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This small cap is tipping a big increase in second half profits

The 20% plus improvement in both its interim top and bottom lines is only the tip of the iceberg for Clean Seas Seafood Ltd (ASX: CSS) with management confident of stronger growth in the second half of this financial year.

The Yellowtail Kingfish supplier reported sales that surged by a quarter to $20.4 million as its net loss narrowed by 22% to $3.9 million in the six months to end December 2017, and noted a strong seasonal skew in earnings towards the current half.

This is because Yellowtail Kingfish grow best when water temperatures exceed 17 degrees Celsius. This means fish growth at its South Australian pens mainly occurs between November and May.

“Historically, only 15% to 35% of full year biomass growth occurs in H1 each financial year,” said the company in a statement lodged with its results.

“Australian and International accounting standards require our fish to be valued at market value with increases in that value included in reported profit. This means that reported profit is much higher in H2, when historically 65% to 85% of full year biomass occurs, while operating costs are more evenly incurred during the year.”

The company had reported a net loss in the first half of FY17 as well but managed to post a small full year profit of around $200,000.

Given the sharp narrowing in net loss for 1HFY18, its full year results should be substantially ahead of last year’s net profit.

Clean Seas is also benefiting from higher farm gate pricing for its fish as well as the opening of its new processing facility at Royal Park, which will improve the company’s cost base and provide capacity for it to process fish for export markets.

Shareholders may also get a “free kick” if Clean Seas wins its court battle with Skretting Australia where Clean Seas is suing for damages as it alleges that Skretting had supplied taurine deficient fish feed.

Management has reaffirmed its full year guidance with sales revenue increasing 21% to 33% to a range between $43 million and $47 million and a “significantly higher” than FY17 profit.

The stock is trading flat at 6 cents on the result but given that it has run up by nearly 82% over the past year when the All Ordinaries (Index:^AORD) (ASX:XAO) has gained 6%, it is perhaps not surprising to see the stock consolidate around these levels before heading higher.

Clean Seas is a good addition to your holdings alongside other outperforming food-related stocks such as A2 Milk Company Ltd (ASX: A2M).

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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