Valuation of SalMar ASA

Værdiansættelse af SalMar ASA

Master Thesis

Author: René Nicholas Kabel Laursen

CPR number: xxxxxx-xxxx

Date of submission: 15 October 2013

Copenhagen Business School 2013

M.Sc. Accounting, Strategy & Control

Supervisor: Edward Vali

Department of Accounting and Auditing

Number of standard pages: 73,7

Number of characters: 167.825

1 Table of Contents Executive Summary...... 5 1. Introduction ...... 6 1.1. Research Question...... 6 1.2. Structure of the Thesis...... 7 1.3. Methodology and Limitations...... 7 2. Introduction to Salmon Farming...... 9 2.1. Salmon Farming Operations ...... 9 2.2. VAP Operations...... 11 3. SalMar and Peers ...... 11 3.1. SalMar Profile...... 11 3.1.1. Strategy...... 13 3.1.2. Business Areas and Organizational Structure...... 13 3.1.4. Executive Management and Board of Directors...... 16 3.1.4. Ownership...... 17 3.2. Peer Group...... 17 3.2.1 Lerøy Seafood Group ...... 17 3.2.2. Grieg Seafood...... 17 3.2.3. Marine Harvest ...... 18 4. Financial Analysis ...... 19 4.1. Growth and Price Development ...... 19 4.1.1. Revenue Growth ...... 19 4.1.2. Salmon Price...... 21 4.2. Accounting Quality...... 22 4.2.1. Applied Accounting Principles ...... 22 4.2.2. Potential Red Flags...... 22 4.3. Preparing the Income Statement for Analytical Purposes...... 24 4.3.1. Tax for Analytical Purposes...... 26 4.5. Profitability Analysis...... 27 4.5.1. Return on Equity ...... 28 4.5.1.1 Return on Invested Capital ...... 29 4.5.2. Leverage Effect...... 32 4.5.2.1. Financial Leverage...... 32 4.5.2.2. Interest Margin ...... 33 4.6. Liquidity Analysis...... 34 4.6.1 Short-term Liquidity...... 34 4.6.2. Long-term Liquidity...... 36 4.8. EBIT/kg ...... 37 4.9. Conclusion to the Financial Analysis...... 38 5. Strategic Analysis ...... 39 5.1. PESTLE Analysis ...... 39 5.1.1. Political Factors...... 40

2 5.1.1.1. Licenses...... 40 5.1.1.2. Trade Barriers...... 41 5.1.2. Economic Factors ...... 42 5.1.2.2. Exchange Rates ...... 42 5.1.2.3. GDP ...... 42 5.1.2.4. Interest Rates...... 43 5.1.2.5. Raw Materials ...... 43 5.1.3. Social Factors ...... 44 5.1.3.1. Health Awareness ...... 44 5.1.3.2. Media Surveillance...... 45 5.1.4. Technological Factors...... 45 5.1.4.1. Scale Production ...... 45 5.1.4.2. Feeding...... 46 5.1.4.3. Disease prevention ...... 46 5.1.5. Legal Factors ...... 47 5.1.4.1. Norway...... 47 5.1.4.2. Scotland...... 47 5.1.4.3. Chile ...... 47 5.1.4.4. Canada ...... 48 5.1.6. Environmental Factors...... 48 5.1.6.1. Sustainability...... 48 5.1.6.2. Health Risks...... 48 5.1.6.3. Fish Escapes ...... 49 5.2. Industry Analysis ...... 50 5.2.1. Substitution treat...... 50 5.2.2. Suppliers...... 53 5.2.3. Customers ...... 54 5.2.4. Barriers to entry...... 55 5.2.5. Rivalry...... 56 5.3. Value Chain Analysis ...... 57 5.4. Conclusion of the Strategic Analysis ...... 59 6. SWOT Analysis...... 59 6.1. Strengths...... 59 6.2. Weaknesses ...... 60 6.3. Opportunities...... 60 6.4. Threats ...... 60 7. Forecast...... 60 7.1. Harvest and Salmon Price Forecast ...... 61 7.1.1. Management’s Historical Guidance...... 61 7.1.2. Harvest Forecast ...... 62 7.1.3. Salmon Price Forecast...... 62 7.1.3.1. Supply...... 62 7.1.3.2. Demand...... 63 7.1.3.3. Regression forecast...... 63

3 7.1.3.4. Testing the model ...... 65 7.2. Financial Statements...... 66 7.2.1. Forecast Period ...... 67 7.2.2. Income Statement Items...... 67 7.2.3. Balance Sheet Items...... 70 8. Valuation...... 74 8.1. WACC ...... 74 8.1.1. Capital Structure ...... 74 8.1.2. Cost of Equity ...... 75 8.1.2.1. Market Risk Premium...... 75 8.1.2.2. Beta...... 76 8.1.3. Cost of Debt ...... 76 8.1.4. Tax rate ...... 77 8.2. DCF Valuation...... 77 8.3. EVA Valuation...... 78 8.4. Peer Valuation...... 79 9. Sensitivity Analysis...... 80 9.1. Salmon Price and Growth ...... 81 9.2. WACC and Growth ...... 81 10. Conclusion and Investment Recommendation...... 82 Bibliography ...... 85 Articles ...... 85 Books...... 85 Company Reports...... 85 Financial Data Providers ...... 85 Reports...... 86 Webpages ...... 86 Appendix ...... 88 Appendix 1: Historical Acquisitions...... 88 Appendix 2: Geographical Breakdown of Revenues...... 88 Appendix 3: Leasing Calculations...... 88 Appendix 4: SalMar Historical Annual Accounts...... 90 Appendix 5: Analytical Historical Annual Accounts for SALM and Peers...... 93 Appendix 6: Indexed Annual Accounts for SALM ...... 99 Appendix 7: Common-sized Annual Account for SALM...... 101 Appendix 8: Management’s Historical Guidance vs. Reported Harvest...... 103 Appendix 9: Regression Model for Forecasted Salmon Price...... 103 Appendix 10: Assumptions for the Forecasted Financial Statements ...... 104 Appendix 11: CAPM and WACC Calculations...... 106 Appendix 12: Aquaculture Specific Terms ...... 108 Appendix 13: Subsidiaries and Associated Companies...... 109 Appendix 14: Major Shareholders ...... 110

4 Executive Summary This thesis has been written with the intention of finding the intrinsic value of SalMar ASA, by means of mainly using the discounted cash flow and the EVA models, based on assumptions made through a financial and a strategic analysis. A peer valuation is also made to act as a sanity check for the former two models, although the two primary valuation models will be further tested for sensitivity in a separate section.

SalMar ASA is a Norwegian salmon farming and processing company. In the recent decade the company, the salmon farming industry as well as the wider aquaculture industry have seen substantial growth rates. This has meant that the focus on the industry from investors’ interest for the industry has also increased. SalMar has been highly regarded within the industry as the most innovative and cost efficient producer of salmon in the world, however, as the fundamental analysis reveals, in recent years SalMar has lost some of the historical superiority due to biological issues and higher than expected raw material costs. Therefore, the company has now initiated several initiatives to regain its former number one position.

Using a WACC of 6,0%, the primary valuation models estimate an intrinsic value of NOK 73,49 on 30 April 2013, indicating 27% premium to the market price of the share. This premium is due to the author’s positive view on the company’s abilities to cut operating costs in addition to the rising salmon price throughout the forecasting horizon.

The peer valuations indicate a valuation range between NOK 44 and NOK 79, leaving the estimate of NOK 73,49 in the higher end of the range. This also verifies the intrinsic value derived by the primary valuation models.

5 1. Introduction The global aquaculture industry has grown by almost 9% annually since 1970, and the UN Food and Agriculture Organization has pointed to aquaculture to become a major employer and revenue generator globally in the future1. The reason for this growth has among others been the increasing world population and the stagnating global supply of wild fish. With 70% of the earth’s surface covered by water, fish farming has been particularly relevant for producing protein for human consumption.

Salmon farming is a sub industry that has seen a growth rate of more than 600% since 1980, despite the fact that it is still only plays a marginal role in the overall seafood market2. With rapid technological innovation, this industry has been able to position itself as a competitive and much sought after protein alternative.

As a natural constraint, production of salmon relies on specific sea water temperature conditions, giving countries like Norway, Chile, Canada and Scotland natural advantages within this industry. Especially Norway has been able to grow the industry effectively, setting up a good collaboration between industry players and the government. However, recent year’s biological issues in Norway and abroad, a low salmon price in 2012 and increasing media critique all dampen the otherwise positive outlook for the industry.

One Norwegian salmon farming company that has been particularly successful is SalMar ASA. SalMar has historically been known as the most efficient salmon producer in the world and has with 15 acquisitions since its IPO in 2007 been a very active player in consolidating the industry. With the establishment of the world’s largest and most innovative salmon processing facility, it has positioned itself to partake in the growth going forward.

1.1. Research Question This thesis will analyze SalMar’s financial position, the strategic environment as well as the current state of the salmon farming market with the aim of estimating the intrinsic value of the company on the date of its Annual Report 2012. Thus, the research question is as follows:

 What is the intrinsic value of the SalMar share on 30 April 2013? Given this question, a series of sub questions will need to be answered:

 Which processes go into the production of salmon and how is value created?

1 Encyclopedia of Global Industries: Aquaculture, see link in bibliography. 2 Marine Harvest: Salmon Farming Industry Handbook 2013, p. 6 6  How has the financial situation in SalMar developed for the years 2007 to 2012?  Which macro- and microeconomic factors will affect SalMar’s future growth potential?  How is SalMar expected to fare going forward?

1.2. Structure of the Thesis The thesis is structured to give a brief introduction to how the salmon farming industry works, followed by an introduction to SalMar, its Figure 1.1: Thesis structure strategy, business areas, management, ownership and peer group. Next, a financial analysis of SalMar will be conducted in order to gain better insights to the company, which is then applied in the subsequent strategic analysis. The historical period of analysis is six years, from 2007-2012, corresponding to a salmon farming business cycle. Both the financial and the strategic analyses are summarized using the SWOT framework. Upon these findings, a forecast of the salmon price and the expected harvest will be made to forecast revenue, after which a forecast of the financial statements will be made using a value driver set- up. The valuation will be performed using a Source: Own research discounted cash flow model and the Economic Value Added (EVA) model. To check if the intrinsic value of the share price is valid another valuation using peer multiples will be made. Finally, the assumptions to the present value models will be tested for sensitivity. The above mentioned structure is illustrated in Figure 1.1.

1.3. Methodology and Limitations Empirical data used in the thesis will be secondary data from annual and quarterly reports, quarterly presentations, analyst estimates, news articles, books, financial data providers and correspondence with equity research analysts. Unfortunately, it has not been possible to get the company to give interviews, despite multiple tries and angles.

The theoretical framework used for financial analysis will mainly consist of the DuPont model, which tries to decompose and explain causality in the Return on Equity ratio. The DuPont model is often

7 criticized for being very extensive, making the financial ratios seem increasingly complex. In extension of the profitability analysis, a liquidity analysis will also be performed. To summarize the financial analysis the Morgan Stanley Model-Ware profitability map is used to gain insights to the historical direction profitability wise.

The theoretical frameworks used for the strategic analysis are the PESTLE framework, Porter’s Five Forces and the Value Chain analysis. The former describes and analyzes factors in the macroeconomic environment that can affect SalMar. Porter’s Five Forces describes and analyses factors and relationships within the salmon farming industry. Lastly, the value chain analysis describes and analyzes SalMar’s internal workings. The models will be introduced further in their respective sections. It is important to use the two models in connection with each other as the PESTLE framework has been criticized for its subjective use of inputs by the user3 and Porter’s Five Forces for the assumption that general macroeconomic factors influence all companies within the same industry equally4.

In forecasting the future salmon price a multiple regression using two variables is used to calculate the future salmon price, which limits the validity of the model. However, using more variables would have been too time-consuming and beyond the scope of the thesis.

To value SalMar, three valuation models will be used 1) the discounted cash flow model, 2) the Economic Value Added model and 3) a multiple valuation based on peers. The DCF model is often critiqued for being time-consuming to generate inputs to the model, for not producing a value estimate easy to communicate to laymen and for not being able to demonstrate value creation5. One drawback to the EVA model is the fact that it relies on the clean surplus assumption, i.e. that all revenues and expenses are recognized through the income statement6. To mitigate this, the pro forma statements will have to live up to this assumption, resulting in an unbiased value estimate from the EVA model. The peer valuation will only be used to support the present value models, as multiples can have different pitfalls to them if not treated properly, e.g. differences in accounting principles, transitory items and similar growth and risk profiles7.

3 Henry, A.: Understanding Strategic Management, Oxford University Press, 1st ed. 2008, p. 61 4 Henry, A.: Understanding Strategic Management, Oxford University Press, 1st ed. 2008, p. 81 5 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, p. 272 6 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, p. 276 7 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 279 8 2. Introduction to Salmon Farming This section provides a brief introduction to salmon farming; focus will be on the salmon farming operations in general and on VAP operations. In appendix 12 there is a list of aquaculture specific terms with explanations.

