This week saw Nutreco announce a move to set up a 60/40 partnership with Durante, a fish feed manufacturer in Nigeria, with the aim of investing in the production of extruded fish feed for the local market as well as for regional export.
Durante, set up five years ago, has a 15% market share of the Nigerian extruded fish feed market.
The company had revenue in 2013 of around €9 million, and sales volume of about 5,500 tons. Nutreco said with the addition next year of a new extrusion line, volume is expected to double by 2016.
No profitability in short-term
“We are not convinced about the potential for growth in this region and don’t quite understand Nutreco management’s rationale for developing this joint venture.
Furthermore, there will be no profitability in the short-term. It’s going to be a cheap feed, as it is targeted at the catfish segment mainly, so margins are not going to be massive.
There are also significant barriers to aquaculture market expansion in Nigeria from a lack of infrastructure to security risks to major concerns over water pollution from oil and mining activities, which limits any fish feed export potential beyond Africa,” said Gerard Rijk, an analyst at SNS Securities.
He said that the Dutch feed firm’s eyes should remain trained on the Latin American and Asian aquaculture markets, which offer more in terms of sales volume and global export potential.
However, Knut Nesse, Nutreco's CEO, said the move helps establish the feed company in one of Africa's most important markets.
“This is Nutreco's second foothold in Africa, after our investment in Egypt last year, and expands our share of fish feed for non-salmonid species. This fits perfectly in our strategy. We intend this joint venture to provide a base for further expansion in the fast growing West African fish feed market,” said the CEO.
Declining confidence in Nutreco executive
Rijk told us there is declining confidence in the financial markets in the current management structure at Nutreco.
“This misjudged Nigerian investment follows on from the badly handled divestment process for the company’s Iberian feed and meat business.
There is an obvious lack of vision from the executive side on how to transform the business in terms of the challenges on the salmon and shrimp feed side, in tandem with how it has managed the process of bringing all its factories onto one technology platform which has been a lot more costly than originally envisaged,” said the analyst.
While he admits operating profit at Nutreco has been moving upwards, Rijk said management needs to be mindful of revenues for 2015 and beyond.
Divestment of Iberian operations
The analyst reckons the halting of the divestment process of the group's operations in Spain and Portugal did not bring certainty to employees, customers and other stakeholders, as the Nutreco executive has claimed.
The Iberian businesses comprise poultry meat producer Sada, the Nanta compound feed business in Spain and Portugal and Inga Food, which operates pig farming and trading activities in Spain.
“We are continuing to give those businesses a divestment status, as the company has decided to not include them in a new corporate strategy, creating insecurity for employees and customers alike.
Nutreco is relying on the capabilities of the present management to run the Iberian operations but is not giving them a stake in the company – they are not part of the Nutreco executive - which is myopic thinking in our view,” said the SNS Securities analyst.
Partnerships with major clients
Rijk said Nutreco should have reduced the exposure from losing long term, critical customers such as Spanish retail giant, Mercadona, and salmon producer, Marine Harvest, by setting up joint ventures with them, and, in this way, it could have kept a close eye on their future strategy:
“I never heard Nutreco management making such a proposition, but, if the price had been right, I am sure Marine Harvest would have jumped at the prospect of a partnership on feed production.”
He said that Nutreco has high confidence that new clients will be found for its Spanish poultry arm, Sada, after supermarket chain, Mercadona, rejected pricing arrangements, which had seen higher feed input costs for the poultry meat products being passed on to the retailer.
“Knut Nesse said the company is looking at regional retailers and is also weighing up export opportunities for Sada products. But poultry meat export is clearly not a stable cash flow generator and is normally characterized by high volatility.
The overall Nutreco strategy leaves the Iberian operations, which are highly integrated, quite vulnerable in our view,” he added.
Rijk also said it is still to be seen whether the roll-out for Nutreco’s new MicroBalance based shrimp feed will be successful: “We have some doubts as it is a fragmented market with mainly, small scale farmers who may not be able to afford more expensive products.”