waters
  • Micro and macro algae cultivation for the chemical, pharmaceutical and food technology industries as well as the feed market “

(See Wikipedia: https://de.wikipedia.org/wiki/Aquakultur)

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(Aquafarming vs wild caught; see FAO: http://www.fao.org/3/i9540en/I9540EN.pdf)

Aquafarming is growing and now contributes just as much to the offer as wild catching – and the trend is rising. In our opinion, the medium-sized family company on the Faroe Islands has positioned itself excellently in this promising field.

That’s how profitable Bakkafrost is

The Faroese were able to do so in the first half of 2020 the sales vs. compared to the same period last year by around 25% to DKK 2,389 million (Danish kroner).

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The development of sales and margins of Bakkafrost

Operational EBIT (EBIT including before fair value adjustments to biological assets) fell by around 29% to DKK 430 million. Operating EBIT is a widely used metric in the aquafarming industry. The “classic” EBIT fell by almost 19%, the second quarter developed significantly better compared to 2019. In the first quarter of 2020, EBIT was still negative due to a high fair value adjustment of the biological assets due to lower futures market prices for salmon. And from this you can already see that the aquafarming industry is not suitable for every investor, as the results can fluctuate sharply in line with salmon prices. The profit collapsed by over 19% to 324 million DKK.

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Development of earnings and dividends per Bakkafrost share

Bakkafrost now reports – since the 68.6% takeover of “The Scottish Salmon Company” – in 4 segments (previously 3).

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Development of Bakkafrost sales by segment (Source: FactSet Workstation)

We go through these segments in order or the value chain:

The Fishmeal, Oil & Feed (FOF) segment

The segment FOF is for the production of fish meal, fish oil and fish feed responsible, of which part is used in-house (Farming Division (FO)) and the rest is sold externally. Sales in this segment increased by 2%. “Internal sales” rose by almost 7%, which means that almost 55% of FOF sales were internal and 45% external in the first half of the year. Of course, we can only use external sales for the share of total sales at Bakkafrost. With just under 11%, the FOF segment contributes the least to the Faroese’s turnover.

The Farming segment – Faroe Islands (FO)

Now we come to the core business of Bakkafrost, the division Farming (FO) – the breeding of Atlantic premium salmon on the Faroe Islands. The farmed salmon are sold worldwide in fresh fish markets (external sales) or given to the VAP segment for further processing (internal sales). In Bakkafrost’s largest division, sales fell by around 20% in the first half of the year. Among other things, this was due to the lower salmon price – yes, when investing in salmon farming, the salmon price always resonates and therefore the quarterly results can be really interesting in the short term.

37.4% of sales were internal and 62.6% were external. Due to the high fair value adjustment of the biological assets, the EBIT margin in the first quarter is only around 4%. But if we use the operational EBIT for the margin, the result is a great 24%. For the share of sales, we again only use the “external” sales. Farming (FO) contributes almost 32% to Bakkafrost sales.

The Farming – Scotland (SCT) segment

The takeover of 68.6% of The Scottish Salmon Company for approx. € 374 million resulted in an increase in sales compared to the same period of the previous year. Farming (SCT) represents the operational business of The Scottish Salmon Company PLC (SSC). Salmon are bred like in the Farming Segment (FO), only in Scotland. This business area was in the first half of the year responsible for about 33% of Bakkafrost sales.

The Value Added Prodcuts (VAP) segment

In this segment the Fish are further processed into skinless and boneless salmon products. The VAP products are sold through long-term fixed price contracts. The main market is Europe. Sales increased here by almost 17% in the first half of 2019. over Bakkafrost has 24% of sales achieved in this business area in the first half of 2020.

Looking at the individual segments, you can see very clearly that Bakkafrost’s increase in sales was due to the takeover of SSC in 2019. In the 2019 Annual Report Chairman Rúni Hansen commented on the takeover as follows: “Most predominant was the giant leap we took when we decided to acquire The Scottish Salmon Company (SSC) and hereby diversify our farming operation into a new geography. The acquisition has increased the scope of Bakkafrost’s operation significantly and brings new growth and development opportunities to the Group. ” (See Bakkafrost: https://www.bakkafrost.com/en/investor-relations/reports-and-presentations/)

And we too see the takeover positively and not only because of the growth in sales. Bakkafrost has so far only focused on salmon farming on the Faroe Islands. The salmon there is considered to be of high quality, which is very much in line with the company’s premium claim. But this focus also comes with risks. Salmon farming can infest the fish with diseases and pests and this is a big problem for the aquafarming company when all the farming facilities are more or less in one place – as was previously the case with Bakkafrost on the Faroe Islands . This risk could be reduced with the takeover of SSC. A certain degree of diversification is also an advantage in salmon farming.