2.1. Salmon Farming Operations Salmon farming typically starts with salmon eggs also called roe in an incubator tray. These are either internally produced or bought from a supplier. Roe are kept in fresh water for about 60 days before they hatch. Upon hatching they will turn into alevins/yolk sac fry after which they turn into fry about four to six weeks after, from there the fry has used up all of its yolk and can begin to eat feed, this is also called the juvenile stage. After 10-16 months in large fresh water tanks the salmon go through the process of smoltification which allows them to migrate from fresh water to saltwater. Around this time they weigh no more than 60-100 grams and are moved to net pens at sea. After having undergone smoltification, the salmon will stay at the sea for another 14-22 months until they weigh 4-6 kg8. Then the salmon will be harvested and go through the primary processing of slaughtering and gutting, up to this point in the value chain is where the “normal” salmon price index relate to9. Figure 2.1: Salmon growth cycle

Source: Marine Harvest: Salmon Farming Industry Handbook 2013, p. 37

Figure 2.1 shows the three different ways salmon can be bred. S0’s are light manipulated, meaning that the farmer has speeded up the juvenile growth phase by up to six months. S1’ are normally grown juveniles while S1½’s are bred much slower, which is also the most uncommon10. The fourth quarter of the year is the quarter with the highest harvesting numbers as the S0’s and S1’s are typically harvested here.

8 Norwegian Seafood Federation: Aquaculture in Norway, Marine Harvest: Salmon Farming Industry Handbook 2013, F. Asche & T. Bjørndal, The Economics of Salmon Aquaculture, 2011, Wiley-Blackwell 2nd edition. 9 Marine Harvest: Salmon Farming Industry Handbook 2013, p. 57 10 Marine Harvest: Salmon Farming Industry Handbook 2013, p. 37 9 Salmon eggs are either sourced internally or bought from suppliers who specialize in breeding salmon. They will choose the fish with the best characteristics with relation to resistance to disease, speed of growth and fillet color. The fish used for this purpose are called broodstock11. Generally, the biggest cost driver in salmon farming is feed as can be seen in Figure 2.2. Variations in the cost of feed across regions are due to different use of raw materials in the feed (more on raw materials later). Figure 2.2 gives a good indication of the different inputs to the production of salmon farming. Figure 2.2: Production costs

Feed 2% 1% 11% Primary processing 3% Smolt 5% Salary 3% Maintenance 50% 6% Well boat Depreciation 9% Sales and marketing 10% Mortality Other

Source: Marine Harvest, Salmon Farming Handbook 2013, p. 42

Further, the salmon price is important when dealing with the salmon farming industry not only because it sets the price of the product sold, but also because it can fluctuate a lot causing salmon farmers to forecast both salmon price and volume, making it difficult to guide for future revenue. In Norway, the salmon price is denominated in NOK, though other big markets such as Chile and Canada also have their own reference price. Salmon produced in different countries, but competing on the same markets will have a similar price development. However, in the case where the Chilean price of salmon might not develop similarly to the Norwegian, is when they are not in direct competition on the same markets12. This means that the development of the Chilean and Canadian salmon prices need not converge. Lastly, it is important to mention the high biological risks associated with salmon farming. As with other types of animal husbandry, good performance comes from well managed day-to-day processes and care. The main factors are disease and escapes, which will be further developed in later sections.

11 http://www.salmobreed.no/en/about/salmobreed and http://www.cermaq.com/portal/wps/wcm/connect/cermaqen/home/fishfarming/Fresh+water+production 12 F. Asche and T. Bjørndal, The Economics of Salmon Aquaculture, 2011, Wiley-Blackwell, pp. 107 10 2.2. VAP Operations In addition to farming, some salmon farmers have integrated value added products (VAP) operations or secondary processing. VAP typically relates to filleting, fillet trimming, portioning, choplets, smoking, ready meals or packing with modified atmosphere13. VAP operations work countercyclical to selling salmon head on gutted (HOG), because the salmon price represents an input cost for VAP, i.e. a low salmon price will mean high VAP margins. This way salmon farmers can alter volume depending on the market price for salmon. VAP operations also help increase profitability as non-superior fish with ethical flaws would trade at a lower price if sold as HOG, but through secondary processing can be sold as fillets, which realize a higher margin.

3. SalMar and Peers

This section provides insights into SalMar (SALM14) and its peer group. I have chosen Lerøy Seafood Group (LSG), Grieg Seafood (GSF) and Marine Harvest (MHG) as SALM’s peers. Further, I have chosen not to include Cermaq due to the fact that the main focus is on the production of fish feed and fish oil. This makes it incompatible in terms of its operations, risk profile and gives it different growth assumptions, as fish feed and fish oil are used for other than the salmon farming industry as well.

3.1. SalMar Profile Headquartered on the island of Frøya in the region of Central Norway, SALM is one of the world’s leading producers of Atlantic salmon, and is known to be one of the largest and most efficient producers of farmed salmon15. SALM operates farms in both Central and Northern Norway. In extension of this, SALM also has VAP its own operations in Norway and sales and marketing activities in Europe, Japan and South Korea. SALM was created in 1991 as part of the restructuring and industrialization the salmon farming industry faced at the time. In the beginning, the main business was to process frozen salmon. While SALM only owned one license and a packing and processing facility to begin with, the company acquired further licenses through time and also expanded into the hatchery business. In 2001, SALM expanded internationally for the first time in a 50/50 partnership with Lerøy Seafood Group in Scotland. The two companies established Norskott Havbruk AS, which fully owns Scottish Sea Farms Ltd., the second largest producer of farmed salmon in the UK. In 2005, SALM divested its herring activities to concentrate on its core business: farming, harvesting and processing of salmon.

13 13 Marine Harvest: Salmon Farming Industry Handbook 2013, p. 57 14 The ticker symbols for the peer group will be used from here on out. 15 This section is based on information from www.salmar.no 11 In order to finance the expansion in capacity and partake in the general industry consolidation, the Board of Directors decided to list SALM on the Oslo Stock Exchange in 2007. From this point, SALM has invested in and acquired various smaller players, thus gradually becoming larger. In 2011, construction of the InnovaMar facility was completed, featuring 17.500 square meters with a capacity of approximately 1.400 tons of salmon. Through InnovaMar, it is SALM’s vision to become “the most cost effective supplier of salmon and salmon products, while maintaining high standards with respect to biology, ethical production and quality16“. Since SALM’s IPO on 8 March 2007, the share price has been closely correlated with the salmon price as Figure 3.1 shows. The figure depicts the weekly share price development as well as the salmon price, both indexed as of the IPO date. The following will describe eight kinks in the share price development based on corporate events. Figure 3.1: SalMar indexed share price development since IPO with salmon price

175% 175% E 150% 125% 150% A D G 100% H C 125% 75% B F 50% 100% 25% Jan/13 Feb/13 Mar/13 Apr/13 0% 9 9 7 7 0 1 2 2 8 9 1 8 0 1 3 1 0 1 1 0 0 1 1 0 0 1 1 0 0 1 / / / / / / / / / / / / / / / l r r r t t c v y y g n p b n c c u a p a e o a a u a e e u J J J O O A S F D A N M M M M

SALM Salmon Price Source: Factset, Fish Pool, Dow Jones Newswires, company reports, ABG Sundal Collier, own research

A. Delivered in-line Q1'08 results, but reported rising feed costs. Subsidiary Senja Sjøfarm AS acquired Straumen Havbruk AS and Fjordsmolt AS. Q2’08 reported slower growth, higher feed costs and higher production costs due to disease issues. Negative. B. Reported strong Q4'08 and Q1'09 results with small beats to consensus and avoiding disease infected Chile. Positive. C. Reported good Q2'09 results, where the market had expected higher costs due to a PD outbreak, SALM still delivered superior EBIT/kg margins and had been able to increase its VAP activity. There was a positive outlook for the salmon price. Acquired the remaining 66% of Volstad Seafood AS. Positive.

16 http://www.salmar.no/About-SalMar/Strategy-and-Vision 12 D. Acquired 75,54% of the shares in Rauma Gruppen in May 2010, a strategically important move enabling SalMar to produce its own broodstock. Reported very strong Q3'10 due to high salmon prices, good operational efficiency and continued satisfactory biological development in the biomass. Secured a new financing agreement with a banking syndicate. Also acquired a 21,8% minority stake in Bakkafrost P/F. Positive. E. Reported a mixed Q4'10 showing good biological development, but very low harvested volumes due to a fire at the InnovaMar facility and low sea water temperatures. CEO Leif Inge Nordhammer stepped down by own request, and was replaced by Yngve Myhre. Acquired 53,4% of Bringsvor Laks AS. Mixed, mostly negative. F. Reported weak Q4'11 and Q1'12 due to low harvest volumes and biological challenges in Central Norway. In February '12, SALM entered into a harvesting and processing agreement with LSG, improving capacity utilization at InnovaMar. Positive outlook for the salmon price, low salmon prices affect in-store consumer prices spurring more demand. Increased the stake in Bakkafrost P/F to 25,21% and acquired 10 licenses in Finnmark from Villa Arctic AS. Mixed, mostly positive. G. Acquired the remaining part of SalMar Rauma AS. Positive. H. Reported a good AR'12, in-line with consensus, showed continued cost improvement and beat consensus in EBIT/kg due to higher salmon prices. Weak salmon price outlook in the near term. Positive.

3.1.1. Strategy Since SALM’s main competence lies within efficient processing of salmon, the company focuses on increased biological control in order to enable further industrialization through increased smolt survival rates, reduced levels of lice infestation and prevention of escaping fish17. The company also wishes to increase the output volume by improving exploitation of its existing licenses, increasing the level of processing and become self-sufficient in high-quality smolt. Another important focus area is the continuous development of the group’s corporate culture and operating model through the “SalMar Standard”, which sets out that all employees must operate in accordance with the same principles and objectives18.

3.1.2. Business Areas and Organizational Structure Being a leading producer of farmed salmon, SALM has integrated its business vertically in order to have as much control as possible, throughout the value chain. The better able a salmon producer is to control all business processes, the more industrialized the production becomes, resulting in large

17 SalMar Annual Report 2012, p. 42 18 SalMar Annual Report 2012, p. 42 13 scale production advantages, cost efficiencies, etc., which fit very well with SALM’s vision of becoming the most cost effective supplier of salmon. Smolt: This area is part of SALM’s hatchery production, i.e. that which pertains to fry and smolt. This is a key strategic input as it makes SALM self-sufficient in providing its own smolt for the production, while ensuring the desired level of quality. To make optimal use of the production potential, it is important that the company be able to spread the transfer of smolt throughout the year, effectively achieving non-seasonal smolt production. Therefore, SALM has researched extensively within this area. Farming: This is the actual fish farming, similar to that of more traditional animal husbandry. In accordance with the company’s vision, the focus here is on cost effective operations and high ethical standards. Consequently, SALM has set up a system of sub-objectives, which must be met, and has made up a set of best practices to realize greater efficiency and full traceability of the salmon. These include achieving the fastest possible growth with the lowest possible feed factor, installment of larger net-pens and increased smolt transfers. Processing: Closely linked with the farming operations as access to processing facilities capable of handling large harvest volumes ensure proper economies of scale and optimal utilization of the entire salmon. The new InnovaMar facility, based at the headquarters in Frøya in Central Norway, comprises two departments capable of harvesting and secondary processing. It symbolizes the technological development and innovative view on salmon farming SALM stands for, by challenging conventional approaches to processing, in order to ensure a more cost effective facility. It is considered to be the most innovative and cost effective facility in the industry, in fact, in the Annual Report 2012 the company states that it wishes to maintain a target rate to harvest 110 fish per minute per year19. Sales & Distribution: Represented either by an in-house sales force or through partners. Focus is on proximity to the markets and the customers. SALM is organized into two main production units: Central Norway and Northern Norway. Central Norway is the main production sites where it all started, where the headquarters are located and where the InnovaMar facility is also located. Under Central Norway, the Rauma Segment is currently reporting separately due to the fact that it is not wholly owned. Figure 3.2: Business areas and subsidiaries

19 SalMar Annual Report 2012, p. 45 14 Source: www.salmar.no SALM consists of a lot of subsidiaries as a result of the consolidation the industry has been through the past decade. In appendix 13 is shown a list of all the subsidiaries and associated companies under SALM. Figure 3.2 shows the major subsidiaries under the two main production units, sorted by their place in the value chain, and showing the non-Norwegian activities of SALM. For later analytical purposes, it is important to briefly describe the primary operations of the associated companies, which will be done below: Norskott Havbruk: Is a 50/50 joint venture with LSG and constitutes SALM’s activities in the UK by being the sole owner of Scottish Sea Farms Ltd. Scottish Sea Farms is the UK’s second largest producer of farmed salmon. Nordskag Næringspark: Is the real estate company that leases the InnovaMar facility to SALM20. Nordskag Næringspark invested in the building and SALM invested in all the machinery. Ownership in Nordskag Næringspark is as follows: Kverva 42.5%, Salmar 42.5% and Abra Norge 15%. Marinetech: Is a salvage, underwater cleaning and inspection company, as well as underwater installation of quays and wharfs21. Bakkafrost P/F: Is a Faroese, vertically integrated fish farming company (salmon and trout) that manages a total chain of production from fishmeal, fish oil and feed, to hatchery, farming and processing, and to marketing and distribution of the finished product22. Trøndersk Kystkompetanse: Is a network for the development of goods and services for the benefit of companies and the greater society in and around mid-Norway23.

