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Analysts mixed on Clearwater, High Liner outlooks

High Liner and Clearwater share prices start the week higher than last week's, but in the view of analysts, the similarities tend to end there.

Shares in Canadian seafood giants Clearwater and High Liner start the week higher than before their differing second quarter financial results were released last week. But in the view of analysts, similarities tend to end there, with the firms' executives facing a wholly different set of challenges and outlooks.

High Liner's second quarter earnings before interest, taxation, depreciation and amortization (EBITDA) exceeded BMO Capital Markets analysts' estimates on stronger margins following cost reduction actions, although sales volumes continue to decline during this early phase of the turnaround initiatives.

"We were encouraged the company continues to discuss new products under development and relationship opportunities, although new products introduced to-date have not been material to results thus far," BMO Capital Markets analyst Jonathon Lammers wrote in a note to investors.

Last week High Liner posted a more than a 48 percent increase in EBITDA to $17.9 million (€15.9 million). This came despite a 9.1 percent fall in revenue to $223 million (€198.9 million) as sales volumes declined 7.8 percent to 60.4 million pounds compared with the same period a year earlier.

Top line losses

There are two totally opposing dynamics currently affecting High Liner, a second analyst said, adding that all evidence and commentary suggests the company's top-line decline is not going to end anytime soon.

The analyst would not be surprised to see High Liner losing around another $150 million (€133.4 million) of revenue before the dust settles, though he praised the company's cost saving efforts.

On an annual run-rate basis, the company has cut out around $14 million (€12.5 million) in costs, which in the analyst's view should more than offset falling sales, but opens the question of what the future holds. However, the behavior of High Liner's stock points to investors believing earnings can and will grow, in the analyst's view.

Figures have to be put into the context of non-commercial activities that have pushed up EBITDA, the analyst said, highlighting changes to how accounts are drawn up, which added $5 million (€4.5 million) to EBITDA, and a product recall recovery in the first quarter accounting for another $5.5 million (€4.9 million).

"It's going to take few more quarters for this to become clear to the street what the actual dynamic is and whether it can actually grow EBITDA," the analyst said. "If they can grow profits it's not going to be in a big way."

Clearwater outlook better, but mixed

By contrast, shellfish harvesting and processing group Clearwater, for whom second quarter earnings "modestly exceeded" estimates of analysts at BMO Capital, the picture appears somewhat rosier, though some analysts appear to take more convincing than others.

"We continue to expect growth to remain constrained, with balance sheet leverage elevated, and Clearwater harvesting to its quota limits," Lammers wrote.

EBITDA for the quarter stood at CAD 30.5 million (€20.4 million/$22.9 million), a 1 percent decrease year-on-year.

Sales for the period grew 4 percent, to CAD 153.8 million (€102.7 million/$115.4 million), while gross margin reached 20.5 percent.

The view was more upbeat about the remainder of the year, with Clearwater's sales typically skewing towards the second half. Shellfish species and other premium lines tend to be strong sellers during holiday entertaining at Christmas and Chinese New Year.

Key species harvested by Clearwater were not necessarily a big growth driver in the first half of the year but they are likely to be in the second six months of 2019, helped also by the timing of shrimp landings, the second analyst said.

"When the big free cashflow starts to roll in that debt leverage that has been a bit of an eyesore for investors should look drastically better by year end," he said.

Both companies have recently suffered contractions in their respective market caps, driven by a decline in the value of China's yuan and global market jitters.

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