Sustainable innovation yields super-size upside for Rare Foods Australia

MST Access analysis has highlighted gains in Rare Foods Australia’s core business and its growth potential to give the company a conservative but substantial Discounted Cash Flow (DCF) valuation of 13c – a 68.8% upside on the current share price of 7.7c.

The research house’s base-case 12-month forward DCF valuation is actually $0.33 – a huge upside of 328.5%, but the conservative cross-check resulting in the 13c valuation excludes possible expansion from a potential Esperance project.

The widely used DCF model works out the value of an investment by calculating expected future cash flows, which are then discounted to take account of the timeframe.

MST confirmed Rare Foods Australia’s (ASX: RFA) core sales are on track for a record year in 2022-23, as forecast in the company’s strong Half Year report, with existing YTD sales and forward non-binding orders exceeding FY22 sales (109%).

MST additionally noted Rare Foods Australia (RFA) recent Q3 success in achieving record post Chinese New Year sales and revenue of its ranched wild greenlip and Wild Origin abalone of 19.2 tonnes, which followed the two previous record Quarterly results.

Looking beyond sales figures, MST Access had a close look at the company’s market position and strategies, which included a visit to operations in Augusta on the southwest tip of WA, and based its investment thesis on three key factors.

Expanding demand

RFA is well positioned to meet growing global demand for seafood, especially sustainable and high-end culinary offerings that are increasingly sought by consumers across the world.

In its efforts to help fulfill this demand, RFA sells its premium abalone to a growing global network of master distributors. These distributors in turn supply wholesalers which then service upmarket restaurants.

As part of its growth strategy, the company’s experienced sales and marketing team is now expanding its distributor network beyond abalone’s traditional Asian markets by following up on enquiries generated at the Global Seafood Expo in Barcelona and the Seafood Expo North America in Boston.

The company is also adding to its range by marketing wild-caught roei abalone via a successful collaboration with local quota holders.

Already the largest sea-based producer of greenlip abalone in Australia, RFA supplies more than 20% of the premium seafood’s global supply.

It does this through an innovative aquaculture technique known as ‘sea ranching’, whereby hatchery-bred juvenile abalone are placed onto RFA-designed artificial reefs (‘ABITATs’) on the ocean floor.

This technique offers the company the competitive advantage of being able to meet year-round market demand – and do so in a sustainable manner.

Also worth noting is that during the past quarter, RFA processed a total of 35.8 tonnes of ranched, wild and farmed abalone, a marked increase on the prior corresponding period and the previous quarter thanks to a consistent increase in processing capacity on site.

Sustainability tick

A prime advantage RFA has as consumers become increasingly concerned about sustainably and ethically grown food is that it operates the world’s only wild enhanced fishery using sustainable practices to commercially produce premium wild greenlip abalone.

In recognition of its environmentally sustainable operations, RFA has earned internationally recognised and coveted Marine Stewardship Council (MSC) accreditation, signified by the blue fish tick on its products.

More recently the company’s founder and director Brad Adams was this year named the Sustainable Fishing Hero 2023 in the prestigious MSC Sustainable Seafood Awards.

Learning from lease

RFA’s unique ‘sea ranching’ of greenlip abalone is made possible by another key strategic advantage for the company – it holds the only two licensed ocean leases, which allow use of the ocean floor, in WA.

One of the benefits of its lease it that it enables RFA to run an extensive R&D program at its 413ha ocean lease and through this program the company is learning to maximise biomass growth and yields by lifting juvenile survival rates. These learnings will in turn lead to greater and more sustainable harvest volumes, all from the same cost base.

Meanwhile RFA’s bi-annual assessment of its biomass led to a fair value of $8.8m, a 16% lift on the previous six months. This was driven by a combination of higher average sales prices (+9%), and reduced costs to harvest, process and distribute (-23%).

More growth initiatives

Enabling management to continue pursuing its growth initiatives is the recently increased debt funding facility, up from $1.0m to $2.5m, which was undrawn at the end of Q3.

Those initiatives include not just building scale in the core abalone business, but also further developing tours of its facilities and expanding other offerings at the newly opened Ocean Pantry café and retail outlet onsite in Augusta’s impressive and popular boat harbour.

RFA is also continuing to develop Australia’s leading ocean-cellared wine projects, where local Margaret River wines are placed on RFA’s ocean lease to be matured naturally by the currents, a method used by several renowned European wineries.

As RFA grows, it is also seeking businesses and assets that are aligned with its premium and sustainable brand for merger and acquisition opportunities.

This article was developed in collaboration with Rare Foods Australia, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.