20 Note 1, SalMar 2012 Annual Report 21 http://marinetech.no/NO/Tjenester.aspx 22 http://www.bakkafrost.com/default.asp 23 http://www.kystkompetanse.no/ 15 3.1.4. Executive Management and Board of Directors For the purpose of later analysis, this subsection will describe the qualifications, education and careers of the Executive Management and the Board of Directors. The Executive Management is comprised by six company managers: President and CEO: Yngve Myhre (44), comes from a position as CEO in Aker Seafoods. Also serves as a board member at Norway Royal Salmon AS. Mr. Myhre holds an MSc. in Business. Mr. Myhre owns 77.425 shares and has been granted 130.000 options. CFO: Ulrik Steinvik (39). Prior to being appointed CFO, Mr. Steinvik was Head of Finance and Accounting at SALM. Before that, Mr. Steinvik worked as an auditor, and is thus a Norwegian state authorized public accountant. Mr. Steinvik owns 5.800 shares and has been granted 80.000 options. Manager Farming: Bjørn Larsen (51), has been with SALM since 1997. Mr. Larsen owns 130.000 shares and has been granted 110.000 options. Business Development / Manager Processing: Gustav Witzøe (60), co-founder of SALM. Mr. Witzøe holds a degree in engineering and has extensive experience in fish farming and processing. In addition, Mr. Witzøe is chairman of Egersund Fisk AS and also serves as a member of the board in SALM and other seafood companies. Mr. Witzøe owns 91,8% of the shares in Kverva AS, which owns 53,4% of the shares in SALM, but holds no options. Manager Logistics, Sales and Marketing: Dag Nikolai Ryste (46), has been with SALM since 2009 when Volstad Seafood was acquired by SALM. At Volstad Seafood Mr. Ryste was the CEO, and holds a Magister degree in agriculture. Mr. Ryste owns no shares in SALM, but has been granted 73.334 options. Head of Quality Management: Eva Haugen, has worked in SALM since 2005 and holds a degree in Ecotoxicology and Physiology in salmonids. Mrs. Haugen owns 800 shares and has been granted 30.000 options.

The Board of Directors is comprised by 4 independent directors, one executive director and two employee representatives: Chairman: Bjørn Flåtgård, currently functions as a board member in several Norwegian companies and as investor. Previously, Mr. Flåtgård worked as CEO at Elopak ASA and Nycomed Pharma. He holds an MSc. in Chemical Engineering and a degree in Economics and Business Administration. Through his company GloMar AS, Mr. Flåtgård owns 2.38% of the shares in Kverva AS, which owns 53.4% of the shares in SalMar. Executive Director: Gustav Witzøe, see above. Independent Director: Nina Udnes Tronstad, currently functions as the Senior Vice President of Procurement at Kvaerner ASA. Mrs. Tronstad holds a degree in Chemical Engineering.

16 Independent Director: Kjell Storeide, is currently chairman of several Norwegian industrial companies and was previously co-founder and CEO of Stokke Gruppen AS. Mr. Storeide holds a degree in Economics and Business Administration. Independent Director: Tove Nedreberg, currently the CEO of Adresseavisen Gruppen AS, also holds other board positions. Employee Representative: Alf Skjærvik, is currently Quality Manager of Biological Production. Mr. Skjærvik has worked within aquaculture since 1986, and serves on the boards of the Mid-Norwegian Seafood Federation, FHL’s Industry Group for Aquaculture and the FHL Prevent Escape Committee. Employee Representative: Monicha Seternes, is currently a Key Account Manager in SalMar Sales and has been with the company since 2007.

3.1.4. Ownership Looking into the ownership structure of SALM, it follows the Pareto Principle wherein the top 19 institutional investors and SalMar itself, hold 81% of the shares in SALM. As mentioned, Kverva AS owned by founder Gustav Witzøe, owns the majority of the shares in SALM (53,4%). See appendix 14 for a specification of the major shareholders.

3.2. Peer Group The following section, will briefly survey peer activities. For each peer, a list of management and the board of directors’ qualifications has been made like that of SALM. This will, however, not be included in the subsequent sections.

3.2.1 Lerøy Seafood Group LSG is the second largest producer of Atlantic salmon in the world, in addition to which LSG also produces trout, whitefish and shellfish. Like SALM, it too, is a wholly integrated producer and distributor of farmed salmon. Headquartered in Bergen, LSG has been listed on the Oslo Stock Exchange since 2002. LSG’s vision is to become the leading and most profitable global supplier of quality seafood. Founded on principles of sustainability, LSG plans to achieve this by supplying high- quality products, with which it will develop profitable relationships with its clients24. It has a market share of 11%, measured by harvest in 2012 in Norway.

3.2.2. Grieg Seafood Headquartered in Bergen, GSF is a leading fish farming company specializing in salmon and trout. GSF has been listed on the Oslo Stock Exchange since 2007. The company is vertically integrated from the production and farming of salmon, to harvesting, processing and distribution. Besides from

24 This section is based on information from www.leroyseafood.com 17 Norway, GSF generates roughly an equal amount of revenue from the UK and Canada. It is GSF’s vision to be a leading aquaculture company25. It has a market share of 3,7%.

3.2.3. Marine Harvest MHG is the largest seafood company in the world measured by market cap. The company is headquartered in Bergen and was listed in its current form on the Oslo Stock Exchange in 2006. MHG has about one fifth of the global production of farmed salmon, and while salmon is the main product, MHG also farms white halibut and offers processed seafood. Like the rest of the peer group, MHG is vertically integrated in the production and farming of salmon, it is however, in the process of trying to set up a fish feed business, by offering to buy Cermaq due to its EWOS division which produces feed and nutrition for the aquaculture industry. Being the largest salmon producer in the world, MHG has farms all around the world, especially in Canada, Chile, Scotland and the US26. Below, is provided an overview of peer group’s main data, to give a more nuanced picture of the current competitive situation. It has a market share of 24%. Table 3.1: Peer group operating data for 2012

Harvest 2012 Tonnes gutted weight SALM MHG* LSG GSF Total 116,200 392,306 167,100 70,000 Northern Norway 22,400 255,306 20,000 20,100 Central Norway 80,200 61,900 0 Southern Norway 0 0 19,200 Western Norway 0 71,600 0 Internationally 13,600 137,000 13,600 30,700 *MHG does not split its domestic harvest geographically.

Licenses 2012 SALM MHG LSG GSF Total 92 0 105 104 Northern Norway 23 17 24 Central Norway 53 54 0 Southern Norway 0 n/a 20 Western Norway 16 34 0 Internationally n/a n/a 60 *2012 n/a *2012 *2012

Summary of peer group SALM MHG LSG GSF Market cap, million NOK (30/4/2013) 6,571 22,490 9,824 1,619

25 This section is based on information from www.griegseafood.no 26 This section is based on information from www.marineharvest.com 18 Number of employees, 2012 616 6,389 1,883 584 Year established 1991 *1965/2006 1899 1992 Year listed 2007 **1997/2006 2002 2007 * Marine Harvest N.V. founded in 1965. ** Pan Fish ASA acquired Fjord Seafood and Marine Harvest in 2006 and changed the name of the group to Marine Harvest. Pan Fish was listed in the Oslo Stock Exchange in 1997.

Business areas: SALM MHG LSG GSF Smolt x x x x Farming x x x x Processing x x x x Sales & Distribution x x x x Source: Company reports, Factset

4. Financial Analysis In order to properly understand SALM’s business, it is important to review the historical accounts and key financial ratios to see the level and trend of the financial performance, and from here, create a solid foundation for forecasting in section 7. The time frame of the financial analysis will be from 2007 to 2012, thus allowing for six years of historical data, which is also the typical length of a business cycle in the salmon farming industry. In order to give further perspective on the level and trend of the accounts and key financial ratios, comparisons to peers will be made in this section. The section will be concluded with a profitability map. Before diving into the accounts, it is important to study the salmon price as it has tremendous influence on the P&L.

4.1. Growth and Price Development It is important to analyze the company’s historical growth rate properly as this, among others, feeds into the assumptions regarding the future growth of the company. Equally important is understanding how the salmon price has behaved historically to be able to create a good basis for modeling a future salmon price.

4.1.1. Revenue Growth In this subsection the development of the revenue in SALM will be compared to that of the peer group. The forecast will primarily be dependent on the expected future revenue, as value drivers will be set up based on this, which is why precision of the expected future revenue is important so as to avoid an incorrect valuation. During the analyzed period, SALM has averaged a double-digit year-over-year revenue growth of 23.5%, in all but 2008, as can be seen in Table 4.1. According to the annual accounts for 2008, this

19 blip is partly attributable to lower exports to the Far East, difficulties with the Russian banking system27 and an outbreak of the ISA virus on three of SALM’s farms28. The CAGR reveals that SALM has grown by more than 22% since 2006, and that GSF is the only peer to outgrow SALM. Table 4.1: Revenue Growth, y-o-y, average and CAGR

2007 2008 2009 2010 2011 2012 Avg. '07-'12 CAGR '07-'12 SALM 34% 2% 39% 44% 12% 10% 23.5% 20.2% Harvest, SALM 45% 2% 18% 3% 32% 12% 18.6% 17.55% LSG 12% -4% 23% 19% 3% -1% 8.8% 7.7% GSF 97% 39% 9% 51% -16% 1% 30.2% 14.2% MHG 176% -4% 1% -12% 8% 15% 30.7% 1.9% Source: Annual reports 2007-2012, own research

Indexing the revenue from 2006, shows growth of 237% until 2012 (see appendix 6), and shows an otherwise steady rise throughout. The simple average, the CAGR and the indexed numbers show a quality to SALM’s growth. Growth has been demand driven, and since salmon farmers are only allowed to hold a certain amount of biomass per license, the consolidation the industry has seen in recent years, could be one of the drivers of growth29. Looking into the geographical split of revenue, gives a clear indication of SALM’s main export markets, which are Asia, Russia, USA/Canada and Europe incl. Norway. Figure 4.1: Revenue, geographical split with percentage of total

4.000

3.000 0 68% 0 64% 0 60% 1

K 2.000 O 64% N 48% 4% 2% 53% 7% 7% 5% 1.000 0% 2% 7% 0% 26% 13% 27% 26% 26% 24% 26% 21% 0 20% 2007 2008 2009 2010 2011 2012

Asia Russia USA/Canada Europe, incl. Norway

Source: Annual reports 2007-2012, own research

Looking into the growth for per region, figure 4.1 shows each region as a percentage of the total revenue per year. Each year, sales to Europe make up a larger part of total revenue, the same goes

27 SalMar Annual Report 2008, p. 32 28 SalMar Q2 and Q3 2008 29 See appendix 1 for a list of historical acquisitions. 20 more or less for Asia, while Russia and USA/Canada make up an increasingly smaller part of total revenue. From 2007-2012 the average y-o-y growth for Europe was 30%, 27% for Asia, -12% for Russia and 109% for USA/Canada (including a decline of 39% for the past two years and only from 2010-2012)30. All in all, revenue growth has been solid throughout the period, only indicating low single digit growth in 2008 due to issues with the Far East and Russia and a small outbreak of ISA, otherwise, being having the financial strength to grow through acquisitions is also seems to be an important factor.

4.1.2. Salmon Price The level of the salmon price when the salmon is sold has tremendous importance to revenue, as a higher realized salmon price per kilo of salmon sold, all else equal, will lead to higher revenue. For that reason, salmon farmers and investors follow the development of the salmon price closely. In Figure 4.2, the weekly development of the spot price for Norwegian HOG salmon is shown over time. It shows the minimum and maximum price levels from 2004-2012, as well as the average for that period. It also shows the weekly development for 2010, 2011 and 2012. Interestingly, 85% of the historical (2004-2012) maximum prices were achieved in most of 2010 and Q1 of 2011, after which prices collapsed reaching historical lows in week 43 of 2011, followed by a return to the historical average. Going back to Table 4.1 shows that a rise in harvest does not necessarily mean an increase in revenues, exactly due to the level of the salmon price. Figure 4.2: Spot price for Norwegian salmon

50 45 40

g 35 k /

K 30 O

N 25 20 15 10 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 Weeks

Min-Max Average 04-12 2010 2011 2012

Source: Fish Pool, own research

As the events in Figure 4.2 show, the salmon price can fluctuate greatly in a matter of weeks. Therefore, it is not unimportant when salmon farmers harvest their fish. Having Figure 2.1 in mind,

30 See appendix 2 21 the fact that most of the harvest is in Q4, this explains why the 2010 revenue grew 44% while the 2011 revenue only grew 12%, despite record high prices for the first four months of 2011. The above discussion of the historical salmon price refers to the price in Norwegian kroner. However, as mentioned in section 2.1, the salmon price is also typically denominated in USD/kg from Chilean salmon and in USD/lb from Canadian salmon. These three price denominations for salmon are the most common as Norway, Chile and Canada are the largest producers of salmon. The strategic analysis will look further into what factors influence the salmon price.

