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Steven Chen
Steven Chen
Articles (184)  | Author's Website |

Bakkafrost: A Moaty, Sustainable Bet

This North-Atlantic company capitalizes on the ultimate farmed meat of the planet

April 26, 2020 | About:

Did you know that salmon is one of the most sustainable meat products on our planet? Atlantic salmon is farmed with unbeatable feed conversion and edible yield compared to its land-based counterparts. It also offers edible meat per unit of feed that is as high as 16 times that for beef, nearly four times that of pork and more than two times that of poultry. Meanwhile, salmon retains considerably more protein and energy than many other farmed animals.

Along with its unrivaled efficiency as a food system, salmon farming also has the least impact on the environment compared to poultry and red meat production. These reasons are primarily why farmed salmon has become a significant part of our diet today, and we should expect the demand for it to rise.

Norway-listed Bakkafrost (OSL:BAKKA) looks extraordinarily well-positioned to benefit from this increasingly trendy niche, in our view. The Faroe Islands-based business takes advantage of the unique natural conditions to produce large-sized salmon without using antibiotics. Its farmed salmon has seen growing desirability from sushi chefs and other health-conscious customers.

Bakkafrost shares more than three-quarters of the Faroe Islands salmon production. In addition to main farming business (65% of the fiscal 2019 revenue), the company sells value-added products, which are the skinless and boneless portions of salmon (21%), fishmeal, fish oil and fish feed (14%), meaning that Bakkafrost controls the entire value chain to ensure availability, traceability and consistently superior quality, helping it to enable long-term contracts with customers. In terms of geographic footprints, Europe represents the largest share of revenue (67%), followed by the U.S. (17%) and China (15%).

We should mention the high barrier of entry when it comes to the competitive landscape for Bakkafrost. Competitors elsewhere would have much difficulty in finding similar geographic advantages enjoyed by the Faroe Island farmers, not to mention that there are only a handful of salmon farmers operating over the Faroe Islands, and that Bakkafrost is the sheer dominator there.

Thanks to the scarcity of the Faroe Island salmon (which is only 2.7% of the world’s salmon) and the company’s competitive edge, Bakkafrost managed to generate super-normal gross margins and returns on capital over the last decade or so (see below), demonstrating robust pricing power and capital efficiency.

At the same time, both revenue and operating income steadily rose, with no break throughout the 2008 Financial Crisis (see below).

Since 2015, Bakkafrost has been increasing its capital investment (from 8% of annual sales to around 20%) across the value chain (e.g., merging factories, new wellboat, enhancing smolt production capacity) to strengthen its leadership position. We believe that the company is firing on all cylinders through regional expansion, market penetration and new products to fuel organic growth. In the meantime, the increasing focus on a healthy diet and food safety among consumers globally should play the role of a long-term tailwind for the business.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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