Summary
After completing its restructuring play, Oceanus moves to commence next phase of growth.
Since taking over the reins in 2014, the new management team has delivered significant balance sheet improvement and improved revenue mix.
The company’s successful completion of the debt restructuring was a particularly skillful move, largely unsung.
From a debt-ridden company to one that is on track towards sustainable growth, Oceanus is showing long term growth potential and is on track to achieving its vision of creating a synergistic aquaculture ecosystem with a focus on food security and safety. This is my analysis of the company.
New Management, New Start
What does Michael Jordan, Paul Scholes and Oceanus CEO Peter Koh have in common? The three of them got called back from their retirement to continue doing what they do best; winning.
Oceanus (SGX:579) was the world’s largest land-based abalone producer. Their main revenue driver was the sale of abalones which they breed and rear in China.
Through a combination of poor execution, bad luck and management issues in China, the balance sheet got all out of shape and as a result the stock was hammered. In December 2014 the board of directors clearly had enough. A new CEO was installed, Mr Koh Heng Kang, Peter.
I first learnt about Mr Koh through this article here back in 2016/17.
https://www.hnworth.com/article/become/high-profiles/peter-koh-ceo-oceanus-group-limited/
Mr Koh came from a media and marketing background. Perhaps, although I can’t be sure, that this background is like a breath of fresh air into the dying business. It could be the reason behind the nice successes in these few years since he was appointed CEO. These successes – and particularly the completion of debt restructuring and the subsequent exit of all major creditor groups involved – is what gave me confidence in Oceanus.
In 2014, they removed the team running the China operations due to unspecified reasons but I suspect that it is due to some dishonest activities. Mr Peter Koh needed someone he can trust to run the show. His brother, Mr Robert Koh stood up to the plate and took charge of the China operations.
The management’s actions all these years made me feel that Mr Koh is a very capable CEO who is able to deliver growth in the company and the share price.
Instead of diving into the numbers, I would like to walk through the steps this management team has taken to demonstrate their skill.
Balance Sheet
Oceanus has successfully entered into a binding term sheet which their major key creditors converted 75.4% of their outstanding debt to equity and the balance was paid in cash. In June 2020, they announced that the last major creditor group, Ocean Wonder International Limited, has exited its stake via married deal with a new shareholder group.
They are currently debt free with cash and cash equivalent of about RMB87mil (or S$17.7mil). With their major creditors out of the picture and the onboarding of new long-term strategic investor, this is good news for the share price as the major shareholders are all in line with the goals of the CEO and the company.
Divestiture
Oceanus was handed a little gift by the PRC government in 2016 when they purchased the land farms from Oceanus for S$20mil as part of their future development plans. This allowed them to pay off their debt as part of the restructuring deal.
Reducing Fixed Costs
Abalone breeding takes about 2-3 years for the juveniles to mature enough to be sold in the market. 2-3 years is a very long time and many things can happen in between this period. To protect themselves from risks such as adverse weather (eg. typhoon), the management decided to focus on the breeding and sale of juveniles to sea based farmers and then have an agreement to buy back the adult abalones at 30-40% discount. This method has worked well for Oceanus as they started to see increase in revenue yoy from 2015.
In 2019, they setup a leasing arm rent out their underutilized aquaculture farm plots in China. From my understanding of such land based farming in the Fujian/Guangdong area, they are at the mercy of typhoons and this area is prone to experiencing them. The damage could be very costly financially.
Incidentally, my distant cousin (my grandfather’s brother’s grandson) who is also in aquaculture business in China (also involved in abalone rearing and seafood trading) told me that there was a year when the typhoon hit and blew off the roof of his farm. It cannot be helped as they had to up and leave immediately when typhoon hits. The reparation costs made him suffer huge losses that year.
By leasing out the farm plots, the responsibility to maintain and repair falls onto the tenant. This further protected Oceanus from such unnecessary risk. In addition, it provides a stable recurring cash flow.