4.2. Accounting Quality This section will look into the accounting quality of SALM to make sure that the accounts present a fair picture of the company’s financial position and whether there are any red flags.

4.2.1. Applied Accounting Principles SALM’s consolidated accounts have been prepared in accordance with IFRS, while the parent company, SalMar ASA, reports it financial accounts in accordance with Norwegian GAAP. For the purpose of this thesis, only the consolidated accounts will be used for analysis and investment decision. The same is true for the peer group. In 2012, there was one change in accounting principles related to the way the statement of cash flow is prepared. Since the statement of cash flow will not be used for analytical purposes, the change has no effect on the valuation and will not be looked into further.

4.2.2. Potential Red Flags From 2007 to 2008, SALM changed its independent auditor from SystemRevisjon to PwC, which is not mentioned in neither of the annual reports from 2007 and 2008. SALM has kept PwC as its auditor since then, and has received a clean audit report throughout the entire period. According to the company’s corporate governance, the auditor is appointed each year at the AGM and independently of SALM assessed for its independence and objectivity31. Interestingly, the responsible auditor from SystemsRevisjon, Trond Tuvstein started at PwC the same year SALM changed to PwC and also became the auditor responsible for SALM here, signing off on all the auditor reports until 2011 where he then became SALM’s Head of Investor Relations. Looking to Marine Harvest, the world’s largest salmon farmer, using the same auditor seems to be standard procedure as it has had the same auditor responsible from Ernst & Young from 2006-2011. There should be no red flags here, although it is of the author’s opinion that the same auditing company should not be used for more than five years in a row in order to maintain the auditor’s independence.

31 SalMar Annual Report 2012, Corporate Governance, 15. Auditor, p. 33 22 SALM classifies leasing agreements in accordance with IAS 17 and recognizes leases which transfer the bulk of the financial risk and control, on the balance sheet32. Based on that, SALM has itself brought some of its leases onto the balance sheet, though it still holds some operating leases in the form of the fish landing facility at InnovaMar (15 years), the Kjørsvik Settefisk hatchery and water rights (expires 1 January 2014) and Vikenco’s harvesting plant (10 years)33. Since all three leases relate to SALM’s primary production activities, they will be capitalized for analytical purposes. There are, however, a couple of obstacles as SALM does not report how much each lease is worth or report lease expenses. Because of the unique nature of SALM’s leased equipment, finding comparable leases on the market is difficult. As of 2012, SALM reports the value of financial leases and the interest paid on these34. The implied interest expense will be calculated using this interest rate. The depreciation expense will make up the residual which makes the “lease obligation” zero upon expiry assuming straight line depreciation. Since SALM does not report lease expense, the implied interest and depreciation expenses will make up an “imputed” lease expense, which will be deducted other operating expenses35. The adjustment for the income statement looks as follows: Table 4.2: Operating lease adjustments to income statement

2007 2008 2009 2010 2011 2012 Other operating expenses 191.270 253.701 311.973 517.067 705.891 885.983 Less "imputed" lease expense 42.850 42.850 42.850 42.850 42.850 42.850 Other operating expenses, adjusted 148.420 210.851 269.123 474.217 663.041 843.133

Depreciation 50.671 55.225 66.578 93.962 132.000 169.621 Plus implied depreciation 15.924 15.924 15.924 15.924 15.924 15.924 Depreciation, adjusted 66.595 71.149 82.502 109.886 147.924 185.545

Interest expenses 47.104 72.178 32.078 49.597 98.791 150.224 Plus implied interest expense 26.926 26.926 26.926 26.926 26.926 26.926 Interest expenses, adjusted 74.030 99.104 59.004 76.523 125.717 177.150 Source: Company reports, own research

The above calculations have no effect on profit for the year. The corresponding adjustment to the statement of financial position will contain each year’s book value of the leased equipment and the resulting lease obligation. For 2012, the lease obligation constitutes 4,7% of the resulting net interest-bearing debt, i.e. not a significant portion, but still a potential red flag as this has historically been higher.

32 SalMar Annual Report 2012, Note 1 Accounting Principles , p. 64 33 SalMar Annual Report 2012, Note 22 Other Off Balance Sheet Liabilities, p. 87 34 See the full calculation in appendix 3 35 For the actual calculations, please see appendix 3 23 It is interesting why SALM does not provide enough information for analysts to perform these calculations more precisely taking into consideration that it already capitalizes some leases. One reason could be due to the potential breach of debt covenants. This will be looked into in the financial analysis. In the follow sections, the accounting quality will be further assessed as relating to permanent or transitory items. Only permanent items from SALM and peers will be used when formulating the analytical financial statements.

4.3. Preparing the Income Statement for Analytical Purposes In order to properly account for the sources of value creation in SALM and the peer group, the income statements have been reformulated to better reflect this through an analytical income statement. The basic idea of the analytical income statement is to classify the items from the income statement as either belonging to operations or financing36. Then, Net Operating Profit After Tax (NOPAT) is calculated to denote the value creation from operations and Net Financial Expenses After Tax (NFEAT) is calculated to denote financing related value creation. Before moving on to the analytical considerations, a few notes on the standard reporting procedures in salmon farming. In order to get EBITDA, depreciation and amortization has been excluded from Total Operating Expenses, otherwise SALM reports its income statement by nature of expense. It is normal industry procedure to report Operational EBIT before “regular” EBIT in the income statement, to show the operational performance for the period. Operational EBIT is based on realized costs of harvested salmon and excludes Fair Value Adjustments on Biomass, which is part of EBIT37. In the following, critical items from the income statement will briefly be highlighted to explain how they have been treated for analytical purposes. Other operating revenues: As opposed to Sales Revenues, it must be assumed that this item does not generate revenue from SALM’s primary area of operations, but as there is no note to shed light on what activity has generated this revenue, it will be treated as part of operations. Exceptional Biological Items: This line item is part of operations and will be considered so in the analytical income statement due to its definition in Note 24 of the 2011 Annual Report where it is defined as “destruction of salmon required by authority due to outbreak of Pancreas Disease and single event of escaped fish with a significant number of salmon”. With this definition in mind, the item has to be included for analytical purposes, because being able to prevent for diseases and

36 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, first ed. 2010, p. 98 37 Marine Harvest: Salmon Farming Industry Handbook 2012, p. 49 24 avoiding fish to escape must be considered a key competitive parameter. Therefore, the item is considered part of operations as it reflects the company’s ability to farm. Impairment Losses: For SALM, impairment losses did not start until 2009, when IAS 36 was changed to require companies to impairment test goodwill. As can be seen from the historical accounts in appendix 4, this item has recurred every year since and will hence be kept as part of operations for analytical purposes. Excess value of inventory from acquisitions: This items does not pertain to neither operations or financing as it has arisen from acquisitions Income from Investments in Associates: This line item has been reclassified as pertaining to operations due to the nature of business i.e. all associates are in one form or another active within salmon farming, effectively assisting SALM in its primary operations. The item is not included as part of operations in the reported figures due to the fact that SALM does not have more than 50% control, and therefore cannot consolidate the accounts. Nevertheless, because Norskott Havbruk AS (NH) is a 50/50 joint venture and because SALM owns 42.5%, 39%, 25.2% and 20% in Nordskag Næringspar AS (NN), Marinetech AS (MT), Bakkafrost P/F (BAKKA) and Trøndersk Kystkompetanse AS (TK), respectively, it can be argued that SALM, for NH, MT, NN, BAKKA and TK holds significant influence38. Historically, SALM has increased its holdings in these companies, thus gaining more and more influence. It is a fair assumption to include these as part of operations, mainly due to their nature of operations (cf. section 3.1.2.1.), as well as due to SALM’s increasing level of investment (i.e. closer to effective control). Badwill Related to Business Combination in Finnmark: The salmon farming industry has been consolidating activities for the past couple of years, especially in Norway, and will continue to do so. Negative goodwill from the acquisition of Finnmark has arisen. The acquisition should therefore be seen as a bargain purchase, deeming it a transitory item as it is not expected to recur, thus it will be excluded from the analytical income statement. Fair Value Adjustment of the Biomass: This item adjusts the value of the biological assets (the biomass) to the market price at the balance sheet date. According to IAS 41, salmon in all states of the growth cycle must be valued at fair value less estimated costs to sell39. The salmon can be compartmentalized into six different weight classes (1-2 kg, 2-3 kg, 3-4 kg, 4+5 kg, 5-6 kg, 7+kg HOG). Therefore this item will usually involve large movements each year. Onerous Contracts: SALM enters into fixed price sales contracts for future physical settlement and deliveries related to the company’s normal activities on an ongoing basis40. This means that the sale

38 Gustav Witzøe owns 91,8% of Kverva AS, which owns 53,4% of SALM. 39 http://www.iasplus.com/en/standards/ias/ias41 40 SalMar Annual Report 2011, Note 1 Accounting Principles, Fixed Price Contracts 25 is made based on a fixed price from which the spot price may deviate from, causing the company to either gain or lose from the transaction. Because this has only happened one time for SALM in 2010 and then reversed the following year, it is deemed a transitory item. Interest Paid to Group Companies: The company has not done so since 2006, so this item will be disregarded.

4.3.1. Tax for Analytical Purposes The effective tax rate has been used to calculate NOPAT and NFEAT, thereby implicitly assuming the same tax rate for both operations and financing as opposed to when using the marginal tax rate. The effective tax rate has been chosen because the effective tax rate is a more accurate representation of a company’s tax liability than the marginal tax rate. Table 4.3: Effective vs. marginal tax rates

2007 2008 2009 2010 2011 2012 Effective tax rate 27% 28% 26% 24% 8% 21% Marginal tax rate 28% 28% 28% 28% 28% 28% Source: http://www.regjeringen.no/nb/dep/fin/tema/norsk_okonomi/norsk_okonomi/The-corporate-tax- system-and-taxation-of-capital-income.html?id=418058, own research

Table 4.3 shows that for the most part, the effective tax rate is close to the marginal tax rate, except for 2011 where SALM paid significantly less taxes. In note 15 to the annual report 2011, SALM reports that a negative change in deferred taxes of NOK 128.580.000 as the cause of the heavily reduced tax expense for the year, but does not give any additional information as to why. To follow up on the discussion on accounting quality, the level of information throughout the annual reports from 2007 to 2012, the information seems to remain on the level of reporting numbers, without giving many explanations as to what has caused changes etc., except for production related information, i.e. there is generally a low level of “between the lines” information in the annual reports.

4.4. Preparing the Balance Sheet for Analytical Purposes After the line items from the income statement have been divided into operating and financing activities, the balance sheet must also be properly reorganized to match the assets and liabilities that correspond. The idea is to measure Invested Capital (IC), which is also called Net Operating Assets and consequently calculated as the sum of the operating assets less the sum of the operating liabilities. A more formal definition of IC is, “… the amount a firm has invested in its operating activities and which requires a return41”. Thinking of IC from the asset side, it is calculated by subtracting Non-Interest Bearing Debt from Total Operating Assets. IC can also be calculated from

41 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, p. 100 26 the liability side, by adding net interest-bearing debt to total equity. In performing these reformulations, the basic balance sheet equation still holds, i.e. assets equals liabilities less owner’s equity, meaning that IC from the asset side must equal IC from the liability side as well, using the above definitions. In the following, critical items from the balance sheet will be discussed briefly to explain how they have been treated for analytical purposes. Other Operating Equipment: Includes vessels, vehicles, etc. deemed essential to obtain normal business activities making it part of operations. Investments in Associates: This is considered part of the company’s operations (as in the analytical income statement), and will therefore be included in the IC from operating activities. Other Receivables: This is two separate line items divided into short-term and long-term receivables. Other short-term receivables include Prepaid Costs, Derivatives and VAT refunds. Other long-term receivables include Pension Fund Assets and Loans to Senior Management and Employees42. Ideally, Derivatives should be classified as belonging to financing, however, SALM only discloses the subcomponents of other short-term receivables from 2008 to 2011 wherein derivatives are only included from 2010 to 2011. Further, taking into consideration that derivatives pertaining to other short-term receivables constitute less than 1% of IC in 2010, this deems it an insignificant separation, hence, all of other receivables will be classified as part of operations. Deferred Tax Liabilities: This is the result of taxable temporary differences and is regarded as an equity equivalent. Because of this and the fact that it is interest-bearing, it will be regarded as part of financing. Cash and Cash Equivalents: According to Note 16 Bank Deposits in the 2012 Annual Report, the use of cash and cash equivalent is mainly goes to restricted tax deductions and to Fish Pool contracts43,44. Consequently, because SALM enters into these contracts as part of daily operations, cash and cash equivalents will be treated as part of operations.

4.5. Profitability Analysis To evaluate the economic performance of SALM, a profitability analysis will be conducted based on the DuPont Model seen below. The ratios are based on figures from the analytical income statement and balance sheet. Figures from the balance sheet are average, because this reflects the average for the year, whereas year-end figures are only a snapshot of the balance sheet as of the last day of the financial year. This is a fair assumption, all else equal. The same has been done for the peer group in order to measure how they perform relatively.

