Sparebank1 Markets: “Chile pushes up global growth – we are still not worried”

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Salmon global supply lifted.

Sparebank1 Markets salmon analyst Tore Tønseth has written in a financial statement on Sunday evening that on the back of increasing biomass in Chile, the investment bank has lifted their 2019-2020 global supply growth to 6.9% (6.0%) and 3.8% (3.0%) YoY, respectively. Expected Chilean growth in 2019 has doubled from 4.2% to 8.0% YoY.

“With higher supply-growth and price development in first quarter 2019 coming in somewhat below our assumption, our salmon price assumptions for 2019-2020 are cut with NOK 0.5/kg (EUR 0.05) to NOK 60.5/kg (EUR 60.5) and NOK 61.5/kg (EUR 6.3). On company level, this equals NOK 2-4% (EUR 0.2-0.4) lower EBIT for the majority of the farmers” wrote Tønseth.

Tønseth explained that in Chile, he didn’t believe that 20% more biomass will result in 20% more growth in 2019 because of the risk for lower harvest weights. Secondly, some of the growth is coming from region XII with longer production cycle, potentially pushing some volumes into 2020, “which still looks very tight,” he wrote. He added that there will probably be some further inventory build-up and that a large proportion of this is going into the frozen market, which will have a limited impact on the EU fresh market.

“Although our estimates are slightly down, we maintain our recommendations for majority of the companies with exception of Mowi (MOWI), which has been lowered to Neutral (Buy). We reiterate our positive sector view and would like to highlight LSG, GSF and NRS as our sector top-picks. We still believe in a short term positive momentum as limited supply is likely to push up price to relatively high level. Several of the farmers also continue to trade at low multiples (9-11x P/E 2019) and have dividend yield in the 3-6% range. There is also still plenty of earnings growth potential through cost reductions or volume growth,” he added.

The banks current recommendations (in NOK) are MOWI Neutral/215 (Buy/220), LSG Buy 75 (78), SALM Neutral/445 (unchanged), BAKKA Sell/420 (unchanged), GSF Buy/125 (Buy/130), NRS Buy/220 (unchanged), SSC Buy/20 (unchanged), AKVA Buy/80 (Buy/90) and NTS Buy/66 (Buy/67).