SeaDragon Marine Oils

SeaDragon’s reverse into CLA and the associated fund-raising in October 2012 was the catalyst for expansion after a long period of funding constraints. It represents an interesting way for investors to tap into the growing demand for refined fish oils. A new fish oils plant, now scheduled for Q4 of FY14, should treble capacity and allow SeaDragon to diversify from squalene to omega-3 oils and eventually from mainly dietary supplement end-markets towards branded B2C and pharmaceutical. The historic financial record is unpromising, but FY13 results should show that the corner has been turned, with order books full and prices firm. SeaDragon’s New Zealand location (with its clean waters) gives it a niche and its small size suggests plenty of growth potential.

Cash Injection Makes All The Difference
SeaDragon is the largest producer of refined fish oils in Australasia, but was cash constrained and unprofitable post the credit crunch of 2008, unable even to fulfil demand from existing clients. A NZ$2.5m cash injection from Bioscience Managers in October 2012 made all the difference to its ability to source raw materials and we expect revenue for the 5.5 months to March 2013 to be NZ$9.3m, helped by two large orders towards the year end.

Moving Up The Value Chain
While squalene is predominantly sold into Asia, omega-3 oils are in strong demand worldwide for a range of end-markets. Delays to the installation of the new refined fish oils plant due to supplier failure have been frustrating, but the order should be finalised this month and the plant should be operational in Q4 of FY14 and fully on stream for FY15. The strength of market demand is such that, unusually, SeaDragon’s competition is for raw materials rather than for customers. Its order books are full and we see upside to profit estimates, albeit tempered by some caution until the group shows that it can trade profitably on a consistent basis.

Valuation: At A Turning Point
SeaDragon is at a turning point, with a restored balance sheet (net cash c NZ$0.2m and a shareholding in Snakk Media currently worth NZ$3.75m), improving profitability and strong demand from a large and growing market. The real investment story is the potential for the group in the much larger omega-3 market. The EV/EBITDA falls to 8.1x by FY15e and our DCF points to a possible value of 3.5-4.9c per share, although this is clearly tentative until the new plant is operational and the business model begins to prove itself.

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