Bakkafrost: the salmon stock that doubled in price and left many behind

Bakkafrost: when salmon is worth more than gold

How much would you be willing to pay for a company that produces a kilo of salmon with 24 kroner of EBITDA while its competitors only manage 14? That gap, which sounds like an accounting detail, is the key to everything. Bakkafrost, the largest producer in the Faroe Islands, presented itself as the sector's cheapest marginal producer: full vertical integration, from feed to packaged fillet, and a conversion ratio of 1.2 kilos of feed per kilo of fish. Chicken needs two. Beef, eight. With those credentials, the calculation doing the rounds was tempting: paying 5,180 million kroner for the whole company and receiving about 576 million a year in free cash flow was equivalent to an 11% bond in a world of rock-bottom rates.

The P/E of 6.5 that invited you in

The argument was not just about asset value. With an estimated P/E of 6.5 times for 2014 and 2015, demanding a multiple of 10 from the stock for its cyclical nature left 54% of upside from the multiple alone, plus the 11% of cash generation. An ROE of 42% in 2013 and net debt to EBITDA of 1.1 times completed the picture of a company growing above 20% a year with the founders still among the shareholders, holding 20% of the capital.

The thesis also rested on something that does not show up on the balance sheet: demand. Global salmon supply was set to grow 3% while demand grew by up to 7%, according to the forecasts in circulation. The Global Salmon Initiative expected consumption to double by 2020. Eating healthy, omega-3, and the shift from fast food to premium protein. Nordea spoke of a possible "golden age" for the sector.

From 200 to 320 kroner: the correction that never came

The stock's trajectory proved the cautious wrong. When the share traded near 200 kroner, the refrain was that it was expensive and that the sensible thing was to wait for a correction to 150. The correction did come, but as a brief pause: the share broke through record highs at 275, then 282, then 312 and finally 320. Each rally was accompanied by the same answer: the results. In the fourth quarter of 2014, Bakkafrost reported operating EBIT of 227.5 million Danish kroner and annual profit of 647.1 million. The 2014 harvests totalled 44,013 tonnes of gutted weight.

The investment plan for 2014-2017 amounted to 1,370 million Danish kroner, including a new harvesting plant worth 450 million that was expected to generate operating savings of 70 to 90 million a year from 2017, and a 3,000 cubic metre vessel for 230 million. The expansion of smolt production in Viðareiði would quadruple capacity, with larger smolts and less time at sea, reducing the risk of sea lice and disease.

The risk that never makes the headlines: currency and sea lice

Some focused on what the balance sheet does not show. Purchases are made in Norwegian kroner, and the exchange rate against the euro moves. An investor who entered when the rate was 1 to 7 could face a rate of 9.5 and see euro returns eaten into by part of the profit. The advice that kept coming up: sell when the exchange rate is favourable, not when the share chart says so. And then there was the biological risk, the one the company itself acknowledged by investing in vessels and plants to reduce it. A single documentary about contaminated fish was enough to remind everyone that even healthy protein has fine print.

The million-dollar question: is it still a gem?

The consensus of those who bought early is that it is never too late as long as the fundamentals hold up. The sceptics' view is that a P/E of 15 and growth that is levelling off do not justify paying record prices. Both had data on their side. The share went from 200 to 320 in months, but it is also true that EBITDA for a given year could be flat versus the previous one. The debate, at heart, was not about salmon: it was about whether the market rewards efficiency or inertia.

In the end, the Norwegian gem — which is actually Faroese, however much the title of the analysis insisted otherwise — proved that a cost advantage translates into a share price advantage. Those waiting for 150 are still waiting. Those who got in at 200 are no longer arguing.