Blue Endeavour Expansion To Increase Production, But Rising Costs May Impact Margins

Key Takeaways

• Adaptive farming strategies and climate resilience initiatives aim to improve fish health and margins by reducing volatility and operational costs.
  
• Strong brand investments and international market expansion are expected to drive sustained revenue growth and improve margins.
  
• A decline in net profit and revised harvest forecasts highlight vulnerabilities, while rising corporate costs and feed pricing volatility threaten net margins and revenue growth.

Catalysts

Engages in the farming, processing, and sale of salmon products in New Zealand, North America, Australia, Japan, Europe, and internationally.

• The implementation of the adaptive farming strategy, including climate resilience initiatives such as hydrology assessments and R&D focused on thermotolerance, aims to reduce volatility in fish mortality rates and improve fish health outcomes, which can potentially enhance net margins through lower operational costs and improved reliability of fish supply.
  
• The Blue Endeavour project is advancing, with infrastructure and pilot trials in progress, aiming to expand the company's production capacity, driving future revenue growth through increased harvest volumes and optimized operational efficiency.
  
• Expanding distribution and solid revenue growth in international markets such as North America and emerging green shoots in China are expected to contribute to sustained revenue growth as demand for premium products remains strong across markets.
  
• Investments in brand building for the Ora King and Regal brands, along with a focus on specialty retail strategies such as Omega Plus for pet food, are expected to support margin improvements through higher brand equity and increased sales of high-margin products.
  
• The company's strong balance sheet, with net cash of $32.5 million, positions it well to fund growth initiatives like the Blue Endeavour project without incurring substantial debt, potentially improving earnings stability and reducing financial risk.

New Zealand King Salmon Investments Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Zealand King Salmon Investments's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.1% today to 6.8% in 3 years time.
• Analysts expect earnings to reach NZ$16.1 million (and earnings per share of NZ$0.03) by about February 2028, down from NZ$23.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, up from 5.1x today. This future PE is lower than the current PE for the AU Food industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.29%, as per the Simply Wall St company report.

New Zealand King Salmon Investments Future Earnings Per Share Growth

Risks

• The decline in net profit from $10.6 million to $6.0 million, despite increased revenue, highlights financial vulnerabilities, particularly affecting net margins.
  
• High volatility in feed pricing due to changing commodity prices and geopolitical issues presents risks to cost stability, which can impact earnings.
  
• The slightly higher mortality rate in fish farming could lead to unexpected losses and costs, affecting both revenue and net margins.
  
• The forecast for full-year harvest has been revised down due to early runting, which could limit revenue growth potential.
  
• The continued increase in corporate costs and expenditure, especially in capabilities and compliance, could pressure net margins if not offset by proportional revenue increases.

Valuation

• The analysts have a consensus price target of NZ$0.29 for New Zealand King Salmon Investments based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$235.9 million, earnings will come to NZ$16.1 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of NZ$0.22, the analyst price target of NZ$0.29 is 22.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.