Evolving Regulations And Climate Threats Will Challenge Norwegian Aquaculture Profitability

Key Takeaways

• Persistent biological and environmental challenges, alongside regulatory uncertainty, threaten cost stability, profitability, and revenue growth.
  
• High investment in offshore and advanced production increases execution risk, potentially depressing returns and long-term earnings if efficiencies are not realized.
  
• Effective cost controls, strategic expansions, and robust financing position SalMar for strong, resilient growth and long-term improvements in margins and profitability.

Catalysts

An aquaculture company, produces and sells farmed salmon in Asia, North America, Europe, and internationally.

• The ongoing high proportion of downgraded fish and persistent biological challenges such as diseases, wound problems, and jellyfish attacks continue to drive up operating costs and reduce average sales price, severely threatening net margins and long-term earnings, even after process improvements or vaccine updates.
  
• Regulatory uncertainty remains elevated, with the Norwegian aquaculture white paper proposing major changes to licensing, lice quotas, and fees; stricter regulations or unexpected tax increases could sharply raise compliance and operational costs, while also imposing production limitations and forcing expensive adjustments, reducing both revenue potential and net profitability.
  
• The elevated risk of climate change-driven disruptions-including ocean warming, acidification, increased disease pressure, and more frequent marine events-poses a structural threat to farmed salmon survival rates, cost stability, and harvest reliability, undermining long-term consistency in revenue and squeezing margins.
  
• As consumer scrutiny of sustainability and animal welfare increases, any struggle by SalMar to further reduce environmental impacts or quickly adapt to evolving standards could trigger a shift in demand toward alternative or premium-priced proteins, capping future volume growth and pressuring realized sales prices.
  
• Heavy investment in offshore and technologically advanced production models-exemplified by the integration of SalMar Ocean and expansion of biomass-heightens execution risk; any failure to realize promised cost efficiencies or yield improvements would result in heightened debt, stagnant return on capital employed, and weaker long-term earnings power.

SalMar Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SalMar compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SalMar's revenue will grow by 11.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.3% today to 15.1% in 3 years time.
• The bearish analysts expect earnings to reach NOK 5.2 billion (and earnings per share of NOK 38.76) by about August 2028, up from NOK 1.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 35.7x today. This future PE is lower than the current PE for the GB Food industry at 22.9x.
• Analysts expect the number of shares outstanding to grow by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.16%, as per the Simply Wall St company report.

SalMar Future Earnings Per Share Growth

Risks

• SalMar reports record high levels of fish and biomass at sea, providing a strong foundation for increased harvest volumes in 2025 and supporting organic growth, which is likely to improve revenue and help lower unit production costs going forward.
  
• The company highlights ongoing strong and growing global demand for sustainable proteins such as salmon, with mentions of new customers and markets seeking long-term supply, suggesting long-term topline growth potential and resilience in revenue streams.
  
• SalMar continues to demonstrate effective cost control despite short-term biological and price challenges, maintaining stable operating costs and investing in operational efficiency, which may sustain or even improve net margins and earnings over the long term.
  
• Strategic expansions including mergers (such as with Wilsgård) and acquisitions (such as Knutshaugfisk), as well as further planned offshore development under the now fully integrated SalMar Ocean segment, position the company for volume growth and operational synergies that can drive higher operating income and improved profitability.
  
• The company boasts a solid liquidity position, robust financing through green bonds with long maturities, stable investment-grade credit rating, and flexible capital, ensuring it has the necessary resources to pursue profitable investments and weather short-term volatility, supporting future earnings and balance sheet strength.

Valuation

• The assumed bearish price target for SalMar is NOK420.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SalMar's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK640.0, and the most bearish reporting a price target of just NOK420.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NOK34.4 billion, earnings will come to NOK5.2 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 6.2%.
• Given the current share price of NOK472.8, the bearish analyst price target of NOK420.0 is 12.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.