42 SalMar Annual Report 2011, Note 10 and Note 21 43 Fish Pool is a global marketplace for fish and seafood related derivatives: http://fishpool.eu/ 44 SalMar Annual Report 2012, Note 16 27 Figure 4.3: DuPont model

Profit Margin ROIC Turnover Rate ROE Financial Leverage Leverage effect Spread (ROIC - Net Borrowing Costs)

Source: Adoption from Petersen & Plenborg 2010

The upper part of the model (ROIC) represents the operating activities, whereas the lower part (Leverage effect) represents the financing activities. Ratios will be analyzed in two different ways, (1) the level of the ratios and (2) the development over time. The ratios will be compared to their respective required rate of return whenever possible and the level/trend of peer ratios. To further accommodate this, indexing and common-size analysis will be used when appropriate45. The following analysis will first focus on the operating part of the DuPont model, then the financing part.

4.5.1. Return on Equity At the beginning of the DuPont model is Return on Equity (ROE). This ratio measures the owner’s accounting return on their investment, as measured by, , or in the context of the ୒ୣ୲ୣୟ୰୬୧୬୥ୱୟ୤୲ୣ୰୲ୟ୶ DuPont model, ( ) , where NBC is Net୆ Borrowing୭୭୩୚ୟ୪୳ୣ୭୤ Cost୉୯୳୧୲46୷. From Figure 4.4 it can ୒୍୆ୈ generally be said thatROIC there− NB isC a clear୆୚୉ overall trend in the industry, mainly characterized by the steep decline in 2008, followed by a return to levels seen in 2007, which are then further exceeded in 2010 hitting record level returns, only to return to relatively low levels in 2011. 2012 shows a return to the more historically “normal” levels.

45 An overview of the indexed numbers can be found in appendix 6 and common-sized numbers in appendix 7.

46 See more in 4.4.2.2. Interest Margin

28 Figure 4.4: Return on equity

60,0%

40,0%

20,0% 16,7% 8,4% 0,0% 2007 2008 2009 2010 2011 2012 -20,0%

-40,0%

SALM LSG GSF MHG Re, SALM

Source: Annual reports 2007-2012, own research based on analytical financial statements

SALM delivers superior returns compared to peers throughout the period in all years but 2011, where it was surpassed by LSG and MHG. With a required rate of return of 8,4% and a ROE of 16,7% in 2012, SALM delivers a satisfying return to shareholders, all else equal. Based on Figure 4.4 the salmon farming industry seems to be rather volatile, due to either macroeconomic or industry specific conditions.

4.5.1.1 Return on Invested Capital An analysis of ROIC will accomplish the above objective, as it measures the overall profitability of operations as a percentage of the company’s Invested Capital. ROIC can therefore be defined as,

, or in the context of the DuPont model, Profit of IC. ୒ୣ୲୓୮ୣ୰ୟ୲୧୬୥୔୰୭୤୧୲ୟ୤୲ୣ୰୘ୟ୶ At first୍୬ sight,୴ୣୱ୲ୣୢ theେୟ୮୧୲ effectୟ୪ of leverage on ROE seems to show, as the returnsMa forrgi ROICn ∗ Tu stayrno withinver more narrow bounds in Figure 4.5. The same y-o-y trend is seen in ROIC as it was in ROE, reflecting the volatile environment of the industry. In 2012, the trend in ROIC continues to decline as opposed to that of ROE. SALM earns double digit ROIC in all but 2012, where the ROIC is 8,5%. Compared to a WACC of 6%47, this is not a satisfying return. SALM does however, have an average ROIC of 13% throughout the analyzed period, which makes it the industry leader profitability wise. Compared to the vision of being the most cost efficient supplier of salmon, this makes sense.

47 See section 8 29 Figure 4.5: Return on invested capital

25,0% 20,0% 15,0% 10,0% 8,5% 5,0% 6,0% 0,0% 2007 2008 2009 2010 2011 2012 -5,0% -10,0%

SALM LSG GSF MHG WACC, SALM

Source: Annual reports 2007-2012, own research based on analytical financial statements

The reason why SALM started to lose some of its historical lead in 2011 is mainly due to the identification of Pancreas Disease (PD) causing the destruction of 1,5 million salmon, leading SALM to recognize a loss of NOK 50 m. and three events of escaped fish with an associated costs of NOK 10 m.48. 2012 characterized by higher production costs and lower sales price as a result of lower average weight per fish than expected, and because of some PD infected fish and ISA infected broodstock49. As previously mentioned, the salmon price was very high in 2010, explaining the general high level. GSF and MHG were hit the hardest in 2008, MHG due to the ISA crisis in Chile, and GSF due to diseases in the Rogaland region. LSG has in recent years started to perform better and gained in on SALM.

4.5.1.1.1. Profit Margin and Turnover of Invested Capital Looking into how the profit margin has developed will partly reveal the development in ROIC. The profit margin is defined as , and thus describes the revenue and expense ୒ୣ୲୓୮ୣ୰ୟ୲୧୬୥୔୰୭୤୧୲ୟ୤୲ୣ୰୘ୟ୶ relation on operating income on an after-taxୖୣ୴ୣ୬୳ୣ basis. The first thing to notice in Figure 4.6, is that the profit margin follows the same pattern as ROIC did, which emphasizes the wider industry development. SALM is clearly the industry leader in terms of profitability from primary operations averaging 18.7% during the period analyzed, with LSG being the closest peer having an average of 7.9%. With an average of 10.8% down to the closest competitor, SALM definitely has a solid margin-lead on peers. The negative development from

48 SalMar Annual Report 2011, p. 35 49 SalMar Annual Report 2012, p. 45 30 recent years is, however, worrisome. Even though it seems to be industry wide, the decline for SALM is still more than 16% since the high in 2010. Figure 4.6: Profit margin

30,0% 30,3% 25,0% 20,0% 15,0% 13,1% 10,0% 5,0% 0,0% -5,0%2007 2008 2009 2010 2011 2012 -10,0% -15,0%

SALM LSG GSF MHG

Source: Annual reports 2007-2012, own research based on analytical financial statements

The company states that due to the identification of the PD and ISA viruses, especially the Rauma Segment is expected to “improve strongly” going forward50. Table 4.4 shows that recent year’s margin decrease is due to higher cost of materials and other operating expenses. Not only do the two line items constitute an increasingly larger share per year, they also have an average annual growth rate of 23% and 41%, respectively51. Materials used for salmon farming will be further discussed in the strategic analysis. Table 4.4: Common-size analysis of operating expenses

2007 2008 2009 2010 2011 2012 Cost of materials 50% 54% 49% 55% 62% 65% Exceptional biological items 0% 0% 0% 0% 2% 1% Change in inventory and biological assets -3% -6% -1% -12% -10% -9% Salary and personnel expenses 13% 14% 11% 9% 10% 11% Other operating expenses, adjusted 9% 12% 11% 14% 17% 20% Source: Annual reports 2007-2012, own research based on analytical financial statements

The second part of ROIC, Turnover of IC, will show the extent to which the peer group is able to generate revenue from IC. Turnover of IC is derived from . From Figure 4.7, SALM is not ୖୣ୴ୣ୬୳ୣ able to keep a high momentum on its revenue growth compared୍୬୴ୣୱ୲ୣୢେ toୟ୮ the୧୲ୟ୪ growth in IC, which is mainly driven by growth in biological assets and the value of licenses. In the long term, the growth in these assets is definitely assumed to be value enhancing for the company. Another reason for the growth

50 SalMar Annual Report 2012, p. 45 51 See appendix 6 for other common-sized items 31 in IC is the fact that even though SALM has tried to tighten up its credit risk, accounts receivable still makes up an increasingly larger portion of IC. Figure 4.7: Turnover of invested capital

1,0x

0,8x

0,6x

0,4x 2007 2008 2009 2010 2011 2012

SALM LSG GSF MHG

Source: Annual reports 2007-2012, own research based on analytical financial statements

The fact that the profit margin is high and the turnover of IC is low indicates that the salmon farming industry is a heavy investment industry as opposed to an industry providing services52. Recent years’ developments within the industry have been trending towards inferior returns than previously. Even though SALM has a historical lead on peers, its operating profitability has developed more negatively than that of peers. Going forward, investors should focus on the development in the turnover of IC and also see if the company is able to get its operations back on track after the instances of PD and ISA viruses.

4.5.2. Leverage Effect Having been through how operations have affected ROE, it is time to dive into the effects of leverage and the interest spread, as these also affect ROE.

4.5.2.1. Financial Leverage Financial leverage is the extent to which the company has supplemented its equity with debt financing. The effect is a multiplier on the returns, as the company will have a smaller base to distribute earnings from and vice versa. Financial leverage is measured as the averages of

. From Figure 4.8., SALM’s level of financial leverage is consistently above 1.0x, ୒ୣ୲୍୬୲ୣ୰ୣୱ୲୆ୣୟ୰୧୬୥ୈୣୠ୲ increasing୆୭୭୩୚ୟ୪୳ୣ significantly୭୤୉୯୳୧୲୷ from 2010 to 2011, because the company in Q2 ’11 was able secure a financing arrangement of up to NOK 4.5 bn. The arrangement means that SALM has access to funding if needed, but making sure that it does not breach the related covenants, i.e. the company does not bear all of the debt on its balance sheet, but did take some of it on.

52 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, p. 141 32 The level of the peer group is generally stable, except for GSF, who has been struggling with increased levels of debt in 2007-2009 before getting it under control and lowering it. Even though SALM’s financial leverage is increasing in 2012, the rest of the peer group is also increasing. Figure 4.8: Financial leverage

1,8x 1,6x 1,45x 1,50x 1,4x 1,32x 1,17x 1,13x 1,2x 1,28x 1,0x 0,8x 0,6x 2007 2008 2009 2010 2011 2012

SALM LSG GSF MHG Peer group average

Source: Annual reports 2007-2012, own research based on analytical financial statements

4.5.2.2. Interest Margin The interest margin is the spread between ROIC and Net Borrowing Cost (NBC), and is thus calculated as , where NBC is calculated as . The NBC will not ୒ୣ୲୊୧୬ୟ୬ୡ୧ୟ୪୉୶୮ୣ୬ୱୣୱ୅୤୲ୣ୰୘ୟ୶ be used for otherROIC analytical− NBC purposes than the interest margin and୒୍୆ asୈ part of ROE, due to the fact that it will likely not match the company’s actual borrowing rate53. It is clear from Figure 4.9 that when the interest margin becomes negative (2011), ROE decreases further and vice versa. It is therefore due to the negative spread in 2011 that ROE deteriorates beyond ROIC, which has historically been lower than ROE. This is also why ROE shoots up in 2012, where ROIC continues to decline. The interest margin is low in 2008 and 2011 because of higher than usual interest expenses, in 2008 due to higher interest rates and increased long-term debt in connection with acquisitions54 and in 2011 due to higher interest rates and also increased long-term debt55.

53 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, p. 152 54 SalMar Annual Report 2008, p. 36 55 SalMar Annual Report 2011, p. 38 33 Figure 4.9: Interest margin

25% 20% 15% 10% 5% 0% -5%2007 2008 2009 2010 2011 2012 -10% -15% -20% -25%

SALM LSG GSF MHG

Source: Annual reports 2007-2012, own research based on analytical financial statements

4.6. Liquidity Analysis An analysis of the liquidity situation is important in cases where a company is growing, in order to make sure that there is sufficient liquidity to service that growth. A well-known of rule of thumb dictates that if growth in operating profit and growth in assets and liabilities do not follow, this might lead to a liquidity problem whereby asset and liability growth is not supported by growth in the operating profit56. Finally, it is especially important to assess the liquidity situation due to equity investor’s bad standing in case of bankruptcy. Therefore, this subsection will include an analysis of both the short-term and long-term liquidity of SALM and its peer group.

4.6.1 Short-term Liquidity To measure SALM’s short-term liquidity, the quick ratio will be used as opposed to the current ratio, which includes all current assets, and therefore also biological assets57. The quick ratio only includes the most liquid current assets, and will consequently lead to a more precise description of short- term liquidity. The quick ratio is defined as and indicates how many times େୟୱ୦ାୗୣୡ୳୰୧୲୧ୣୱାୖୣୡୣ୧୴ୟୠ୪ୣୱ the most liquid assets cover current liabilities. Tableେ୳୰୰ 4.5ୣ୬୲୐ shows୧ୟୠ୧୪୧୲୧ୣ theୱ quick ratio for SALM and the peer group. SALM is slowly trending upwards during the period, but clearly lags after LSG and MHG. The general level within the peer group seems to be rather low compared to traditional rules of thumb indicating low liquidity risk with a quick ratio of around 2x. Such rules of thumb do not always apply; within the salmon farming industry it seems not to be the case. The quick ratio reveals that only LSG is able to service its short-term debt, leaving SALM and the rest of the peer group to rely on income throughout the years to service debt falling due.

