Background

Ocean Fresh Berhad (Ocean Fresh) is primarily engaged in processing and trading frozen seafood, as well as provision of frozen seafood processing services.

IPO Statistic

The IPO entails a public issue of 50.1mn new shares with no offer for sale. Collectively, the share offers account for 31.1% of the group’s enlarged issued share capital.

Competitive Advantages and Investment Highlights

1. Wide Range of Customers;

2. Products Are Internationally Recognised; And

3. Consistent Supply of Frozen Seafood Products.

Valuation

At the IPO price of RM0.28 per share, Ocean Fresh is valued at a PE ratio of 8.47x based on its FY23 EPS. We have applied a target PE ratio of 9x to the CY25 EPS, to derive a fair value of RM0.35/share, representing a 10% discount to its peers after considering the relatively smaller market capitalisation and earnings growth. Our valuations take into account the gradual expansion of storage facilities, increasing demand from both existing and new customers, and effective cost management efforts. Additionally, we have considered Ocean Fresh's medium-to-long-term earnings growth prospects, supported by rising demand in China and the expansion into a new business segment (Dried Seafood Products).

Business Overview

Incorporated in 2023, Ocean Fresh Berhad focuses on processing and trading frozen seafood, primarily for international markets. Over the years, the group has cultivated a wide range of customers, comprising over 160 local and 170 global clients. The headquarters is located in Kuantan, with two factories equipped with semi-contact blast freezers and cold rooms on the same premises.

Competitive Advantages and Investment Highlights

1) Wide Range of Customers

With 22 years of experience in the frozen seafood industry, Ocean Fresh has established an extensive network of customers. The group serves both domestic and international markets, with significant presence in Turkey, China, Vietnam, Japan, and other countries. As Ocean Fresh enters its 16th year since its initial export, China has emerged as the largest contributor to the group’s revenue, accounting for 33.49% of the total in FY23, followed by Turkey at 24.83%.

Given its expanded product range, which includes mollusks, fish, prawns, abalone, and sea cucumber, we view China as a promising market for Ocean Fresh to expand its business. This outlook is based on the country's sizable population and the increasing affluence of its middle class, both of which significantly drive demand for seafood.

2) Products Are Internationally Recognised

Ocean Fresh is headed by Siang Hai Yong and Kee Wan Chum, each bringing 20 and 15 years of experience in the fishery and frozen seafood industry, respectively. Over the course of its operations, the group has achieved multiple internationally recognised certifications and complies with the food quality and safety standard.

In fact, the group has obtained HACCP, GMP, MeSTI and HALAL certification for its seafood products and production. With these quality and food safety management certifications, Ocean Fresh has the capability to penetrate overseas markets. As of FY23, overseas orders accounted for more than 82.8% of the group’s topline. The group has developed a customer base exceeding 300 clients, with some of them consistently placing repeat orders. Therefore, the proven quality and freshness of the products, which foster confidence in its customers, are the key to recurring income.

3) Consistent Supply of Frozen Seafood Products

The group maintains established relationships with suppliers, including both local and international wholesalers. To address the seasonality of fishing activities, the group purchases not only wild-caught seafood but also farm-raised seafood. Excess inventory from purchase orders is stored in cold rooms to meet future demand. Currently, the group owns a cold room facility with a capacity of 1.7k tonnes.

Future Plans and Business Strategies

Ocean Fresh Has Planned to Expand Its Network Through Both Domestic and International Channels:

I. Continue to Growth Its Presence in China Market. Moving Forward,

the group will focus on growing its international market, particularly in China. According to the IMR report, China had the second-highest seafood consumption in the Asia Pacific region, with 40.3kg per capita in 2020. In terms of retail sales volume and value of frozen seafood, China experienced a 5-year CAGR of 3.4% and 9.0%, respectively, from 2017 to 2022.

Ocean Fresh intends to capitalize on this growth by leveraging its existing network of local wholesalers in China to distribute its seafood products. Discussions regarding the appointment of a Chinese wholesaler are expected to be finalised by 3QCY24. Following this, Ocean Fresh plans to further expand its presence in the Turkish market.

Ii. Establishing a New Cold Storage Facility. Ocean Fresh Currently

operates 3 cold rooms with a total storage capacity of 1.7k tonnes. As of FY23, the group has fully utilised its storage capacity, achieving a utilisation rate of up to 99.94%. To address the space constraints, the group has engaged third-party cold room facilities, adding an additional storage capacity of 400 tonnes. Consequently, Ocean Fresh plans to construct a new cold room facility adjacent to its current processing facility. This new facility will feature 6 cold rooms and a loading bay, effectively more than doubling the group's total storage capacity to 4.7k tonnes (+3.0k tonnes). Construction is expected to commence, with operations slated to begin 18 months thereafter.

Iii. Venture Into Processing and Trading of Dried Seafood Products.

With new inquiries from its existing customers in China, Ocean Fresh has decided to expand into dried seafood products, which have lower storage and transportation costs. According to the IMR report, the dried seafood market in the Asia Pacific region grew at a 6-year CAGR of 3.8% from 2017 to 2023, reaching an estimated sales value of RM 18.5bn in 2023. Among all countries in the Asia Pacific, China accounts for a significant portion, comprising 30.8% of the total market size for dried seafood products. Therefore, the group plans to utilise its extensive customer base to cross-sell dried seafood products. A land area of 3,300 sq ft in Factory B will be allocated for the processing and storage of dried seafood products.

Key Risks Relating to Business and Industry

i. High Reliance on a Single Large Customer;

ii. Adverse Fluctuations in the MYR/USD Foreign Exchange Rate; And

iii. Dependence on Foreign Labour.

Financial Highlights & Forecast

FY23 revenue grew by 2.0% to RM3.12mn, while PBT increased marginally by 0.1% to RM7.0mn, driven by higher export sales from China, Vietnam, the US, and the Philippines, which rose by 3.28% YoY to RM132.0mn. The marginal rise in PBT was primarily due to increased direct labor costs (+12.5% YoY to RM3.5mn) and overhead costs (+10.1% YoY to RM6.7mn), which offset the improved top-line performance. During FY23, the group hired an additional 18 foreign workers to support daily production and faced increased utility costs following electricity tariff adjustments.

Going forward, we forecast Ocean Fresh’s net profit to increase to RM7.3/8.3/8.9mn in FY24/25/26F, driven by higher demand from exports Our sales growth expectations for FY24/25/26 of 3%/4%/5%, are based on the gradual expansion of storage capacity to offer a broader range of products to customers.

Dividend Policy

Ocean Fresh Does Not Have Any Formal Dividend Policy.

Valuation

At the IPO price of RM0.28 per share, Ocean Fresh is valued at a PE ratio of 8.47x based on its FY23 EPS. We have applied a target PE ratio of 9x to the CY25 EPS, to derive a fair value of RM0.35/share, representing a 10% discount to its peers after considering the relatively smaller market capitalisation and earnings growth. Our valuations take into account the gradual expansion of storage facilities, increasing demand from both existing and new customers, and effective cost management efforts. Additionally, we have considered Ocean Fresh's medium-to-long-term earnings growth prospects, supported by rising demand in China and the expansion into a new business segment (Dried Seafood Products).

Source: TA Research - 19 Jun 2024