And then we have Corona. Bakkafrost has been largely spared so far. According to the company, the operating business was not affected in the Faroe Islands and only slightly affected in Scotland, so that the biggest problem with regard to COVID-19 from the management’s point of view is the extreme uncertainty in global markets.

Qualitative analysis

Bakkafrost is a salmon farmer in the premium segment. The company says it is most vertically integrated salmon farming company in the world. (See Bakkafrost: https://www.bakkafrost.com/en/about-us/full-vertical-integrated-value-chain/). The value chain goes from the production of fish meal, oil and feed to the core, the breeding of Atlantic salmon on the Faroe Islands and in Scotland, to the production of “value added products”.

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(Bakkafrost business model; cf. Bakkafrost: https://www.bakkafrost.com/en/investor-relations/reports-and-presentations/)

FOF and the “harvested salmon” are either sold externally or used for internal production. Bakkafrost is independent of other companies and can also control quality and sustainability across the entire value chain. The entire value chain is GlobalGAP certified. The VAP are sold through long-term fixed price contracts

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(Distribution of sales Bakkafrost 2019; cf. Bakkafrost: https://www.bakkafrost.com/en/investor-relations/share-information/bakkafrost_quick-fact-sheet/)

The Faroese attach great importance to sustainability. For example, Bakkafrost is a Founding member of the Global Salmon Initiative (GSI), an international initiative that advocates more transparency and sustainability in aquafarming. The company was also the first company in the Faroe Islands to receive ASC certification for a plant. Aquaculture Stewardship Council (ASC) was founded in 2010 by WWF and IDH (The Sustainable Trade Initiative) and is an independent organization that sets standards for responsible aquafarming. To In 2020 Bakkafrost would like to have all systems ASC certified.

In 2019 you also have the third place in the Coller FAIRR Protein Producer Index reached. The Coller FAIRR Protein Producer Index rates meat, dairy and farmed fish producers according to significant environmental, social and governance risks.

Bakkafrost can still referred to as a family business become. The largest shareholders are Oddvør Jacobsen (7.77%) and Johan Regin Jacobsen (7.81%) with together over 15.5% of the company shares. Johan Regin Jacobsen is the CEO of Bakkafrost and son of the founder Hans Jacobsen. Oddvør Jacobsen is the mother of Johan Regin Jacobsen and the widow of Hans Jacobsen. Regin Jacobsen’s management has an excellent reputation. And since his own wealth largely depends on the long-term development of Bakkafrost, he is certainly anxious to make good and sustainable decisions in the future.

Speaking of shares: To support the takeover of The Scottish Salmon Company, new shares were issued last year, increasing the number of shares. An increasing number of shares for a dilution and is of course always a warning signal for investors. In the case of Bakkafrost, however, we think that it makes sense in terms of the acquisition and are less critical of it.

In addition, Bakkafrost is pursuing the long-term goal of its dividend policy that 30-50% of adjusted EPS shall be paid out as dividends. (See Bakkafrost: https://www.bakkafrost.com/en/investor-relations/financial-strategy/dividend/) Bakkafrost pays attention to the long-term and sustainable increase in shareholder value and tries to communicate and implement this.

Long-term development of Bakkafrost’s dividend

Key figure analysis

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(own calculations)

Bakkafrost has a high equity ratio, which has always been over 60% in recent years. This, together with an average low dynamic level of debt, shows that the group is solidly financed.

The company is also above average profitable. The EBIT margin fluctuates between values ​​of 17% to 37%, but the lower range is still impressive. This impression is also confirmed by the operating cash flow margin with values ​​of over 20% over the past three years. The profit increases in the long-term trend, but is of course – like the EBIT – subject to the respective salmon prices and the “harvest”, which of course cannot be “fixed” every year with a natural product as precisely as in other industries. For a rapidly growing company, Bakkafrost has a thoroughly good fundamental basis, but one has to be prepared for fluctuations.

Competition & competition analysis

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(own calculations)

Bakkafrost is nowhere near the largest fish in the pond (pun intended

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