Salmon “supercycle” forecast

The Nordea analyst reflects: “The salmon industry has been struck by wave after wave of negative news, but we expect the Norwegian producers to emerge not only relatively unscathed, but in a stronger earnings position. Our salmon price forecasts rise to NOK 44 and 46 for 2016 and 2017, respectively, as we digest current events and the impact on the future of the salmon industry. We lift our EPS forecasts and target prices by 25% on average and highlight Marine Harvest as our top pick. We now rate all seafood stocks a buy”.

He believes that the industry is likely to bounce back from a series of problems that have driven down prices in the last year or so.

“The salmon market has suffered a number of blows in recent times: prices in the key off-take markets in Europe and the US are down 10-20%; costs have grown structurally (+5% y/y); cold summer weather and growing biological challenges in key regions are prompting cuts to supply forecasts; a fragmented Chilean market has impacted pricing discipline in the region; massive currency swings have effectively closed some important emerging markets; and a trade embargo has closed the Russian market to Norwegian producers. Individually, these factors would appear to create a negative operating environment. Collectively, however, we see quite the opposite.

“We believe that the net effect of all these factors is more robust salmon demand, particularly for Norwegian players. Adding a mix of currency effects and structural changes on the supply side, we see the coming of the second wave of a supercycle. In our view, the weak prices in the European and US market have acted as a longer-term demand catalyst, and M&A is likely to bring a more industrial approach to salmon farming in Chile, which could reduce some erratic pricing behaviour from a market that makes up 25% of global supply.

“We expect muted supply and a weak NOK to push prices up to record highs. Combined with a softer cost trend, we see this lifting the margins in the sector. The high margins and attractive dividend yields (3-7%) are, in our view, solid arguments for being long in the sector. We make five upgrades, leaving all seafood stocks we cover at Buy, with target prices showing average upside of 32%. Our top pick is Marine Harvest, where we see 21% upside and a dividend yield of 6-7% next two years.”