Clean Seas Clarification

This story features CLEAN SEAS SEAFOOD LIMITED. For more info SHARE ANALYSIS: CSS

By Greg Peel

[This is a corrected republication of an article appearing November 18. The previous article implied Clean Seas Tuna had successfully hatched another round of fingerlings ready for transfer into ocean cages in January.  In fact spawning is not due until December and thus further success following on from the successful May spawning trial is assumed but cannot yet be assured. FNArena apologises for this error.]

Necessary reading ahead of this follow-up article is May’s Life On The Clean Seas.

As the above article explains, South Australian-based Clean Seas Tuna ((CSS)) is an aquaculture company in a unique position of being first in the world to attempt to breed the highly prized Southern Bluefin Tuna (SBT). When we last checked in with Clean Seas in May, its stock price had managed to recover to 80c from the thumping to 30c it copped by virtue of the GFC. Clean Seas’ earlier share price peak had been $2.00.

It was not that Clean Seas was a highly leveraged listed company staring bankruptcy in the face, it was just that Clean Seas is a speculative small-cap on a death or glory quest, and such high-risk low-caps were the first to be dumped in panic from share portfolios of 2008.

Success in an initial stage of breeding and a share price recovery saw Clean Seas raising $23m of fresh capital in May, as per the company’s fully disclosed capital program, the dilutionary effect of which took the shares back to 60c. Using technology developed over a decade and input from a Japanese university (no prizes for guessing why the interest), Clean Seas had managed to breed SBT from roe into fingerlings before the seasonal cold prevented that particular experiment going any further. But a fresh round of hatchlings intended for December will, if successful, have Clean Seas ready to shift its juvenile fish into ocean tanks come January.

From there the goal is sashimi in Tokyo.

But still Clean Seas could not shake off the lingering effects of the GFC – this time beyond its control. Financiers Rabobank/Ridley Feed pulled credit lines, forcing a sudden and unscheduled equity raising of $42m which again diluted the stock by half. At this level, however, the attention of respected stockbroker Patersons was piqued.

Patersons has initiated research coverage on Clean Seas with a Buy and a 12-month price target of $1.33. The broker sees a “high-value, high-margin, high-growth business”, noting SBT can sell in Japan for over 3000 yen per kilo (that’s about A$36/kg wholesale).

Clean Seas’ plan has always been to incrementally raise capital as milestones are ticked off in this capital intensive project – not including the last one – and Patersons sees another $110m needed before FY14. But if this were debt, Patersons calculates a “comfortable” 4.5x interest cover at the funding peak, meaning funding is not really a concern out to FY15.

Investment in Clean Seas is speculative and not for the risk averse. It’s a case of either succeeding and watching the share price skyrocket or facing setbacks in what is a six-month cycle game. Patersons nevertheless feels a lot of the risk is tempered for new investors by the effect of the surprise raising and a share price now sitting around 30c.

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