Abagold: more risks to assess?

1815
Abagold

THE wide(ning) spread of the coronavirus from China could have some severe implications for local fishing companies – especially those that export more exotic seafood products to the sprawling Far Eastern markets.

One such company is abalone faming venture Abagold, which has recently released its 2019 annual report.

Abagold has successfully bounced back from a devastating red tide incident in 2019, and continues to work hard to reinforce the business against operational risk.

The annual report disclosed that Abagold produced 12 m spat for the year and was able to meet its own requirement as well as supply spat into the market.

The successful operational use of the two Adverse Water Quality (AWQ) plants has eliminated the occurrence of mortalities during the late 2017 red tide event.

The company also reported there had been significant improvements in the product quality of formulated feed from Specialised Aquatic Feed (SAF) as well as in the diversification of products.

In addition, production costs per kg decreased by 11% as the farm recovered to full production and there could be more to come after successfully piloting an automated sorting machine (which will be fully implemented in the financial year ahead).

The company also noted that further productivity improvements in the formulated feeds, genetic selection programme and innovative husbandry practices could be anticipated.

But will the coronavirus outbreak – which appears to have already slowed the exporting of certain seafood into the Chinese market – negate these gains?

It seems a slowdown was already apparent by the end of June last year.

Chairman Hennie van der Merwe noted that for the first time in the history of Abagold, a slowdown in market demand for premium South African abalone was encountered. “This started in January 2019 with pressure on live abalone prices, and further impacting the sales price for smaller sizes in cans by April.”

He added that the protest action in Hong Kong and the trade tariff wars between China and the USA did not help the situation. “So we enter the new fiscal year with our market under pressure and the need to look at different formats, offerings and geographical markets (including direct to China) as outlets for our high-quality product in the future.”

Van der Merwe said the financial resources of the business were tested in this financial year after the earlier decision to continue to harvest only 75% of all growth in the year in order to facilitate the maturation and growth of the abalone pipeline as quickly as possible.

Although the tonnage sold increased year-on-year by 38% to 336 tons, this was only 67% of the volume that would be harvested and available in FY20.

Van der Merwe said Abagold continued purchasing abalone from third parties to maintain market share. But he indicated that this activity reduced in the last quarter, and had a drain on cash reserves as sales in late May and June slowed down and the company carried over more finished goods stock than originally planned.

Ultimately this meant Abagold increased its debt funding in this past fiscal year to allow the business to sustain itself during the farm recovery of the volumes and sizes to sustainable levels, while maintaining consistent supply to its loyal customers.

In terms of financial performance, Abagold’s total revenue for the year hit R206 million – up significantly from the R150 million for the prior year.

Van der Merwe said the largest contribution to the revenue increase was from abalone sales, which increased by R51 million year-on-year.

The company managed to eke out a small profit before interest, tax, depreciation and amortisation.

It seems clear from Abagold’s annual report that chasing short term profits is not an imperative at this juncture. Van der Merwe stresses that the consistent production of the required volumes of high-quality spat remained an essential basis for the sustainability of the company’s production pipeline.

He said that while the expansion of operations on competitor farms led to third-party demand for spat, this demand had reduced significantly and the hatchery would now scale back its production capabilities as well as the area of the farm that the hatchery occupied.

“The focus of the hatchery is now to meet Abagold’s demand with some overproduction. This division is the platform for the rest of our abalone business to achieve growth targets, competitive feed conversion rates and cost efficiencies.”

Van der Merwe said Abagold’s Sea View, Sulamanzi, Amaza and Bergsig production pipelines were already full with abalone by July 2018 – although the overall age of the pipeline remained very young.

He pointed out that the yield (growth net of sales/starting volume) achieved of 97.3% was in line with the previous yield of 100%. This was despite the increase in average size and a natural slowdown of growth rate as the pipeline matures past 100g average. Van der Merwe reassured that the operations team was comfortable that the pipeline would be fully restored in size and maturity by July 2020.

Abagold deserves an even break after its arduous recovery process over the last two years. Let’s hope the coronavirus can be contained, and that traditional trading patterns in abalone resume in the key Far East markets as quickly as possible.