Thread by @DownunderValue

Angel Seafood $AS1 $AS1.AX is the largest oyster producer in Coffin Bay, making news for all the wrong reasons. A real microcap seeking to build scale, is now the time to swim against the tide? 🦪

Let’s take a deep dive. 👇

1. Investment thesis: Fast Grower.
✅Strong market for oysters
✅Revenue ramping up
✅CAPEX pulling back
✅Biomass in place for scaling
✅Skin in the game
🚨Food poisoning / sales suspension

2. Recently I looked at East 33 $E33 as an oyster play – sorry folks, it was a ruse!

That was my competitor research on Angel, which has taken a lot longer to get my head around due to the lack of information available.

https://twitter.com/DownunderValue/status/1455732655358558210

3. The global market for oyster production and exports have been growing rapidly. Oysters are very efficient (near zero food inputs required). Australia is a small but increasing player in this space.

4. Sydney rock oysters ($E33) are substantially different to Pacific oysters ($AS1). Sydney’s take longer to mature, but have more appeal in the luxury and export markets.

5. The unit economics for Pacific Oysters are much better.

Lower inventories due to time of maturity, able to be grown in more locations all year round, and generally a lower cost of production with lower price point.

6. Angel Seafood are the largest producers of Pacific Oysters in Australia.

They are a microcap (MC=$20m) with a short history and large ambitions, led by a founder-CEO with skin in the game. CFO is pretty impressive to listen too.

7. Angel operate out of Coffin Bay in South Australia, with an integrated (From larvae to your lunchbox? From spat to snack?) production capacity across three bays on the Eyre Peninsula.

8. One may be surprised, but they’re actually profitable.

Unlike some other micro-aquaculture stocks with terrible unit economics that may never be profitable ( $SFG $MCA 👀), these folks are already in the black on the P&L but not cash flow.

9. Growth has been lumpy.

This is partly driven by seasonal factors (e.g. bigger Sep-Dec quarter with Christmas sales. But on an annualised basis, you can see the growth in biomass and revenue. And they may just now be ready to ramp with their biomass haul.

10. Angel have a three pillared approach to growth:

🎯Roll up the marine licenses
🎯Productivity improvements
🎯Premiumisation and pricing power

11. The supply chain for Pacific Oysters is fragmented and relatively complex.

Production is fragmented, there are multiple distribution channels, limited value creation and a high number of intermediaries.

12. Coffin Bay has over 350 license holders for Oysters, and Angel represents ~25% of production.

Economies of scale and profit make them the go-to for those wanting to get-out. This could be handy during the current gastro-crisis if there are distressed license holders.

13. Flip farms will improve productivity, while Summer Oysters will enable all-year-round production and sales of their Pacific Oysters.

14. Being able to produce year-round low-cost oysters is driving the growth in the oyster market.

This will expand the retail outlets ( $WOW $COL ), which currently are only 2-5% but have potential for much more. They tend to prefer the smaller/cheaper oysters too.

15. Their direct-to-consumer Halo Club is another way of capturing more of the oyster value.

To be frank, not sure many folks will sign up for a subscription for $100 of 3 doz oysters per month.🤷

16. The strategy is to get to 20m, and they have the licenses, infrastructure and biomass to get there in the next couple of years.

You can hear more about this on @CMicrocaps 👇

https://twitter.com/CMicrocaps/status/1453519509931835393

17. Biosecurity risks can be quite severe in any primary industry, but particularly aquaculture. Just last week PIRSA banned the sale of Coffin Bay oysters as it was linked to food poisoning – doesn’t affect the oysters.

abc.net.au/news/2021-11-1…

18. With only 7-10 days of inventory in the supply chain, I think this recall will be less damaging (~$250k of revenue) than the movement in the share price (from 16c to 13c, or $4.5m).

Though if it drags on, or they run out of cash, then the market may be right.

19. @ElephantCapita2 has provided some technical analysis showing we’re near the base.

Share price has now approached NTA of 11.4c as of June 2021.

Previous cap raise was at 17c including insider participation.

20. Liquidity is strong for Angel with around $4m of headroom.

This PIRSA matter shouldn’t impact their long term survivability. It may even shake out some of those 351 license holders at good valuations.🤞
(Not nice really to cheer on distressed sales, sorry)

21. Risks are real 🚨
This is a microcap in the midst of a food poisoning scandal that could lead to brand deterioration, shifting preferences, etc. While sales should be back on from 29th of November, no guarantees.
theguardian.com/australia-news…

22. Skin in the game.

CEO Isaac Halman has ~15% of the company, other directors in total around ~8%, and two major shareholders (Thorney = long term value investor) with around ~13% each. Thinly traded, tightly held.

23. Overall, I like the sort of investments where previous shareholders pay the CAPEX and I get to reap the rewards of growth. The market dynamics look good, and so does the business strategy. Execution to be proven.

It’s high risk so only a small allocation.

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A deep dive per week is my commitment to FinTwit - failing, sorry!

Questions and feedback always welcome. DYOR.

Disclaimer, I have a small position in $AS1

If they get to 20m target in 3 years as per Simba's comments, and assuming no additional efficiencies, then..

Rev: Up from ~$6 to $15m
Ebitda: Up from ~$1.5m to $5.5m
NPAT: Up from ~$1.2m to $4m
PE: Down from 16.6 (CY20) or to 5 (CY23f).