Valuation of Marine Harvest Group

Øyvind Eikeland & Leif Audun Sørensen

Student thesis: Master thesis


EXECUTIVE SUMMARY: The purpose of this thesis is to find out why MHG is traded at higher multiples than its competitors. Our method for answering our problem statement was to find the fair value of MHG’s share per 31.12.2013. By choosing this approach we have examined whether the reason where mispricing of MHG’s stock or other causes. The fair value of MHG’s share is estimated on the basis of our finding in the strategic- and financial analyses. The salmon farming industry is currently experiencing high spot prices and consequently strong profitability. Historically the price- and profitability development have been characterized by high volatility and a cyclical pattern. The long production cycle, limited short-term supply elasticity and few dominant producers have amplified this. The most significant value drivers in the industry are identified as salmon price, harvest volume and cost of materials. We early highlighted the close relation between global supply and spot prices. The industry is expected to grow at a slower pace than historically due to limited supply of new capacity and already high capacity utilization. Consequently we believe it is likely that the high spot prices will sustain, reducing the volatile nature of the profitability. Historically MHG have performed relatively average with regards to cost efficiency and margins. Future cost of materials will be dependent on input prices in fish feed and the outcome of MHG’s own fish feed production. There is also identified risk related to biological- and climatic factors as well as increased regulation. The share price is calculated through cash flow based models (DCF and EVA) before stress tested through sensitivity- and scenario analyses. The stress tests highlighted the risks in the industry and the sensitivity towards moderate changes in input. To further investigate the relative price difference between MHG and its competitors, a multiple valuation and corresponding discussion is conducted. MHG is working towards becoming a fully integrated protein producer and has come a long way towards their goal. This reduces the company’s operational risk and sensitivity to salmon spot prices. MHG as an investment target also stands out as an object with higher liquidity than the closest alternatives, which can be attractive to investors. Based on our finding we initiate a buy recommendation on MHG’s stock. We estimate the fundamental value to 82,64 NOK, implying a potential upside of 12 per cent from the listed price at 31.12.2013. The interval we find relevant in the sensitivity analysis excludes the value from the multiple valuation (45 NOK). Our conclusion is that MHG is traded within the relevant interval and at fair multiples. As we are generally positive to the industry we recommend investor to take a closer look at competitors with lower relative price levels. While we believe there is upside potential in MHG we also recommend investors to investigate alternative targets with larger upside potential.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages162