Valuation / Recommendation

We have a SUBSCRIBE recommendation on Ocean Fresh Berhad (OFB) with RM0.52 FV based on 8x FY25F EPS, translating to a 91% potential upside to the IPO price. Our target PE is at 20% discount to comparable peers’ average, considering OFB’s smaller market capitalisation.

Investment Highlights

Better margins despite flattish revenue. OFB primarily specialises in the processing and trading of frozen seafood products. The company has a strong focus on overseas markets (>80% of sales), exporting to countries such as China, Turkey, and Vietnam. Its revenue has remained flattish over the past three years (at around RM156m-159m) mainly due to maxed-out cold room storage at its Kuantan HQ (1,700-tonne capacity). The company has been renting third-party cold room facilities in Klang Valley for additional storage (up to 400 tonnes), but this isn't sustainable in the long run due to the extra logistics costs. Despite the flattish revenue, OFB was still able to improve its operating margins over these years, largely thanks to the higher ASP realised for its frozen seafood products as well as the stronger USD.

Normalised FY24F earnings. While FY24F revenue is likely to remain flat (due to storage constraints), we expect OFB earnings to normalise to RM9.8m (+41% y-o-y) in the absence of several major one-off items that dragged the previous year's earnings. To be prudent, OFB has previously provided for larger bad debt write-offs and net impairment losses of its receivables in FY23 (even though collections have been decent, with 80% outstanding collected as of May 2024). The company has also incurred sizeable one-off professional fees in 2023 to prepare for its IPO listing.

New cold room facility to drive FY25-26F growth. OFB plans to use funds from its IPO (RM8m) and bank borrowings (RM3.6m) to build a new 3,000-tonne cold room facility in Kuantan. The expanded storage capacity will allow OFB to fulfil more customer orders and store additional seasonal seafood supplies. The new cold room facility is expected to be completed within 12 months, enabling increased frozen seafood production from 2H25 onwards. We project frozen seafood processed by OFB to increase to 11,500 tonnes in FY25F and 14,500 tonnes in FY26F, contributing to higher sales of RM213m-268m. Overall, we anticipate earnings to grow by 28%-44% y-o-y to RM14.1m and RM18.1m in FY25F-26F respectively.

Risk factors for OFB include (1) Product quality risks, (2) Risk of availability of seafood supplies, (3) Foreign labour risks, and (4) Exposure to forex risks.

Source: Mercury Securities Research - 19 Jun 2024