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Austevoll Seafood (AUSS NO)

Market Cap: 4.13 Bn NOK Last price: 19,90 NOK 5 year median EPS: 3,63 NOK Dividend yield: 5.03 % Altmans Z-score: 2,63 Graham intrinsic value estimate: 46 NOK Upside to intrinsic value estimate: 130 % P/B: 0,60 P/S: 0,33

Variant view: The stock markets myopic focus on the global salmon supply growth in 2011/early 2012 has led to a severe mispricing of seafood stocks in general and AUSS in particular. AUSS is exceedingly cheap on a normalized earnings basis. It could easily double and more within a 2 year timeframe as salmon prices continue to firm up after the recent large supply increase in 2011/2012 put temporary downward pressure on salmon prices. The company has a strong balance sheet and a dividend yield of of 5%. AUSS is an unusually compelling investment as it has plenty of upside potential, a large margin of safety and pays a solid dividend.

Austevoll Seafood (AUSS NO) vs OBX Index:

Investment thesis: AUSS is sharply undervalued relative to its long term earnings power AUSS and other seafood stocks are out of favor after several short term-bearish developments: A period of rapidly declining salmon prices due to substantial supply growth, particularly from Chile, hit the companies hard. This is the most important reason by far. Austevoll recently cut its dividend substantially for 2011 to NOK 1,00 while the market consensus was 1,13. BB future dividend estimates (consensus) are now bearish. Fishmeal prices fell markedly in 2011 as fishing quotas rose.

I expect earnings to be weak for AUSS and other seafood players in both Q2 and maybe even Q3 2012 before they start to recover convincingly in 2H 12 and into 2013. I also expect the stocks to appreciate before that is an accomplished fact. Why? Because even if salmon supply growth has risen, salmon demand is now strengthening in the face of that supply growth, underpinning AUSSs future earnings power and ability to keep paying juicy dividends. The astute investor will buy the stocks before the firming up of salmon prices is discounted. I think the bottom is near in these stocks. AUSSs 62% ownership in the major salmon farmer Lery Seafood is by far the companys most important asset. This investment thesis mainly revolves around LSG, as it is the delta in LSG earnings that is the likely catalyst for a rise in AUSSs share price. There is less detail on AUSSs residual earnings. That being said, the companys fishmeal/oil operations should also produce stable results in the short term and have good potential for long term growth as demand for fishmeal and oil remains strong - poultry, pork and aquaculture production continues to rise globally, and the price of substitutes is rising as well (soymeal mainly), supporting fishmeal prices. I prefer AUSS to LSG proper and other seafood stocks because of the added safety the less cyclical fishmeal and oil business provides while I wait for salmon prices to recover (LSG is the salmon pure play) and better liquidity. The sector as a whole is cheap, but I believe AUSS is the lowest risk play.

Valuation at rock bottom levels Seafood stocks in general trade at valuation levels not seen during the financial crisis. Using a Graham approach with extremely conservative assumptions, I estimate the intrinsic value of Austevoll to be around 46 NOK per share and LSGs to be 161 NOK. That implies an upside to fair value of 130% and 81% respectively. Other valuation metrics support the undervaluation thesis.

Catalyst: firming salmon prices in 2012, and longer term, rising prices for fish oil and meal The market prices AUSS and LSG as if farming margins will never recover to the norm. My analysis indicates that they will. As salmon prices are likely to firm up later in 2012/first half of 2013, I expect the broader market to rediscover the strong income potential of stocks like AUSS and LSG. At that time, the stock prices will probably rise sharply. In the meantime, AUSS has other segments not impacted by the salmon price weakness.

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Austevoll Seafood: Austevoll Seafood is a Norwegian pelagic fishing company listed on the Oslo Stock Exchange under the ticker AUSS (Bloomberg ticker AUSS NO). The company operates in Norway, Chile and Peru.

Segments and operations overview: Fishing: operates vessels through subsidiaries in Chile, Norway and Peru. Fishmeal and oil: Fully integrated production chain operating in Peru, Chile, UK and Ireland. Products mainly sold to producers of aquaculture and animal feed, as well as the Omega 3 oil market. Canning: South American subsidiaries make pelagic canned fish products: canned fish, mussels, clams, tuna and other seafood products. The products are exported across the globe. Frozen fish: Frozen pelagic products for human consumption. Salmon farming: Austevoll is a major shareholder in Lery Seafood Group (62,56%) and Br. Birkeland AS (49,99%), and holds a total of 137 salmon farming licenses globally. It is among the largest salmon producers in the world through its ownership in LSG. Lery is by far the most important EBITDA contributor. See separate section on LSG NO for more details on the company.