56 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 192 57 According to IAS 41, biological assets become part of inventories at the point of harvest, however, intuitively and for analytical purposes, biological assets and inventories will be treated the same for now. 34 Table 4.5: Short-term liquidity overview

07 08 09 10 11 12 Avg. 07 08 09 10 11 12 Avg. Quick ratio Liquidity cycle

0.9x 0.7x 1.1x 1.1x 0.8x 0.8x 0.9x SALM 187 177 162 176 113 147 160

1.3x 0.9x 1.2x 1.5x 1.4x 1.2x 1.3x LSG 108 94 105 151 129 128 119

0.4x 0.2x 0.5x 0.7x 0.4x 0.5x 0.4x GSF 220 -78 201 205 126 143 *179

1.1x 0.7x 1.2x 1.2x 1.2x 1.1x 1.1x MHG 152 108 148 191 158 151 151 Days sales outstanding Days payable outstanding 40 39 50 58 62 79 55 SALM 43 53 64 67 63 103 66 53 56 49 49 43 48 50 LSG 39 46 45 42 44 47 44 66 51 55 46 50 31 50 GSF 97 87 95 99 102 88 94 66 66 56 64 57 56 61 MHG 54 72 56 68 64 55 62 *Excluding the negative number from 2008.

Source: Annual reports 2007-2012, own research based on analytical financial statements

The liquidity cycle also measures a company’s short-term liquidity risk, as it indicates the number of days it takes to convert inventory into cash. The liquidity cycle is measured by 365/(Revenue/ (Current Liabilities).

From TableAss 4.5,ets − SALMCurr hasent an average liquidity cycle of 160 days, the second longest in the peer group. LSG has significantly less with 119 days, while GSF has an average of 179 days58 and MHG 151 days. As in some of the profitability ratios, GSF and MHG are rather volatile. Similar to the trend in financial leverage, SALM’s liquidity cycle ticks upwards (with 34 days, not insignificant) for 2012, mainly because net working capital increases due to a rise in the inventory level, which in turn is due to a 40% increase in biological assets59. Ultimately, this increased level in net working capital should lead to higher future cash flow, and because the level of the liquidity cycle is not alarmingly abnormal from peers, investors should just keep the direction in mind for now. They should, however, also realize that salmon farming companies in general have long production times cf. Figure 2.1. To give a more nuanced look into why SALM’s liquidity cycle is so long, days sales outstanding (DSO)60 and days payable outstanding (DPO)61 have been included for analysis. DSO specifies how

58 GSF has a negative liquidity cycle of 78 days in 2008, due to part of long-term liabilities falling due within a year, hence making them part of current assets. 59 SalMar Annual Report 2012, Note 13 Inventory and Biological Assets, p. 82 60 DSO = ୖୣୡୣ୧୴ୟୠ୪ୣୱ 61 DPO = ୖୣ୴ୣ୬୳ୣ ∗ 365 ୔ୟ୷ୟୠ୪ୣୱ େ୭ୱ୲୭୤ୋ୭୭ୢୱୗ୭୪ୢ ∗ 365 35 well a company is able to manage its receivables by measuring the number of days it takes to receive the cash after the sale. SALM seems to do well within the peer group with an average DSO of 55 days, however, notice how SALM’s DSO has risen almost 100% since 2007, while the rest of the peers have remained relatively stable. One reason is the low risk profiles of SALM’s customers as it mentions low historical counterparty credit risk62. Meanwhile on the liability side, DPO measures the number of days it takes the company to pay for the goods it has purchased. DPO is also increasing; in fact it increases to a greater extent than DSO, i.e. by 60 days. Again, peers have remained relatively stable throughout. The combination of rising DSOs and DPOs while recognizing low counterparty credit risk in the annual report indicates a coordinated management decision to focus on working capital. Consequently, SALM is well on to insuring a stable short-term liquidity situation, although the quick ratio and the liquidity cycle did show signs of only average performance compared to peers.

4.6.2. Long-term Liquidity To measure long-term liquidity risk, the solvency ratio and the interest coverage ratio will be used to illustrate how SALM and peers have fared historically and how they are developing currently. These ratios are shown in Table 4.6. The solvency ratio for SALM is stable throughout the whole period, decreasing towards the end. The solvency ratio starts to decrease because SALM, in Q2 ’11, secured a financing arrangement of up to NOK 4.5 bn., for operations, acquisitions and other investments. One of the covenants of the loan agreement is a solvency ratio of at least 35%, which SALM easily meets in 2011 using average figures. Even though this gives SALM the lowest solvency ratio of the peer group together with GSF, the financing arrangement itself will enable SALM to respond to any strategic actions that will occur going forward and will ensure management discipline to be able to cover interest payments. Table 4.6: Long-Term Liquidity Overview

07 08 09 10 11 12 Avg. 07 08 09 10 11 12 Avg. Solvency ratio Interest coverage ratio

44% 43% 46% 47% 41% 40% 43% SALM 7.0x 3.2x 22.7x 20.3x 2.2x 4.6x 10.0x

52% 54% 55% 58% 57% 56% 55% LSG 6.3x 2.1x 12.5x 30.3x 7.5x 8.1x 11.1x

44% 39% 37% 47% 48% 42% 43% GSF 1.9x -0.9x 5.8x306.1x -5.3x -0.9x 51.1x

54% 52% 53% 59% 54% 52% 54% MHG 5.2x -0.9x 4.3x 21.4x 7.0x 5.4x 7.1x Source: Annual reports 2007-2012, own research based on analytical financial statements

62 SalMar Annual Report 2012, p. 47 36 The interest coverage ratio measures the company’s ability to cover net financial expenses. From Table 4.5, we see that SALM has a moderate interest coverage ratio. The peer group as a whole seems to be widely spread on this particular ratio, which averages 19.8x for the four companies during the period. SALM is doing better in terms of long-term liquidity and short-term liquidity. By now it is worth noting that LSG has been a close number two on most of the profitability ratios, and also performs well in terms of liquidity. It will be interesting to follow LSG relative to SALM going forward.

4.8. EBIT/kg The last financial parameter to analyze is the EBIT/kg, which is a rather salmon farming specific ratio. The ratio denotes the operational operating profit achieved per kilo of salmon harvested. Operational EBIT is used because this ratio only focuses on how well the underlying operations have fared. To further accommodate the analysis, the operational EBIT from the analytical income statement has been used throughout, except for GSF (Norway) and MHG (Norway), where the reported operational EBITs have been used due to lack of segment information. From Figure 4.10, once again SALM has a leading position until 2011 and is on par in 2012. Further, it seems like salmon farmers are quite competitive in that they follow a steady cost level until operational EBIT, but that minor deviations from a “normal” cost level will lead to a decline in EBIT/kg. This is precisely what has happened to SALM in 2011, who was NOK 179.203.871 short in operational EBIT of achieving the same EBIT/kg of 8,88 as LSG, the closest peer, achieved. Figure 4.10: EBIT/kg for the peer group

15,78x

12 9,59x

7 6,97x 3,58x 2

-32009 2010 2011 2012

SALM* LSG* GSF (Norway)** GSF MHG (Norway)*** MHG

*Harvested salmon from Norskott Havbruk have been excluded because investment in associates comes after operational EBIT in the analytical income statement and to illustrate Norwegian operations only. **Norwegian operations include GSF Rogaland and GSF Finnmark. Reported segment operational EBIT has been used. ***For MHG Norway reported business segment operational EBIT and gutted weight MHG Norway have been used. Source: Company reports, own research

37 Having the high historical salmon price in mind, salmon farmer’s key to achieving high EBIT/kg is cost control, especially as the whole peer group has increased harvested salmon each year. Cost wise, there are a couple of reasons why SALM achieved a relatively lower EBIT/kg in 2011, 1) start-up costs associated with the InnovaMar facility, 2) identification of Pancreas Disease causing the destruction of 1,5 million salmon, leading SALM to recognize a loss of NOK 50 m., 3) three events of escaped fish with associated costs of NOK 10 m. and 4) an unfavorable harvesting profile in SalMar Northern Norway63. This shows how a series of events can quickly deteriorate otherwise good performance as Table 4.4 showed. With the start-up costs from InnovaMar now paid, the company is poised for efficient growth.

4.9. Conclusion to the Financial Analysis Based on the above analysis, the level of the salmon price has tremendous importance for financial performance, and because all Norwegian operations command the same salmon price, keeping a low cost level is important in order to earn superior results. SALM has historically led the industry profitability wise, but has not been able to keep the same pace for the past two years. This has been due to minor disease outbreaks, escapes and start-up costs associated with the InnovaMar facility. The overall peer group has followed a very clear pattern, caused by fluctuations in the salmon price, i.e. SALM’s historical leadership position has been due to superior operational performance, needless to say that this was also showed in the EBIT/kg ratio. Liquidity wise, SALM keeps up with peers having a reasonable buffer for long-term liquidity, but lacking on the short-term liquidity side. This was industry specific and not because of bad financial management. It was also shown that management had actively tried to lengthen DSO and DPO, without any harm done. Lastly, SALM has grown its revenue steadily throughout the period with an average y-o-y growth of 23,5 %, with Europe and Asia being the two most important markets for SALM. Figure 4.11 synthesizes the profitability situation in the sector via a profitability map64. This map indicates where a company is headed based on the profit margin and turnover of IC. Using data from the past three years, a clear pattern emerges indicating less profitability within the industry, which is due to the declining salmon price. MHG is on its way to improve its profit margin at the expense of a slightly lower turnover of IC. GSF, which has experienced a lot of growth within the sector, is also the least profitable and now has a negative profit margin. LSG seems to be the closest peer to SALM, operationally and financially. LSG has followed the same trend in profitability as the rest of the peers, but has at the same time been more resilient. Finally, SALM has seen the second greatest drop in profitability and turnover of IC

63 SalMar Annual Report 2011, p. 35 64 Viebig, Podig, Varmaz, Equity Valuation, Wiley Finance, 1st ed. 2008, p. 215. 38 since 2010, chiefly from 2010-2011. Going forward it will be interesting to see whether the company is able to curtail this trend. Figure 4.11: Profitability Map

30,0% 2010 25,0% 2010 20,0% n i 2010 g 15,0% r 2012 a m

10,0% t i

f 2011

o 2012 r 5,0% 2010 2011

P 2012 2011 0,0% 2012 -5,0%0,50x2011 0,60x 0,70x 0,80x 0,90x 1,00x -10,0% Turnover of Invested Capital

SALM LSG GSF MHG

Source: Adopted from Morgan Stanley Model Ware, annual reports 2007-2012, own research

The strategic analysis will help elaborate what drives the salmon price, and together the financial and the strategic analysis will serve as the foundation for the forecasted financial statements.

5. Strategic Analysis This section is mainly a qualitative contribution to the financial analysis, intended to shed further light on the industry as a whole. The analysis is structured as a funnel, starting with a macroeconomic view, then zooming further in, ultimately summing up the conclusions via the SWOT framework in the next section.

5.1. PESTLE Analysis In the following, the PEST framework has been chosen to shed light on the current macroeconomic environment facing SALM. Due to certain legal and environmental factors pertaining to salmon farming in Norway, these two components have been added to the more traditional PEST framework. Generally, the supply focus will be on Norway as it is SALM’s main country of production, and the demand focus will essentially be on the rest of the world. First, there will be a brief introduction to Norway. With almost all of SALM’s production in Norway (except for the 50/50 JV with LSG in the UK), it is important to look at Norway as a whole: Norway has its own parliament from which political decisions are made and there is a high degree of political stability and minimal corruption in the

39 country. Further, Norway is not part of the European Union, making it politically independent from Brussels.

5.1.1. Political Factors This subsection describes the extent to which the government may influence the salmon farming industry. The main political factors are licenses to biomass and different forms of trade restrictions.

5.1.1.1. Licenses The main political factor governing the total supply of salmon in Norway is dependent on having a license. In Norway, the Ministry of Fisheries and Coastal Affairs grants licenses for the right to farm salmon at either a freshwater or a seawater site65. One license can be related to up to four sites at a time and vice versa. Since 1982, there have only been seven licensing rounds, meaning that the Norwegian government holds significant power with regards to controlling the overall supply of salmon from Norway. The last licensing round was in 2009, and the next round is expected to occur in H2 201366. The government is expected to allocate 45 so called “green” licenses intended to promote sustainable salmon farming. 35 of the 45 new licenses require the redemption of an existing license, meaning that redeeming one current license will ensure two new green licenses. Further, of the 35 licenses 20 will only be allocated to farms in Northern Norway (Troms and Finnmark). To be awarded the green licenses, companies need to apply to a committee appointed by the government by documenting higher technological standards which will reduce escapes and the level of sea lice. As a corollary, these stricter requirements will imply higher production costs at sites with green licenses; however, an offsetting factor would be the fact that the higher maximum allowable biomass would enable the farmers to grow the fish larger in certain periods67. Licenses can be traded between companies, although if a company wishes to obtain more than 15% control of the total biomass in the country it needs to apply for approval at the Ministry of Fisheries and Coastal Affairs68. Currently, the upper limit is 25% of control of the total biomass in the country beyond which no company can obtain control. There is also a 50% cap of control of the total biomass in any region. Recently, there has been opened for a discussion of expanding the 25% cap to 40%, albeit with stricter requirements69. An overview of the proposed scheme is shown in Table 5.1, and it shows that beyond the 15%, stricter requirements will be put forth to ensure added value from the aquaculture industry to the communities in coastal Norway.

