China Salmon Capacity Expansion And Premium Positioning Will Drive Long-Term Upside

Catalysts

About Nordic Aqua Partners

Nordic Aqua Partners operates land based salmon farming facilities in China, supplying fresh, high quality Atlantic salmon to local consumers.

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

• Ramp up of Stage 2 and subsequent Stage 3 capacity, supported by standardized modular design and lower than previously guided CapEx, is expected to materially lift harvest volumes and revenue while improving capital efficiency and return on invested capital.
• Positioning inside China with local production close to major consumption hubs allows the company to serve rising domestic demand for fresh salmon and health focused protein. This positioning may support sustained volume growth and pricing power, and in turn may benefit the company’s revenue and earnings.
• Premium brand attributes such as unique freshness, high superior share and Raised Without Antibiotics certification are aligned with the growing focus on food safety. These attributes may support price premiums versus imports and potentially expand gross margins.
• New long term renminbi financing and strategic state owned investors provide a deeper local funding base and potential access to a future Chinese listing. This could reduce financing costs, support capacity build out and influence the company’s earnings profile.
• Operational learning from Stage 1, combined with stable biology and standardized Aqua Group units in later stages, may contribute to lower unit operating costs over time. This could support net margins even in periods of softer salmon prices.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Nordic Aqua Partners's revenue will grow by 86.0% annually over the next 3 years.
• Analysts are not forecasting that Nordic Aqua Partners will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Nordic Aqua Partners's profit margin will increase from -150.3% to the average NO Food industry of 10.2% in 3 years.
• If Nordic Aqua Partners's profit margin were to converge on the industry average, you could expect earnings to reach €8.2 million (and earnings per share of €0.38) by about December 2028, up from €-18.7 million today.
• 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 34.1x on those 2028 earnings, up from -7.7x today. This future PE is greater than the current PE for the NO Food industry at 26.6x.
• Analysts expect the number of shares outstanding to remain consistent over 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 remains loss making despite rapid capacity ramp up, as seen in the current negative operating EBIT of minus EUR 4.8 million and high unit costs of EUR 9.45 per kilo. If biological performance or growth again weakens as in Q2, scale benefits may not materialize and net margins and earnings could stay structurally depressed.
• Nordic Aqua Partners is highly exposed to the Chinese Atlantic salmon price cycle. Q3 already showed how harvesting into historically low price months in August and selling smaller fish dragged realized prices down, so a prolonged period of weak or volatile salmon prices in China could cap revenue growth and compress margins.
• The long term strategy depends on major capacity expansions to Stage 2 and Stage 3 with large CapEx requirements. Although Stage 2 costs were cut to EUR 65 million, any cost overruns, construction delays or failure to achieve expected cost reductions in Stage 3 would weaken capital efficiency, increase financing needs and pressure future returns on invested capital and earnings.
• The business model is concentrated in China and tied to local banks and state owned investors. Changes in Chinese regulatory, environmental or capital market policies, or difficulties executing a potential local IPO, could affect access to funding, increase compliance costs and constrain the company’s ability to grow revenue and earnings.
• The company’s premium positioning is based on attributes like unique freshness and Raised Without Antibiotics certification. Norwegian imports currently dominate a fast growing Chinese market and benefit when global prices are low, so stronger competition from imported salmon or rival land based producers could erode price premiums, slowing revenue growth and limiting improvement in gross and net margins.

Valuation

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

• The analysts have a consensus price target of NOK128.86 for Nordic Aqua Partners based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK142.88, and the most bearish reporting a price target of just NOK114.84.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €80.0 million, earnings will come to €8.2 million, and it would be trading on a PE ratio of 34.1x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of NOK80.0, the analyst price target of NOK128.86 is 37.9% 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.