Land Based Flow Through Salmon Farming Will Drive Strong Long Term Earnings Potential

Catalysts

About Andfjord Salmon Group

Andfjord Salmon Group is developing a large scale, land based, flow through salmon farming facility designed for high fish welfare and sustainable production.

What are the underlying business or industry changes driving this perspective?

• Completion of core infrastructure at Kvalnes, including tunnels, harbor and technical systems for up to 12 pools, allows incremental capacity additions at lower marginal CapEx. This supports operating leverage and improved return on invested capital, which may enhance earnings growth.
• Planned ramp up from 1.1 million smolt in 2024 with five pools this year and additional pools in 2025 and 2026 positions the company to scale volumes into a structurally tight global salmon market. This provides a clearer path to higher revenue and cash flow generation.
• The flow through, deep water intake concept that avoids salmon lice and reduces disease pressure can support higher survival rates and feed conversion versus industry averages. This may enable structurally higher net margins as biomass and harvest volumes increase.
• Warmer, stable seawater sourced from 50 meters depth near the Gulf Stream may increase biological robustness and shorten grow out cycles. This could accelerate harvest timing, enhance asset turnover and support improved earnings visibility through 2026 and 2027.
• New long term regulations that confirm the facility as on land and exempt existing sites from additional disinfection requirements materially reduce regulatory risk. This improves predictability of capacity expansion and may support valuation through more stable long term margin and cash flow outlooks.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Andfjord Salmon Group's revenue will grow by 1012.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8327.8% today to 9.2% in 3 years time.
• Analysts expect earnings to reach NOK 118.8 million (and earnings per share of NOK 0.88) by about December 2028, up from NOK -78.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NOK155.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 49.4x on those 2028 earnings, up from -35.5x today. This future PE is greater than the current PE for the NO Food industry at 26.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is still pre revenue with no current harvesting activity and is funding its multistep buildout through bonds, construction loans and sale leaseback arrangements. Any delay or cost overrun in completing Phase 1 and Phase 2A could force further dilution or more expensive debt, weighing on earnings and net margins over the long term.
• The growth plan assumes successful biological performance at much larger scale than the pilot pool. However, long grow out cycles of 12 to 15 months, dependence on consistent Gulf Stream temperatures and evolving disease or environmental challenges could lead to lower survival rates and weaker feed conversion, reducing biomass growth, revenue and operating margins.
• The business case relies on ramping capacity to more than 23,000 tonnes annually within a few years, yet smolt release volumes and post smolt plans beyond the first 1.1 million fish remain uncertain. Any slowdown in licensing, smolt supply, logistics or harbor operability at this weather exposed site could delay volume ramp up and push back the path to positive earnings.
• Although current regulations are favorable, land based aquaculture is drawing increased regulatory attention. Any future changes around disinfection, environmental standards or coastal infrastructure could require additional capital investments, lifting long run operating costs and compressing net margins.
• The strategy assumes robust long term demand and pricing in the global salmon market. If sea based farmers successfully improve biology and capacity or if alternative proteins gain share, Andfjord Salmon may not achieve the price and volume assumptions needed to justify high projected growth in revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NOK41.67 for Andfjord Salmon Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NOK1.3 billion, earnings will come to NOK118.8 million, and it would be trading on a PE ratio of 49.4x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of NOK29.0, the analyst price target of NOK41.67 is 30.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.