Austevoll Seafood EBITDA split 2012E DNBNOR Estimates:

Salmon
37%

Human Consumption
59%

Fishmeal/Oil
4%

Source: DNBNOR Markets

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Valuation

A Graham-formula approach shows AUSS to be severely undervalued: Some notes on this method first: Valuing a cyclical business like AUSS by way of a DCF analysis is fairly unreliable. I choose not to. In this case I think its more useful to ballpark the normalized earnings power of AUSS and see if the company appears undervalued and if so, approximately by how much. It is my opinion that the Graham approach is suitable in this instance. Others may not agree with me on this. My persistent and pervasive risk aversion and need for a large margin of safety (aka my chicken-shit nature) has led me to modify Grahams original formula from the Intelligent Investor slightly, making the assumptions more conservative than in the original. Graham used a formula to estimate intrinsic value of a stock which basically uses a normalized earnings multiple (a 5 year average EPS) and adjusts for a growth factor based on historical growth rates. This formula has later been used and modified by many others, e.g. Jae Jun of Old School Value. I have done my own modifications and arrived at the below formula, which uses a 7 multiple on the latest 5 years median EPS, factoring in the historical nominal earnings growth rate of the S&P 500 (3,8%) times a multiplier of 1,5. The point of using this seemingly arbitrary growth rate is to minimize growth forecasting by simply referring to a long term historical average - I want to avoid overpaying for growth. I will never be right using this growth rate, but odds are I will be right on average regarding growth across all the stocks I invest in using this formula if history is any guide. The modified formula looks like this:

V* = 5yr median EPS x (7 + 1,5g)


where 7 is the fair PE ratio of a stock with 0% real growth (Ben Graham: 8,5) g is the historical earnings growth rate for the last 100 years (SPX): 3,8% 1,5 is the growth rate multiplier (Ben Graham: 2)

Plugging AUSSs 5 year median EPS into the formula yields an intrinsic value of abou t 46 NOK, indicating an upside of 130%. That is quite attractive, in my view. The same method applied to LSG NO yields an upside to intrinsic value of 81%.

Other pricing metrics supporting the undervaluation thesis: Normalized EV/EBIT multiples for the sector indicate a fair value above 36 NOK for AUSS. Rolling EV/Kg for the salmon farming companies are at 2H 2008 levels. This in spite of stronger balance sheets. This is also the case for LSG NO (source: Pareto Securities, Mikael Clement). (charts from Pareto on the next page).

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

AUSS Balance sheet (mNOK)

Assets Cash & Near Cash Items Short-Term Investments Accounts & Notes Receivable Inventories Other Current Assets Total Current Assets Net Fixed Assets Gross Fixed Assets Accumulated Depreciation Other Long-Term Assets Total Long-Term Assets Total Assets Liabilities & Shareholders' Equity Accounts Payable Short-Term Borrowings Other Short-Term Liabilities Total Current Liabilities Long-Term Borrowings Other Long-Term Liabilities Total Long-Term Liabilities Total Liabilities Total Preferred Equity Minority Interest Share Capital & APIC Retained Earnings & Other Equity Total Equity Total Liabilities & Equity

2011 2383 0 1189 3285 402 7259 3980 0 0 7335 11315 18574

2010 2811 0 1341 758 3174 8084 3865 6051 2186 7094 10959 19042

843 1427 952 3221 4286 1867 6153 9375 0 2514 3815 2871 9200 18574

841 1154 1034 3030 4895 2007 6902 9931 0 2614 3815 2682 9111 19042

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Lery Seafood Group LSG NO

Market cap: 4.83 Bn NOK


Last price: 89.75 NOK 52w Hi/Lo: 5 year median EPS: 12.80 Dividend yield: 7.80 % Altmans Z-score: 3.51 Graham intrinsic value estimate: 162 NOK Upside to intrinsic value estimate: 81 % P/B: 0,94 P/S: 0,54

Lery Seafood Group can trace it origins back to Bergen, Norway in 1939. It went public in 2002. Lery has grown both organically and through acquisitions to become the worlds second largest salmon and trout producer, producing 147 tons of high quality salmon in 2011, its second most profitable year ever. Lery Seafood Group is owned 62% by Austevoll Seafood. It is the latters most important business segment and profits driver. Austevolls chairman of the board is also Lerys chairman. In addition, AUSSs CEO and CFO are on the Lery board.

