www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

  Still not time to cut bait with High Liner

BENJ GALLANDER and BEN STADELMANN

Friday, July 20, 2007

Four years ago, we wrote a column on our oldest holding, which had been in the portfolio since 1993. The headline read, "We're waiting to put High Liner Foods into drydock." At one point, the position was trolled, in hopes that a fish might come along and bite. The unfortunate part about this fish story is that it didn't happen.

These days, the seafood company's operational numbers are looking pretty dishy. In the most recent quarter, sales were up 4.7 percent year over year to $81.3 million. Earnings were $3 million, the equivalent of 26 cents a share, while inventories were smartly reduced by 29 percent. This was accompanied by a drop in bank debt from more than $33 million to under $15 million.

However, one aspect of this enterprise that is laughable is its share buyback plan. When in force last year, the company had the option to acquire 510,000 shares. How many did they purchase? Three thousand. Holy Hannah, if you're not going to use the reel, buddy, might as well just leave it in the shed.

The company has an unexpected opportunity right now. This month, the U.S. Food and Drug Administration barred seafood imports from China unless the exporters can show that the goods comply with American safety standards. Given that the United States imports about 18 percent of its seafood from China; this will leave a major gap in U.S. consumption — more than a billion pounds' worth.

One would think that High Liner could partially fill that vacuum, with increased sales the healthy byproduct. Traction is already there, as revenues from our southern neighbours were up by 18 percent last year.

On the local front, after fighting against consolidation in the industry for decades, those shell shuckers in the Newfoundland and Labrador government have approved a preliminary agreement for the sale and breakup of FPI Ltd. Some of those assets will likely come High Liner's way, growing the company. The deal is not done yet, and given the governmental involvement, it will naturally take longer.

Other investors who bought in as long ago as we did probably have sold and cast their lines in other waters that appeared to have greater potential. It would be difficult for us to dispute that move. Given that the average holding period for a Contra the Heard stock is 3.5 years, this position certainly does not fit our modus operandi.

Nevertheless, given the tangible improvements in High Liner's business, it does not make sense to simply dump. Rather, our gut feeling suggests that patience will win the day, and in the meantime the dividend yield of about 2 percent makes this tranquil outing more worthwhile.

Long-standing chief executive Harry Demone suggests that more acquisitions are on the High Liner agenda. Perhaps size will catch investors' eyes, and if so, trading volume could jump like a flying fish, causing a breakout on the stock price. Given that the stock currently dances around the $10 mark, and it is 16 years since the stock traded at $29, it does appear to have some catching up to do.


back