Oceana’s headline earnings plummet 50% while management puts out fires
After a spate of changes in its C-suite and major concerns about corporate governance, the results of South Africa’s biggest fishing company for the six months to March did little to inspire confidence.
First, fishing company Oceana delayed the publication of its annual results to the end of September 2021 by several months. Then, it suspended its chief financial officer, Hajra Karrim. This was followed by the sudden resignations of both the chief executive officer, Imraan Soomra, and company secretary Adela Fortune.
Although Oceana had satisfied JSE requirements with regular publication of updates for shareholders, the updates did not exactly put all the cards on the table, raising eyebrows in the investment community. Then, a week before its interim results to March could be published, PwC, the company’s external auditors, resigned.
All that could have been forgiven, however, if the numbers told a different story. Unfortunately, headline earnings for the six months to March 2022 plummeted 50% to R153-million, and group operating profit dropped 37% to R353-million.
Oceana CEO Neville Brink, who was acting in the position until the day before the results were announced on 2 June, attributed the poor performance to lower inventory levels because of supply chain disruptions, the impact of Hurricane Ida in the US on the production of fishmeal and fish oil, as well as to the civil unrest in KwaZulu-Natal that affected South Africa’s canned fish sales volumes.
Zwelakhe Mnguni, chief investment officer at Benguela Fund Managers, formerly an Oceana shareholder, pronounced the results “shocking”, saying they reflected a strained operational focus where management was putting out fires rather than running the business.
“The numbers are negative across all divisions. As a potential investor and former shareholder, I am not comforted by these results or recent developments,” he said. “The resignation of auditor PwC is a big red flag. It’s very rare for an auditor to resign and signals a lack of independence at board level.”
PwC has declined to comment on the reasons for its resignation.
Oceana, however, has itself admitted that PwC resigned “due to their assessment of significant doubt as to whether there is objective and transparent communication between PwC and the board, which they assert constitutes a significant impairment of their independence”.
Brink said lower opening inventories of fishmeal and fish oil resulting from last year’s weather-disrupted fishing season had reduced sales volumes by 47%.
This was partly offset by higher oil yields and significantly higher global price support for oils, which was driven by improved demand from aquafeed producers, which are building inventories to mitigate against supply chain risks.
In the US, low opening inventory levels (because of last year’s poor fishing and weather events) reduced sales volumes by 33% in fishmeal and 15% in fish oil, resulting in Daybrook Fisheries undersupplying on contracts concluded during the previous season. This had resulted in a 38% reduction in operating profit.
The Hurricane Ida business interruption insurance claim of R63-million was recognised in the current period, partially mitigating the effect the hurricane had on opening stock levels.
The 2022 fishing season opened in the middle of April and will continue until the end of October.
In the same boat
Anthony Clark, an analyst at Smalltalkdaily Research, was somewhat more optimistic than Mnguni, saying that all fishing companies are in the same boat after a rather taxing six-month period.
Premier Fishing, for example, posted a 22% decline in revenue to R224-million and a drop of 38% in profit before tax to R13-million for the six months to February 2022.
Chief executive officer Rushaan Isaacs, who has since resigned, said the drop in revenue was primarily because of the scarcity of squid.
“Volumes landed and overall catch rates in the squid sector have taken a massive knock compared with the prior year,” she said, adding that the availability of squid had become an industry-wide challenge. Export demand for squid remains strong, with selling prices per kilogram improving and overall customer demand improving.
Isaacs noted that “another standard trend” was a decline of catch rates for the pelagic sector.
“Operationally, everything management is doing seems to be working. Shareholders just want a stock that shows good revenue, earns profits and pays dividends,” Clark said. However, he shared Mnguni’s concerns around corporate governance and the recent turmoil at the company.
“The trouble is that the board is not fully addressing the issues that have been raised and seems to be hiding behind a haze… The real truth is just not coming out. The auditors walking out a week before results is a damning development,” he said. “A corporate scandal is like a cut on your leg that will never heal if you just pick at it. The quicker Oceana comes out and addresses issues directly, the sooner the market will move on.”
Clark also noted that management seems to be hiding behind the use of technology: “The results were presented online but we had to submit questions beforehand. The questions were basically sanitised and edited to avoid embarrassment. I asked several pointed questions that simply went unanswered, and I was told to rather schedule a one-on-one session to receive direct answers.”
According to Simply Wall St, Oceana’s revenue is forecast to grow 17% over the next year, compared with a 6.3% growth forecast for the industry. Over the past three years, earnings per share have fallen 5% a year, and the company’s share price has fallen 8% a year. BM/DM