Zacks Initiates Coverage on Umami Sustainable Seafood Inc.
Ian Gilson, CFA
Headquartered in San Diego, California, Umami Sustainable Seafood Inc. .OB $2.50) is the global leader of high quality bluefin tuna for the high end Japanese sushi and sashimi market. The Bluefin Tuna market is estimated to exceed $1 billion with the Japanese market consuming 80% of the total.
The company aquafarms tuna at two locations, Ugljan Islands, Croatia (Northern Tuna) in the Adriatic Sea and Coronado Islands, Baja, Mexico (Pacific Tuna) in the eastern pacific, with a combined capacity of over 15 million pounds (7000 metric tons).
There are quota restrictions on catching Atlantic Tuna and these are being reduced each year. The farmed tuna grow faster than do the wild tuna (since more food is available), gain weight quicker (and so command a higher market price). Farmed tuna is replacing wild caught fish.
The tuna are kept and fed for about 3 1/2 years. A 10 Kg tuna will grow to over 100 Kg during this period.
The Kali facility has a successful breeding program that has released tuna eggs and larvae into the Adriatic sea each year over the last three years.
Umami has positive EBITDA and positive cash flow on an annual basis. This will allow the company to pay down debt and potentially acquire facilities and/or fishing licenses.
When the tuna are captured they are undernourished so they double their weight in the first 6 months and then every 12 months afterward. When the fish are over 60 kg they are harvested, frozen and sent to Japan in specially made freezer ships.
Current breakeven revenue is about $55 million a year. At that run rate all operating expenses and the current level of interest expenses are covered. The company has a gross profit margin of over 50% so that pretax income will build rapidly as revenue increases. The Baja operations have a lower cost structure (bait fish are more plentiful) so as Baja grows gross margins will expand.
We are rating the stock as OUTPERFORM with a price target of $60.00 a share.
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