LSG NO vs OBX Index:

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Lery Seafood Group (LSG NO): Company structure and overview

Operations Salmon farming operations depend both on attractive licenses and lean operations - scale and logistic efficiency are critical. The company has a leading position in the industry, and has a strong sales and distribution network with an impressive reach. The company operates production, sales and distribution facilities in Norway, Sweden, Finland, Turkey, Holland, France, The UK, Portugal, USA, Japan and China. This size and reach has allowed it to operate more efficiently than smaller competitors and even enter into important strategic agreements with other players, like the recent alliance with SalMar. This leads to even lower processing and harvesting costs. Reproducing Lery license portfolio, operations, distribution network, product line and brand value would be very difficult if not impossible for a new competitor. Lerys competitive advantage/economic moat can thus be said to be large and sustainable. Farming operations are spread geographically over the northern, middle and southern regions of Norway, making it less susceptible to major crises stemming from biological problems (disease outbreaks do occur in the industry and geographically concentrated operations run a higher risk of major incidents). Brand recognition and product line Lery is a household name in Norway, known for making high quality products. Its products are divided into 4 major sectors: Salmon and trout, whitefish, pelagic fish and shellfish. Whole salmon sales is the largest revenue contributor, followed by processed salmon products. They already offer a broad spectrum of processed products, but appear innovative and able to reach new market niches by creating new and (mostly) attractive products. One example is their new product Finest, a highend loin product of sashimi quality that should grab market share from competitors like Salma. Another interesting focus area is the take-home sushi market: Sushi sales in grocery stores is up 60% y-o-y in Norway in 2011. Whitefish and shellfish are other potential future growth areas.

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

LSG Balance sheet (mNOK)

Assets Cash & Near Cash Items Short-Term Investments Accounts & Notes Receivable Inventories Other Current Assets Total Current Assets LT Investments & LT Receivables Net Fixed Assets Gross Fixed Assets Accumulated Depreciation Other Long-Term Assets Total Long-Term Assets Total Assets Liabilities & Shareholders' Equity Accounts Payable Short-Term Borrowings Other Short-Term Liabilities Total Current Liabilities Long-Term Borrowings Other Long-Term Liabilities Total Long-Term Liabilities Total Liabilities Total Preferred Equity Minority Interest Share Capital & APIC Retained Earnings & Other Equity Total Equity Total Liabilities & Equity

2011 1597 0 0 328 3454 5379 0 1836 0 0 4246 6083 11462

2012 1357 0 1014 290 2883 5544 23 1586 2559 973 4198 5808 11352

0 761 1375 2136 2429 1099 3528 5664 0 535 2766 2497 5798 11462

638 434 794 1866 2222 1270 3492 5358 0 549 2786 2659 5994 11352

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Salmon market outlook

The stock market is myopic; most investors and sell-side analysts (with the exception of Paretos Mikael Clement) are stuck in bearish mode still focusing on the global supply growth in 2011/Q1 2012 after Chilean production finally came back on track and Norwegian supply growth increased simultaneously. I believe it will serve investors well to dig a little deeper and look beyond this headline number, focusing on the dynamics of demand side of the market. Lower prices seem to have increased demand as other animal protein sources lost market share to salmon with falling salmon prices - demand is clearly up in the EU markets in 2011, as numbers from Spain, UK, and Germany all point in the same direction. EU markets constitute 80% of demand for Norwegian salmon. Russian demand has increased sharply after salmon prices fell (sales increase of 24% y-o-y), and Japan sales were up 30% y-o-y. Growth in the PIIGS countries has been weak, probably because of the ongoing Eurozone crisis. Another important fact is that the average reduction in salmon retail prices is markedly lagging the reduction in salmon spot prices in 2011 (by about 50%), allowing for further increased demand in 2012. Overall, Lery management estimates global demand for salmon to increase by 16% in 2012. There are indications that 2012 will be a sort of mirror image of 2011. According to Kontali and Pareto Securities estimates, global supply growth of Atlantic salmon is likely to abate later in the year after being up sharply in Q1, falling from > 20% y-o-y in Q1 to < 5% in Q4. 2011 was the exact opposite, yielding high prices going into the year and weak prices in the second half. As most of the incremental supply (45% of the 2012 global supply growth came to market in Q1) has been absorbed in Q1 and spot prices are now at about 28 NOK/Kg, it can reasonably be assumed that demand has strengthened and that this will lend support to prices and by extension farmer earnings later in 2012. According to Kontali, global salmon supply growth will be in the mid-single digits in 2013 and 2014. I believe salmon prices will be stronger than forward curves imply today (Jan 13 contract at 26.30 currently while the mid-price of the 2014 contract is now 28.25) as this demand strength continues to become apparent. I expect prices to average about 27-28 NOK/Kg in 2012. The Q1 avg was 26,5 NOK/Kg and I expect about 28 on avg for Q2-Q4, moving to an average of 28-30 in 2013. Production costs are estimated to be around 23 NOK/Kg, leaving margins for producers roughly inline with the historical average margins in the business (5 6 NOK/Kg) from 2012E onwards. One should also keep in mind that there is always risk of disease outbreaks in the salmon farming business. As an example, the ISA outbreak in Chile in 2006 was catastrophic for operations in Chile and led to sharply higher salmon prices*.

