Company Overview: Murray Cod Australia Ltd (ASX: MCA) is involved in the breeding, growing, and marketing of Murray cod, which is a premium freshwater fish. It also engages itself in the construction and sale of aquaculture equipment.  The company operates its business through the functioning of a hatchery, a nursery and is focused on providing high-quality Murray cod fish.

MCA Details

Rise in Revenue on the back of Increasing Demand: The company has acquired a fully operational hatchery based out of Euberta, New South Wales, in FY20. The acquisition is expected to be value accretive to MCA through the sales of fingerlings and larvae to the State Governments.

Impressive Growth in Revenue

MCA has recently provided an update on its June 2021 quarterly performance, where it reported a robust increase in annual revenue.

• Annual cash revenue grew by ~125% for the year ended 30 June 2021, when compared to the prior financial year. There has been growth in sales despite the sudden impact of COVID-19, which caused exports to cease.
• The company executed a domestic market strategy during the period and recruited a domestic sales team for the fresh and live categories.
• Its produce Aquna Sustainable Murray Cod has received Gold during the Harvey Norman delicious Produce Awards.
• The average sale weight was reported at 2.08 kg per fish for the June 2021 quarter, which is an increase from the pcp period reflecting an increase in foodservice and restaurant sales.
• MCA has continued to sell live Murray cod in the domestic markets and finished the quarter and year with sales ahead of expectations.
• The cash position stood at ~$3.42 million as of 30 June 2021.

Increasing Trend in Revenue (Source: Analysis by Kalkine Group)

Launch of Product in Woolworths Stores:

On 11 June 2021, the company has launched Aquna Sustainable Murray Cod as a premium product in selected Woolworths stores for an initial 12-weeks period through targeted stores in Sydney. It also plans to execute its strategy of the launch of Aquna Sustainable Murray Cod with other major retailers into their chilled seafood sections.

Expansion of Hatchery

The company is in the process of expanding its two hatcheries. It is planning to add nine new larval rearing ponds at the Silverwater site, along with an additional bore, infrastructure expansion and additional mains for water supply.

Update on Whitton Site:

MCA has updated that it has completed construction of the first stage of eight ponds at the Whitton site, where fish have been stocked. Construction of stage two is underway presently and consists of six ponds. The company expects to complete it by spring in order to commence stocking in summer.

Top 10 Shareholders: The top 10 shareholders together form around 42.52% of the total shareholding, while the top 4 constitute the maximum holding. Ryan (Matthew John) and One Funds Management Ltd. are holding a maximum stake in the company at 15.57% and 7.34%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

 Key Metrics: The company reported an improvement in the ROE performance at 1.7% in H1FY21, compared to negative 1.5% in H1FY20. The cash cycle increased to 995.3 days in H1FY21, from a level of 870.2 days in H1FY20. It ended the period with a total debt of $4.76 million as of 31 December 2020, comprising of $4.15 million in long term debt and short-term debt of $0.61 million.

Profitability Metrics and Turnover Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• COVID-19 Uncertainty: The prevalence of the COVID-19 spread is still present, and it poses a risk of further lockdowns and trade restrictions, which might impact the business of the company.
• Biological Product Risk: The company’s fish products are prone to disease and other health risks, which can have a significant adverse impact on its profitability.
• Regulatory Risk: The Group’s line of business is under strict regulatory purview.

Outlook: The company has witnessed favourable growing conditions in 2021 and reported that growth in fish and their health has been in line with expectations. It expects growth to improve as there is an increase in temperature as it moves into the spring season. It is planning to add 17 new larval rearing ponds at the Euberta site, along with upgradation of power and an additional bore. MCA believes that the upgrades in the two hatcheries will increase the breeding capacity by 30%. The upgrades are expected to be completed in October 2021.

Valuation Methodology: P/B Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of MCA is trading below its average 52-weeks’ levels of $0.120-$0.485. The stock of MCA gave a positive return of ~46.34% in the past six months and a negative return of ~21.05% in the past three months. The stock has been valued using a P/B multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average, considering the decent increase in revenue, launch of products in major retailers, increased traction in demand and significant increase in gross margin performance. For the purpose of valuation, few peers like Elders Ltd (ASX: ELD), Inghams Group Ltd (ASX: ING), Youfoodz Holdings Ltd (ASX: YFZ) have been considered. Considering the expected upside in valuation & current trading levels, robust increase in revenue, achievement of awards, increase in demand, launch of products in major retail stores and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.300, (as on 20 August 2021, 10:34 AM (GMT+10), Sydney, Eastern Australia).

MCA Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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