SeaDragon (SEA) is a final-stage fish oil processor based in Nelson, New Zealand. Its existing 300 tonne (t) capacity plant produces omega-2 oils for the global dietary supplements market. A new 5,000t omega-3 plant has been commissioned and the first production of omega-3 will begin in late December 2015. A NZ$10m capital raise (completed on 2 October 2015), double H115-on-H116 sales and confirmation that the FY16 EBITDA target of NZ$0.144m should be achieved are positive indicators. We see entry into the omega-3 market as a game-changer for SEA because the market is ~50 times larger (by volume) than the omega-2 market and the new factory is capable of allowing SEA to produce more value-added products.
The H116 results showed the benefit of an improvement in the supply of omega-2 raw materials, increased factory throughput and improvements to the refining process. Revenue doubled to NZ$5.3m, the gross profit margin increased by 330bp to 32.2% and operating cash flow improved from a loss of NZ$2.144m in H115 to positive operating cash flow of NZ$0.758m in H116. This result underpins the confidence we have in our forecasts for FY16 EBITDA of NZ$0.195m compared to the company’s forecast of NZ$0.144m.
The plant commissioning has been conducted without a hitch and the investment to date is in line with SEA’s NZ$9.2m budget. The company reports that good progress has been made in putting together supply agreements with local fishermen.
Our DCF valuation of NZ$0.0205 is based on unchanged operating assumptions. It assumes that omega-3 production will reach capacity by FY19 and that omega-2 production will increase to 460t by FY19. The current share price is assuming that omega-3 production will be a moderate success. It is pricing in production reaching a maximum of ~23% of capacity. We think that the achievement of SEA’s fundamental value using a DCF valuation will depend on production levels reached by the omega-3 plant rather than on issues with demand. Volume demand is forecast by Frost & Sullivan (2013) to grow by a CAGR of 6.1% through to 2020. We think that SEA has the capacity to win market share, because it has a quality product sourced from sustainable, traceable fisheries.