*This is both a risk factor for LSG and AUSS, and a potentially supportive factor for salmon prices. Im not implying that this is something to count on in the future, merely that negative supply shocks are more likely than positive ones going forward.

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Salmon prices(monthly) last 20 years (source: Indexmundi)

Correlation 3m rolling EU supply growth and salmon prices (chart from Pareto Securities):

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Fishmeal and oil outlook: my long term view + AUSSs company guidance for 2012

On a longer term basis, my view is that global demand for more protein will continue to rise. That means more fish, pork and poultry must be produced. To do this, the proper feed must be supplied. China is the most important market in this regard, and protein production there is the main driver for the feed suppliers. Substitution does occur, and soymeal has taken market share from fishmeal because of the relatively large price differential. However, fishmeal is and will remain an important part of the feed mix, as it has important dietary properties other feed sources do not have (i.e. full substitution with e.g. soymeal is not an option). Despite last years increase, as the chart below shows, production is actually close to the lowest levels in 30 years, and demand is rising with rising global protein demand. Generally speaking, pelagic fish is a scarce resource, and the biomass does not change very much over time (meanwhile, the human race grows at a rapid pace). The absolute levels of fishmeal production are not very easily increased as they depend on the abundance of fish from year to year. Longer term, more of the catch may also go directly to human consumption, pressuring feed prices further.

AUSS commented on the outlook for fish oil and meal prices in the latest quarterly report. A brief summary follows below: Aqua production in China increased by 4,4% y-o-y, and demand from hog farmers rose as demand for pork continued to rise. While production of fishmeal rose by almost 20% in 2011 from 2010, and prices subsequently fell, the market now looks fairly tight as fishmeal consumption in China (the main market) also rose 25% y-o-y (up 180.000 tons to 1.41 m tons). This demand increase will be met by further imports from South America (mostly from Peru). The fish oil market looks tight as well, with limited unsold global stocks and robust demand despite increasing production in 2011. Management also mentioned that the fishmeal/soymeal ratio is now at levels supporting fishmeal demand (below its historical average by about 15%.)

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Fishmeal 10 last years

Fishmeal vs Soymeal price relative supports fishmeal prices at these levels

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Summary:

AUSS is trading miles below its intrinsic value from a normalized earnings perspective. At its current valuation, AUSS provides an investor with plenty of upside, a large margin of safety and a solid dividend yield (5%).

A profitable outcome of an investment in this company does not rely on above average profit margins going forward or high growth rates lasting forever. The current valuation of the company is so low that a mere return to average margins and a realistic and very modest EPS growth is all that is needed for AUSS to appreciate dramatically from here.

This would in turn depend on firming salmon prices over the course of 2012 and 2013(but no return to record prices is necessary). An analysis of the supply and demand dynamics of the salmon market indicates that this is likely.

AUSSs other business is likely to benefit from the favorable long term outlook for fish meal/oil. In the short term it will provide a stable income stream while salmon farming income is down.

Sources: Bloomberg Indexmundi Company websites and reports Pareto Securities (research reports by Mikael Clement) DNB Markets (research reports by Knut Ivar Bakken)

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Appendix 1: LSGs financial history in brief

EPS (adjusted) history + BB consensus estimates 2012+13

Revenue history + BB consensus estimates 2012+13

Operating margin history + BB consensus estimates 2012+13

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Profit margin + BB consensus estimates 2012+13

ROE (adjusted) history

Net debt/Equity % history

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com

Appendix 2: Peer group valuation and 1yr performance

Norway-listed seafood stocks are cheap in general

1 yr performance %

Henrik Stang Heffermehl

Groven & Partners Asset Management

hsh@grovenpartners.com