New Zealand King Salmon (NZK)

New Zealand King Salmon trades on the NZX under the ticker code NZK.   The clue as to what they do is in the name, they grow salmon in Marlborough.  It is a reasonably easy company to understand and get your head around the economics.   They are a reasonably well-known company, they have been listed since 2016 and have a market cap of around NZ$260 million.

The stock, however, has been extremely volatile for shareholders over the last year or so (I like volatility as it often provides opportunities to buy stocks).  For a company like NZK there are a lot of things that are outside of its control such as sea temperatures and government regulation.  These factors have been impacting the stock price this year with people either selling or buying the company based on their interpretation of certain events.  These sort of events are part and parcel of holding a stock like NZK and can be expected going forward.  So I think if you are owning a company like NZK you can expect the occasional, or perhaps regular up and down from factors such as this.

During the week, the company provided guidance for the 2020 financial year and forecasted EBITDA of between $25 and 28.5 million.  I am certainly no expert on Salmon farming and the costs involved.  But I imagine that there is a lot of real depreciation in their plant and equipment.  Their stuff is in the sea and is subject to the damage that the sea and salt invariably cause.  Providing guidance that ignores the cost of depreciation in the case of NZK might paint an unrealistic picture as to what the profitability is.

Because of this, we will try to estimate what the profits will be.   In the last two financial years, they have recorded a depreciation charge of approximately $5 million.  So let’s make the assumption that there will be another $5 million in depreciation for 2020.  If we also keep financial and tax constant in our assumptions then the numbers will be around the same or slightly lower than the most recent full year.

The company said that harvest volumes will be “very slightly above 2019” at 8,000 mt.  Due to seasonality they expect sales to be weighted towards the second half of 2020.  They expect that they will spend $17 million on CapEx in 2019 and $20 million in 2020.   Some of this will be to facilitate future growth while the rest will be upgrading existing facilities.  The company will always need to spend money to fix, upgrade, repair and expand its current facilities to maintain efficient operations.  In most cases, this money is on top of the money that they spend to grow.  This capital expenditure is not a bad thing, it is just a fact that you need to factor in your valuation.

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