Why has NZ King Salmon become the worst performer on the sharemarket?

Investors in New Zealand King Salmon have had a torrid year.

The salmon farmer’s shares have the unfortunate accolade of being the worst performer on the sharemarket, having lost 71% of their value. So what’s behind the slump?

A really, really bad year

NZ King Salmon reported a loss of $73 million for the year to the end of January. A lot of its fish died as a result of warmer sea temperatures over summer, so it decided to change its farming practices and cut back on the use of its warmer sites over summer.

This is going to reduce its future harvest volumes and cashflows, and because of that it was forced to write down the value of its assets by $59m.

New share issue

The fish deaths put NZ King Salmon under some financial pressure – its debt ballooned, and it breached its banking covenants with its lender BNZ. The bank agreed to a temporary waiver so long as NZ King Salmon raised at least $50m of new equity, after any transaction costs.

The company sold $60m of shares, about $43m of which went to repay its debt, and about $3m on transaction costs, with the rest of the cash going back into the business. The 400 million new shares were sold at a big discount, and diluted the value of its existing shares.

What hope is there?

NZ King Salmon plans to temporarily fallow some of its warmer farms in Pelorus Sound, which will reduce harvest volumes but give the company a more stable, predictable operation.

It’s pinning its hopes on being able to shift its salmon farming operation out into the cooler open ocean, 7km north of Cape Lambert in Cook Strait, a project it calls Blue Endeavour. If that is successful, the three fallowed farms in Pelorus Sound would be used as nursery sites for nine months of the year, avoiding summer.

Will it work?

The Blue Endeavour project is still waiting for approval, and even if it does get approved, the earliest possible harvest isn’t expected until the company’s 2027 financial year. It’s probably also going to have to raise more capital to develop Blue Endeavour if it does get approved.

It’s important to keep in mind that climate change is outside the company’s control, and fluctuating water temperatures are not good for fish.

Good fish

NZ King Salmon produces a premium product, and has a great opportunity as an increasingly affluent global population seeks highquality protein. But it’s in a really tough spot, and is facing an uphill battle until it has some certainty over its ability to supply significant volumes to meet the demand.