Sanford shares a bumper catch

The global explosion in food prices and increasing demand for protein isn't just affecting New Zealand's dairy industry.

Over the first six months of this year, fishing company Sanford was one of just a handful of stocks to rise: while the Top 50 Index fell about 20%, Sanford shares rose nearly 30%.

And about half that gain came after rather gloomy comments at the annual shareholders meeting in January and before the company surprised everybody with a much higher-than-expected first-half result announced in late May.

"The results for the past year and the likely results from operations this year do not deliver adequate returns for shareholders," managing director Eric Barratt told shareholders in January.

But there were good reasons for the share price to rise.

Chris Tennant-Brown, Commonwealth Bank of Australia's New Zealand economist, who regularly monitors commodity prices, estimates fish prices, based on an index of hoki, orange roughy and mussels, rose 32% in the year ended July 4.

Some of the price increases Sanford has been achieving - it holds quota for more than 84 fish species - have been even stronger.

The first-half report shows hoki fillet prices are up more than 40% since October 2006, half-shell mussels up more than 30%, ling fillets up 50% and skipjack tuna up about 70%. The indications are prices are still rising.

Adrian Allbon, at Goldman Sachs JBWere, estimates Sanford achieved an overall 15% increase in underlying fish prices in the six months ended March. On top of that, he estimates the volume of fish caught also rose 15% in the half-year.

Sanfords ebitda (earnings before interest, tax, depreciation and amortisation) jumped 34% to $35.5 million for the six months. That compares with a forecast from Forsyth Barr's John Cairns of $26.5m.

The increase is despite the company facing strong headwinds from both the currency and soaring fuel prices. Chairman Bruce Cole told the shareholders meeting the high exchange rates "continue to inflict a baleful influence." The company's average currency rate in the latest six months was $US0.77.2 compared with $US0.68.9 in the same period a year earlier and its fuel costs rose 24% - the latter increase was contained by efficiency gains since fuel prices rose an even steeper 50%.

Barratt still doesn't think the first- half result was adequate. "I would like to see further improvement."

If the analysts are correct, such an improvement is likely. Betting on continuing strong fish prices and a decline in the New Zealand dollar, just about all of them have a buy recommendation on the stock, despite the heady share price gains already achieved.

David Oxley, at ABN Amro Craigs, raised his recommendation to buy after the results and raised his valuation to $5.61 from $5.27 previously. Cairns has raised his valuation from $5.01 to $5.86 - the shares were trading at $5.20 last week.

Oxley is assuming the New Zealand dollar will return to its long- run average level of $US0.61.7s.

Cairns, who is assuming a slightly higher sustainable currency at $US0.65, says every 1c change in the currency impacts Sanford's ebitda by more than $2m, all other factors remaining constant.

That means if the currency had been $US0.65.0 in the first-half, ebitda would have been about $24m higher.

One reason the result was so strong despite the adverse currency are the operational improvements Sanford has implemented such as its "one fleet" agreement on the Chatham Rise off the east coast of the South Island.

The agreement with fellow fishing firms Sealord and Talleys involves them each working in separate areas of the fishery and catching the quota for all three companies in their respective areas with the idea of using substantially less fuel.

The company said in the latest results the agreement was working well, showing increased catch rates and lower fuel consumption.

Barratt says the company is studying the possibility of extending the arrangement to other fisheries but there are a lot of complicated and sensitive competition issues to work through.

One major uncertainty in Sanford's outlook is what happens to catch volumes, particularly for deep- water species including skipjack tuna and squid in the Pacific. Barratt says although those fisheries are exploited at sustainable levels, the volumes caught will continue to vary from year to year, depending on factors such as the vagaries of weather.

* Jenny Ruth is a freelance financial journalist and a columnist for the Independent.

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