65 Marine Harvest, Salmon Farming Handbook 2012, p. 27. 66 http://www.undercurrentnews.com/2012/11/09/norway-suggests-handing-out-45-green-salmon-licenses/ 67 ABG Sundal Collier: Salmon Farming Norway – Instant Comment, 12 November 2012 68 Marine Harvest, Salmon Farming Handbook 2012, p. 29. 69 http://www.regjeringen.no/en/dep/fkd/press-centre/Press-releases/2013/proposal-to-allow-up-to-40- percent-owner.html?id=726813 40 Table 5.1: Draft of Possible Future Scheme

Share of total MAB >40% under 15-20% 20-25% 25-30% 30-35% 35-40% certain conditions Terms and conditions

Average amount of Progressively processing over 5 years in 25% 30% 36% 38% 40% stricter terms and Norwegian coastal districts conditions

Research and development Progressively 30 mill 50 mill 70 mill 80 mill 100 mill – average investment over stricter terms and NOK NOK NOK NOK NOK 5 years conditions

Minimum amount of Progressively available stricter terms and 20 30 50 60 70 apprenticeships/trainees in conditions Norwegian coastal districts

Providing activity centers in each region the Equal terms regardless of share of total MAB: activity centers in each region company has aquaculture activity

Source:http://www.regjeringen.no/en/dep/fkd/press-centre/Press-releases/2012/more-wealth-creation- desired-from-the-aq.html?id=709659

It is clear that being able to obtain a 40% control of the rights to farm salmon in Norway, one would have a very strong competitive position going forward, which would have a big influence on the valuation, especially to companies like SALM and LSG who only have production in Norway (except for their 50/50 JV in the UK, but which only constitutes a fraction of total revenue), and hence also have their “expertise” here. However, obtaining licenses to a biomass beyond 15% comes at a cost that gets progressively stricter by each additional 5%.

5.1.1.2. Trade Barriers Historically, a political factor influencing the demand for Norwegian salmon has been different forms of trade restrictions, such as when Russia banned all import of Norwegian salmon on claims that it contained too much lead and cadmium70. Another example is the 20-year-old 24% trade tariff to the US which was revoked in 2012, but which had effectively kept Norwegian salmon out of the US market during that time71. Lastly, Norwegian salmon farming companies have had difficulties exporting their products to China due to a political fallout between China and Norway. The fallout arose because the Norwegian Nobel Committee awarded the Nobel Peace Prize to the Chinese human rights activist Liu Xiaobo, who was simultaneously being held as a political prisoner. Chinese officials said that it was wrong of the Norwegian government to support a Chinese criminal, and as a

70 http://www.dn.no/forsiden/naringsliv/article681828.ece 71 http://www.seafoodsource.com/newsarticledetail.aspx?id=13884 41 result Norwegian salmon farming companies have had difficulties getting their fresh products through the Chinese food safety inspectors causing them to decay72 73.

5.1.2. Economic Factors These are determinants of the economy’s performance, which impact the company. The main economic factors affecting SALM are currency fluctuations, the GDP development in the main export markets, interest rate fluctuations and the price of raw materials. In addition to that, standing biomass, the forward prices for salmon and fish feed sales are important factors to the spot price of salmon.

5.1.2.2. Exchange Rates Being a major exporter of salmon, the fact that most of SALM’s costs are in NOK while almost all of its revenue is in other currencies, represents uncertainty in terms of currency fluctuations. From Note 24 Sales Revenue in the annual report 2012, SALM gives a rough geographical split of its revenue. The categories are: Asia, Russia, USA/Canada and Europe incl. Norway. To get more country specific, Note 2 Financial Risk in the same annual report, SALM mentions four foreign currencies that it is especially exposed to; EUR, JPY, GBP and USD. This gives shows Great Britain’s significance within Europe and, more surprisingly, the fact that the Russian ruble is not significant enough to buy forward currency contracts for, while the USD is, despite the export development (cf. Figure 4.8 where exports to the US and Canada constitute an increasingly lower share, whereas exports for the Russian market have remained somewhat constant). SALM makes sensitivity calculations on its forward currency contracts, and given the financial instruments in effect at year- end 2012, a 5% fall in the NOK would lead to a NOK 24.7 m. decrease in group profit74. Further, in an international perspective, the Norwegian krone’s recent fall75 will stimulate export, compared to other foreign competing salmon farmers and Norwegian salmon farmers operating in other countries than Norway.

5.1.2.3. GDP In addition to the fall in the NOK, GDP growth in the respective export markets is important as this, all else equal, will lead to higher demand for higher priced foods such as salmon. Below is a table of the historical and forecasted GDP growth from the four main regions represented by the major salmon importing countries within them.

72 http://www.huffingtonpost.com/2011/05/06/norway-china-liu-xiaobo-peace-prize_n_858506.html 73 As for Asia, SALM has focused on Japan as the main market. Interestingly, SALM has not mentioned anything about trade problems in Russia, only the difficulties with the banking system as mentioned in 4.6.1. Revenue Growth. 74 SalMar Annual Report 2012, Note 2 Financial Risk, pp.68 75 http://www.ft.com/intl/cms/s/0/048f6540-d9b8-11e2-bab1-00144feab7de.html#axzz2ZJ8Sv3EP 42 Table 5.2: GDP growth rates for selected countries

2011 2012 2013e 2014e Norway 1,3% 3,2% 2,6% 2,4% Europe 1,6% (0,4%) (0,1%) 1,4% Great Britain 0,9% (0,0%) 0,8% 1,7% USA 1,8% 2,2% 1,9% 3,0% Canada 2,4% 2,0% 2,6% 2,5% Japan (0,7%) 2,0% 1,6% 0,7% Russia 4,3% 3,6% 3,7% 4,0% France 1,7% 0,5% 0,5% 1,4% Source: Marketline In-depth PESTLE insights, Eurostat

Table 5.2 shows that recent GDP growth has remained fairly muted in SALM’s traditional markets, while Norway, Russia and Canada have fared well and are also set for further growth in the years to come, making them future potential areas of focus for the sales force.

5.1.2.4. Interest Rates Currently, SALM has NOK 2.9 bn. in interest-bearing debt, most of which pertains to the NOK 4.5 bn. financing agreement obtained in 2011. The interest terms are based on “current terms” which relate to the NIBOR plus a margin depending on the level of EBITDA/NIBD76. NIBOR is the Norwegian Inter Bank Offered Rate intended to reflect the interest rate level lenders require for unsecured money market lending, governed by a panel of six banks77. In the twelve months leading to the publishing of SALM’s annual report for 2012 the three month NIBOR rate has decreased 53 bps from 2.32% to 1.79%78. According to SALM’s own sensitivity calculations, this would translate to a rise of NOK 14 m. in group profit, given the financial instruments in effect at year-end79. The opposite will take effect when the NIBOR3M rises 0.5%.

5.1.2.5. Raw Materials Lastly, cf. Figure 2.2; feed is by far the largest input cost component to the production of salmon. In Norway, feed generally contain vegetable meal (49%), fish oil (11%), vegetable oil (18%), fish meal (12%) and other raw materials (8%)80. Therefore, the prices for raw materials such as fish meal, soy meal, wheat, rapeseed oil and fish oil become important for the overall cost of producing salmon. Feed suppliers do not produce the raw materials that go into the feed themselves, but purchase these materials on the market, price the feed based on the market price of the raw materials plus a margin, thus exposing the salmon farmers to the fluctuations of the raw materials market.

76 SalMar Annual Report 2012, Note 18 Interest-Bearing Debt, p.85 77 http://www.fno.no/en/main/markets/nibor---the-norwegian-interbank-offered-rate/ 78 Bloomberg 79 SalMar Annual Report 2012, Note 2 Financial Risk, pp.68 80 Marine Harvest, Salmon Farming Handbook 2013, p. 44. (I do not know what the last two percent goes to). 43 Figure 5.1 shows that the traditional ingredients to feed, fishmeal and fish oil, have risen a lot in recent years, which is why constant development of the composition of the feed is so important. Having become less dependent on these inputs and focusing more on vegetable inputs like soy and wheat, have made the cost of feed more stable and less costly. However, Table 4.4 showed that COGS has been rising for the past two years, among others because of raw materials. Figure 5.1: Price development in raw materials, 2006-2012

Source: Marine Harvest, Salmon Farming Handbook 2013, p. 46

The current outlook for both marine and non-marine raw materials continues to look bleak, as 2012 price rose as a result of reduced fishing quotas in Peru and poor growing conditions for non-marine raw materials, while long-term prices are expected to rise due to limits on the supply of wild catch fish and economic growth in emerging markets should increase demand for these raw materials81. Meanwhile, Cermaq, the market leader within fish feed is continuously developing feed with a broader raw materials platform to support farmers’ long-term cost efficiency programs.

5.1.3. Social Factors These factors are from the social environment of the market, e.g. cultural trends, etc. Social factors namely constitute increasing health awareness and media surveillance.

5.1.3.1. Health Awareness Worldwide obesity has nearly doubled since 1980, meaning that 11% of the adult world population is obese, according to the World Health Organization82. Obesity is a result of unhealthy diet and physical inactivity. These two factors combined, can lead to cardio vascular disease, which is the

81 Cermaq Q4 Report 2012, p. 10 82 http://www.who.int/mediacentre/factsheets/fs311/en/ 44 number one cause of death globally83. As obesity is categorized as preventable by healthy diet and exercise, focus has among other things come on the benefits of salmon. Salmon contains omega-3 fatty acids, which are known to prevent and slow the development of cardiovascular disease, and the European Food Safety Authority has in fact concluded that 250 mg of omega-3 fatty acids a day is enough to maintain a general cardiovascular health84. This obviously speaks well to salmon producers. In addition to omega-3 fatty acids, salmon also contains a high amount of protein, which is important to another trend that has gained popularity in recent years; the combination of having an active lifestyle with a high focus on a healthy diet. Especially the rising popularity of sports such as crossfit, several types of healthy diets have ensued, e.g. the zone diet, the paleo diet, etc. The basic idea of these diets is eating lots of protein due to the amino acids which build and maintain the cells in the body, but which the body cannot produce itself, and thus needed through diet.

5.1.3.2. Media Surveillance Media coverage of farmed salmon has mainly resulted from disease outbreaks and fish escapes and their consequences on the environment. Stories like these mostly have a negative view towards the whole industry. This is one of the reasons the Norwegian government specifically focuses on sustainability in salmon farming by issuing green licenses and having an Aquaculture Act, which among others focuses on creating a modern and comprehensive environmental regime85. The Norwegian government’s sustainability focus will be further discussed in section 5.1.6. Environmental factors.

5.1.4. Technological Factors These factors have to do with the technological development such as automation, research, etc. that improves operations. The main technological factors are the advantages of scale production, improvements in the feeding process and disease prevention.

5.1.4.1. Scale Production The average production per farm in Norway in 1982 was 47 tonnes; in 2008 this had grown to 904 tonnes86. This is primarily due to two reasons, (1) until 1992 each firm could only own one license per farm with production per license remaining the same, but by the end of the 1990’s salmon farmers began to combine licenses to single sites, allowing them to farm a larger biomass (like mentioned in 5.1.1.1. Licenses). (2) Being able to have such large production required improvements

83 http://www.who.int/mediacentre/factsheets/fs317/en/index.html 84 http://www.efsa.europa.eu/en/press/news/120727.htm 85 http://www.regjeringen.no/upload/kilde/fkd/reg/2005/0001/ddd/pdfv/255327-l- 0525_akvakulturloveneng.pdf 86 F. Asche and T. Bjørndal, The Economics of Salmon Aquaculture, 2011, Wiley-Blackwell, p. 45 45 to the pen system. In the 1980’s a pen cage had a diameter of 5 meters and ran 4 meters deep. As the cage size has developed over time, cages now have a diameter of 50 meters and extend 40 meters below the surface, at the same time farmers are able to attach 6-14 pens to a barge with offices installed for crew etc., increasing the production capacity immensely87.

5.1.4.2. Feeding Feed is the most important input factor and has been improved in several ways. Firstly, feed composition has changed from containing fishmeal (59%), fish oil (24%) and vegetable meal (17%), to now containing almost equal parts of fishmeal, fish oil, vegetable meal, vegetable oil and other raw materials88. This development has mainly happened because of limited access to fishmeal and fish oil. Cf. Figure 2.2, Asche and Bjørndal suggest that salmon farmers will be able to reduce the overall costs going forward even more through efficiency gains. By comparison to the most efficient chicken producers the cost share for feed is at 80%, leaving plenty of upside potential for the younger salmon farming industry to reduce other costs than feed89. Secondly, feeding methods have gone from hand feeding to automated data-controlled feeding systems. As feeding by hand was very labor intensive, automated feeding became an area of development for salmon farmers. Automated feeding is data-controlled so as to not generate too much waste, i.e. measuring how much feed the salmon actually consume90. Further, to ensure less feed waste, feed that sinks very slowly has been developed.

