Clearwater Seafoods Incorporated

Clearwater Seafoods Incorporated (TSX: CLR) is one of the leading vertically integrated harvester, processor and distributor of premium seafood. The Group operates in wild-caught shellfish with harvesting operations in Canada, Argentina and the UK.

Key Highlights:

• Quin-Sea Fisheries Ltd and Clearwater Seafoods informed that the application to transfer the processing license for St. Anthony fish plant has been approved by the Newfoundland and Labrador Minister of Fisheries, Forestry and Agriculture.
• The company reported that it would sale its two offshore lobster licenses to Membertou First Nation at a price consideration of ~CAD 25 million.

Q2FY20 Financial Highlights: Clearwater Seafoods announced its second quarter results, wherein the group reported sales of CAD 105.968 million, as compared to CAD 153.874 million in the previous corresponding period (pcp). Sales volumes decreased within all the segments and regions, during the first half due to lower demand in food service on account of store closure and social distancing norms. Gross margin stood considerably lower at CAD 18.398 million, as compared to CAD 31.587 million Q2FY19, due to lower revenue, partially offset by a slide in the cost of goods sold. Adjusted EBITDA stood at CAD 18.923 million, as compared to CAD 30.250 million in pcp. Earnings before income taxes improved to CAD 12.029 million, from CAD 11.843 million in pcp, aided by a gain from derivative financial instruments coupled with lower administrative and selling costs, lower net finance costs and a higher other income. The Company reported an improved bottom-line at CAD 12.780 million, as compared to CAD 11.339 million in Q2FY19.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company might face challenges within the traditional retail segment if the COVID-19 restrictions extended or reintroduced. Further, a second wave of the novel virus might interrupt the supply chain.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CLR appreciated ~19% and ~25% in the last three months and six months, respectively. Clearwater is recognized for its high quality, variety, and reliable delivery of premium, wild and exotic seafood and has a decent market presence, which is noteworthy. However, the current glitch in the economy owing to lower consumer demand and strict measures across the hospitality and retail sectors took a toll on the demand and subsequently, on its sales volume. We expect a demand revival in the coming quarters as COVID-19 related restrictions are easing out, which would support the sales volumes. Furthermore, the company is focusing on the expansion of global distribution, new products launch and promotional activities across the channels, which are witnessing higher demand, including retail and e-commerce. The company estimates a demand improvement in the second half of FY20 and expects governments to relax measures and markets continue to reopen, which would support sales volumes. The stock has closed above its 200-days simple moving average of CAD 5.41, indicating a bullish trend. We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purpose, we have considered the industry median (Food & Tobacco) for the purpose. Considering the aforesaid facts, and the current price levels, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 5.92 on September 21, 2020.

CLR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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