Diversification
Throughout the 5 years, Oceanus has made several investments and acquisitions to move away from the “one product, one country” business model. This has been proven a wise move after looking at the pandemic and the China crackdown on corruption which reduced demand for abalone and related products. This could be detrimental to the company had they focused only on abalone breeding.
Oceanus now has four pillars of growth. Aquaculture, Distribution, Services and Innovation.
Looking at the four pillars, the subsidiaries seem to have synergy between the key business segments except for marketing agency Capy Comm and AP media. However, given Mr Peter Koh’s background, this is his forte and with their own in-house marketing specialists, I believe that there is some value creation behind this move.
Of course, no amount of research is complete unless you tried their abalone. Personally, I have tried 2 types of Oceanus Brand abalone, the abalone in braised sauce and their New Zealand “Black Gold” abalone.
The packaging for the New Zealand abalone is impressive and it comes with a Abalone shell (for decor?). Taste-wise, you couldn’t really tell that it came from a can (taste like it was served in a restaurant) and the size of the abalone is quite big too. But don’t hear it all from me, you guys can buy it from online platforms like RedMart and Lazada. It’s quite affordable too.
Oceanus has also made several investments into companies which can provide opportunities to expand the business.
For example, their investment and partnership with Season Hong International Trading Limited, allows them to tap onto the sales network a leading distributer of Fast Moving Consumer Goods (FMCG) products and food.
Another investment is into Barramundi Asia Pte Ltd (BAPL), Oceanus’s first investment in fish farming. Recently, BAPL appeared in the news where they talked about their aims to scale their operations and getting listed to obtain the funds is one of the options that they are considering.
Coming back to the topic, through their business dealings, Oceanus has managed to diversify their operations and revenue streams to build a more resilient and stable business model.
What’s the Play Now?
After years of getting relegated into the SGX Watchlist, Oceanus is ready to get out. The deadline for meeting the Financial Exit Criteria has been set on 1 March 2021. I am confident that Oceanus will be able to meet their criteria and apply to get out of the Watchlist. This could be a near term catalyst.
Of course, to get out of the watchlist, Oceanus must be profitable. Gross margins have improved in 1H2020 due to the strategic change in business model to contract leasing of the farms which reduces cost of running the farms. Revenue from the Distribution business segment was given a boost with the addition of Season Global Trading Pte Ltd.
As mentioned above, Oceanus has made several investments in companies that compliment their business. Some of these investments like BAPL are starting to show favourable results. Others are looking very intriguing, like the investment in hi-tech shrimp farming in Singapore.
https://thefishsite.com/articles/oceanus-invests-in-singaporean-shrimp-tech-pioneer
Given Oceanus operational excellence and potential synergy between their pillars of growth, I am expecting margin improvement from a reduction in expenses as the expansion costs are reduced. Higher margins results in higher EBITA and free cash flow, which the company can use it to make acquisitions and investments to grow their revenue and profit.
Risks
Oceanus’s product ramp has been impressive. The continued widening of their sales network will strengthen their value proposition. However, it is not clear that all their investments will bear fruit. This may lead to writedowns of their investments.
Even though distribution is one of their main revenue drivers, I consider it as a low margin business. They will require to move a large volume of goods to be able to see significant profit.
The pandemic has impacted several industries such as hospitality and transport. The demand/supply of their goods and products might be affected negatively due to the “new normal” The good news is that no single customer represents more than 10% of the company’s revenue.
Conclusion
Oceanus has proven that it is able to clean up their act and create value for their shareholders. It is now entering the next stage of growth after undoing the past management’s mistakes.
They have successfully diversified their revenue streams to move away from the “one product, one country” business model. Growth in their 4 business segments will lead to improved profitability which will then enable the company to continue its acquisition and investment strategy.
However, a small bump in the road in execution could still lead to a rapid change in sentiment regarding the stock.
I feel that this is a ground floor opportunity which carry higher reward potential but greater risk. There is a long runway to go for sales and profit margins to keep improving, thus great upside potential as a stock to hold for the long term.
Cheers
The Moss Piglet is invested in Oceanus (SGX:579) shares