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Clean Seas Tuna to focus on yellowtail

Sushi has taken off in Australia, where you can find it in many food courts and restaurants, and along with tuna, another popular kind of fish served is yellowtail, or hamachi. Clean Seas Tuna (ASX: CSS) is an aquaculture business that raises yellowtail kingfish and bluefin tuna at its SA facilities and seawater lease areas.

It produces about 500 tonnes of yellowtail, with a goal of increasing production to 3000 tonnes yearly. Recently, domestic and international demand for the fish has raised the price from about $9/kg to almost $14.50/kg over the past two years. The company’s mid-term goal is to raise its earnings to $3/kg before overhead costs.

The quality of the yellowtail produce has established the company’s brand reputation at the high end, and exports are predominantly going to Europe, with 73% of its revenue comes from Australian sales.

In the company’s September investor update, it reported that its bluefin tuna propagation program will be put on hold, placing its main focus on yellowtail production for the medium term. It will reinstate it once the company has been able to establish a more sustainable financial footing through yellowtail production.

In its 2013 annual report, revenue has slid off 36% from $22.4 million to $14.3 million, continuing the string of net losses that started in 2008. This year its net loss was $34 million, surpassing its current market cap of $33 million.

The biggest expense hasn’t been for plant, property and equipment but just overall operating expenses that stay relatively high regardless of the drop in revenue. Unless it can ramp up production as it plans to, the running costs will keep on eating any potential profit it creates.

However, the suspension of the tuna development and the increased demand for yellowtail seems to have made a difference to investors since the share price has risen from about $0.01 in July to $0.04 currently. Before the GFC, the price rose to as much as $1.60.

In contrast, Tassal Group (ASX: TGR) has had a run up in share price, doubling to $3.10 since January 2013. This salmon producer, well known by its Tassal brand, has been steadily increasing production, and has established a stable earnings level for the past five years.

Foolish takeaway

A lot of times if you like a product it is always good to investigate its producer for investment opportunities. In this case, yellowtail is still a commodity subject to strong competition; the company hasn’t gotten to a point where it can sustain itself on operational earnings, and is in the process of developing another line of product to replace its tuna segment, which had very good potential yet is difficult and costly to scale up.

Investors should wait on this story until further progress can be seen.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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