5.1.4.3. Disease prevention In order to industrialize the production of salmon, it is important to be able control diseases. As with wild salmon, there are diseases that pose threats to the health of farmed salmon, and although some vaccines do exist to help mitigate these, far from all diseases are covered. So far quarantine, destruction of infected fish and proper distance to neighboring farms so diseases will not spread, seem to be the solutions until more effective vaccines come to market. This means that the industry will have to rely on better husbandry until technology has caught up, leaving upside potential depending on innovation. More on the different kinds of health risks in 5.1.6.2. Health risks. The worst disease outbreak in recent memory is that of the ISA outbreak in Chile, which was first reported in 2007, and continued well into 201091. Reportedly, the ISA virus caused the overall production of salmon in Chile to drop by 50% and the industry lost around USD 2 bn. between 2007 and 2009.

87 F. Asche and T. Bjørndal, The Economics of Salmon Aquaculture, 2011, Wiley-Blackwell, p. 15 88 Marine Harvest, Salmon Farming Handbook 2012, p. 43 89 F. Asche and T. Bjørndal, The Economics of Salmon Aquaculture, 2011, Wiley-Blackwell, p. 50 90 F. Asche and T. Bjørndal, The Economics of Salmon Aquaculture, 2011, Wiley-Blackwell, p. 16 91 Marine Harvest, Salmon Farming Handbook 2012, p. 13 46 5.1.5. Legal Factors These factors are the laws that govern the industry. The main legal factors are those of the licenses. Having already been through most of the relevant regulations for Norway, this subsection will also include regulation from other popular salmon farming regions.

5.1.4.1. Norway As mentioned in 5.1.1.1. Licenses, since 1973 it has been required by law to have a license in order to operate a salmon farm in Norway. Legally, these licenses allow for a maximum allowable biomass (MAB) of up to 780 tonnes, except for Troms and Finnmark where it is up to 900 tonnes. Typically, farming sites have between 2.340 and 3.120 tonnes of allowed maximum biomass92. A license usually trades for NOK 20-70 m.

5.1.4.2. Scotland In Scotland, there are several institutions that give farmers permission to operate in an area. The assimilative capacity93 of the seawater site sets the limit on the MAB, which therefore varies somewhere in-between 100-2.500 tonnes94. New license applications take around 6-12 months and have to pass an Environmental Impact Assessment.

5.1.4.3. Chile In Chile, there are two institutions governing the salmon farming production; the Fishery Sub Secretary stands for the authorization to operate aquaculture facilities, and similar to Norway, these authorizations can be freely traded. The second authorization is issued by the Sub Secretary of the Navy and works as a permission to use national sea areas. After having obtained authorization, this authorization is only valid for a certain geographic area, specie and limit of production95. Licenses granted before March 2010 are valid for an infinite period of time, whereas licenses granted after March and in cases where the farmer needs a loan from the state, are only valid for 25 years. Further, trading of licenses in Chile is regulated by the General Law on Fisheries and Aquaculture, which stipulates that monitoring and correct practices are used, that fallow periods, disease and mortality treatments be used and that there will be protection areas in case of new virus outbreaks96.

92 Marine Harvest, Salmon Farming Handbook 2012, pp. 27 93 The ability of a body of water to cleanse itself. 94 Marine Harvest, Salmon Farming Handbook 2012, p. 27 95 Marine Harvest, Salmon Farming Handbook 2012, p. 28 96 Marine Harvest, Salmon Farming Handbook 2012, p. 33 47 5.1.4.4. Canada In Canada, farmers need to obtain tenure licenses, in order use a sea area. These are issued anywhere from in-between 5 and 15 years apart. An annual rental fee is charged depending of the size of the site and can be renewed upon request. In addition to this, farmers need to obtain a license issued by the Federal Government in order to operate a site. These site licenses typically range from 2.000-4.500 tonnes of MAB. Currently, the federal licenses are issued for one year and are subject for renewal. Licenses can be lost for non-compliance and non-payment of fees97.

5.1.6. Environmental Factors These are the factors that influence the surrounding environment. The main environmental factors are general sustainability initiatives, health risks and fish escapes.

5.1.6.1. Sustainability Besides from the caps on how much of the total biomass a single company can control, another reason the government restricts the issuance of licenses is because of its stated objectives for the aquaculture industry: “Aquaculture will not contribute to long-term changes in the generic characteristics of wild fish stocks”, “All fish farming locations in use will maintain an acceptable environmental state, and will not have higher emissions of nutrient salts and organic materials than the receiving waters can tolerate”, and “The aquaculture industry will have a location structure and zoning which reduces impact on the environment and the risk of infection”98 The focal point here is to improve the overall sustainability situation of farmed salmon through enhanced husbandry and as a corollary, the general cost level will be higher for the salmon farmers.

5.1.6.2. Health Risks The major health risks in relation to salmon farming pertain to disease outbreaks, which are able to wipe out large numbers of fish and have a great impact on profits. The best-known case of a disease outbreak was in Chile in 2007, like previously mentioned, this was caused by the ISA virus, called infectious salmon anemia. Other prevalent diseases are infectious pancreatic necrosis (IPN), pancreas disease (PD) and heart and skeletal muscle inflammation (HSMI). To combat these diseases, farmers must focus on improved husbandry and higher biosecurity99. Salmonid rickettsial septicaemia (SRS) can be prevented by the use of vaccines, and lastly for gill disease (GD), there is no effective cure. Beyond these diseases there are also seawater parasites called sea lice, which infect the skin and cause infections, potentially killing the fish. To control sea lice require good husbandry, the use of

97 Marine Harvest, Salmon Farming Handbook 2012, p. 28 98 Norwegian Ministry of Fisheries and Coastal Affairs, Strategy for an Environmentally Sustainable Norwegian Aquaculture Industry, 2009 99 Marine Harvest, Salmon Farming Handbook 2012, p. 53 48 wrasse species to eat the parasites off the salmon skin, pharmaceutical products and hydrogen peroxide baths100. Lastly, algae also possess a problem to the fish in that some algal blooms are able to produce toxins, which poison the fish, physically clog the gills and reduce the oxygen level in the water101. Besides from the dangers for salmon, the toxins from the algae can also have poisonous repercussions for shellfish.

5.1.6.3. Fish Escapes Because of the above mentioned health risks, escaped farmed salmon have given the industry a bad reputation. This is in part due to competition for food and the risk of spreading disease or sea lice to the wild salmon population. At the Norwegian Seafood Federation’s (FHL) general assembly in 2007 a zero-escape policy in line with the intentions of Norwegian government was ratified. In 2011, the Escape Commission for Aquaculture set up the “Environmental Promise 2011” wherein member companies committed to (1) higher mandatory demands on equipment, procedures, risk assessments and preventive measures, (2) increased preparedness, (3) setting up an environmental fund to help remove escaped salmon, (4) fines of NOK 500 per escaped fish through a tracking system where fish are tagged and (5) further research on the influence of escaped salmon on wild populations and the environment102. Figure 5.2 shows the results from the above mentioned efforts to combat fish escapes. Besides from the environmental consequences, preventing fish escapes has a clear P&L advantage in that the fish will count in sales and no fine will be paid, so even though companies have to invest in better equipment, this will be offset in the long run. Figure 5.2: Fish escapes in Norway

1000 921

800 717 s

d 600 553 n

a 477 s

u 409

o 368

h 400 t 272 298 291 225 200 111 38 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: http://www.fiskeridir.no/statistikk/akvakultur/oppdaterte-roemmingstall

100 Marine Harvest, Salmon Farming Handbook 2012, p. 53 101 http://www.marineharvest.com/en/Systempages/Global-leftmenu/FAQ/ 102 http://www.fhl.no/getfile.php/DOKUMENTER/faktaark_escapes2011_ENG.pdf 49 To give a perspective on why the Norwegian government focuses so much on sustainability, disease prevention and fish escapes, the ISA outbreak in Chile in 2007-2009 will illustrate this. The outbreak of the virus led to a major restructuring of the salmon farming industry in the country. In addition to the economic consequences it had for the companies, it also had great social impact. The crisis led to several farming site and processing plants to close down, resulting in 15,000 employees losing their jobs103. Further, the ISA virus is not only prone to infect farmed salmon, but also wild salmon, threatening artisan fishermen’s livelihood and thereby also the total supply of salmon. A quarantine area would normally be 5 km. and then all the fish would be destroyed, however, if one or more fish are able to escape, this could be a contributing factor to further spreading of the disease.

All of the above factors are factors that influence SALM, but which SALM is either able to affect minimally or not at all. The key is to understand the environment by maximizing opportunities and minimizing treats. In the following subsection, the lens will turn to the competitive dynamics of the salmon farming industry.

5.2. Industry Analysis To better understand the salmon farming industry, it is important to look into the different industry characteristics present in Norway and internationally. This will be done through the Porter’s Five Forces framework. Threat of Substitute Products, Bargaining Power of Suppliers, Bargaining Power of Customers and Threat of New Entrants are all determining factors of the Intensity of Rivalry within a given industry104.

5.2.1. Substitution treat The threat of substitute products relates to products that rival salmon products as a source of protein. Therefore, the determinants of substitution threat will be the relative price performance of substitutes, the switching costs and the buyer propensity to substitutes105. The relative price for competing products is shown in Figure 5.3. The figure compares the prices of food sources containing animal protein for the last 20 years, indexed from April 1993 and rebased at 100. The largest competitors to salmon are pork, chicken, beef and lamb. The figure shows that the price of salmon has declined relatively to competing products until 2007 when the ISA crisis started to affect the world supply of salmon and hence caused it to rise, and in later years how high volatility in the salmon price also caused the price of salmon for customers to become fairly unstable.

103http://infosurhoy.com/cocoon/saii/xhtml/en_GB/features/saii/features/economy/2010/11/15/feature-03 104H. Mintzberg et al., Strategy Safari, FT Prentice Hall 2nd edition, 2009, p. 105

105H. Mintzberg et al., Strategy Safari, FT Prentice Hall, 2nd edition, 2009, p. 105 50 Figure 5.3: Price development for substitute products last 20 years106

200

d 175 e s a 150 b e r

, 125 s e c i

r 100 p

x

e 75 d n I 50 25

Salmon Pork Chicken Beef Lamb

Source: www.indexmundi.com/, own research

Another way to gauge the competitiveness of the different sources of protein is to see how well they turn feed into body mass. To do this, feed conversion ratios (FCR) will be used to illustrate. The FCR is defined as FCR = , i.e. the lower the FCR, the better. Figure 5.4 ୩୥୭୤୤ୣୣୢୡ୭୬ୱ୳୫ ୣୢ illustrates well how competitive୩୥୭୤ୠ୭ୢ୷୫ farmedୟୱୱ୥ୟ୧୬ୣ salmonୢ୤୰୭୫ ୤ୣ actuallyୣୢ is when measured by FCR. There are several reasons for why farmed salmon have such low FCRs, e.g. because salmon is a cold-blooded species it does not require energy to heat itself and because salmon live in aquatic surroundings, they do not need to support their own body mass like animals on land have to107. Judging by the FCR, poultry keeps up with farmed salmon well, however, taking the relative price development from Figure 5.3 into the equation chicken has steadily become more expensive over the years. Pork needs 2,5 times more feed to produce 1 kilo of body mass than farmed salmon, and although prices are currently around the same level, the price of pork has historically been very volatile. Cattle/beef is rather uncompetitive both measured on FCR and price. Lamb is uncompetitive based on FCR and historically also on price. However, the price of lamb has recently come down to be the cheapest of all the protein sources. Lastly, it takes more than 8 times the amount of feed to produce 1 kilo of body mass on wild salmon compared to farmed salmon. There are three main reasons for this (1) farmed salmon live in a farmed setting where they do not have to hunt for feed and avoid predators nor travel long distances to spawn, (2) farmed salmon are polyploid animals i.e. sexually inactive, thereby saving energy to become meatier and (3) farmed salmon are fed with feed that is continuously being optimized for the benefit of growing the salmon.

106 Prices used are in USD 107 http://www.mainstreamcanada.ca/salmon-have-most-efficient-feed-conversion-ratio-fcr-all-farmed- livestock 51 Figure 5.4: Feed conversion ratios

10,0 10,0 8,0 8,0 8,0 6,0 4,0 3,0 2,0 2,0 1,2 0,0 Farmed Poultry Pork Cattle Lamb Wild salmon salmon

Source: Marine Harvest Salmon Farming Handbook 2010 p. 11

Further, compared to pork and poultry, salmon has a higher edible yield at 68%, where pork has 52% and poultry has 46%108. This is likely due to the lighter bone structure salmon has. Lastly, it takes 1.500 liters of freshwater to produce 1 kilo of salmon109, whereas it takes 4.000 liters to produce 1 kilo of poultry, 6.000 liters to produce 1 kilo of pork and 15.000 liters to produce 1 kilo of beef110. Looking to other types of farmed seafood, Figure 5.5 shows that tilapia is the world’s most farmed type of fish, while pangasius is equal to salmon. Tilapia and pangasius have approximately the same amount of protein as salmon has, but are less fatty i.e. have less omega-3 fatty acids. Tilapia has an FCR of 1,5-1,8 and for pangasius it is 1,5. Figure 5.5: Fish species – harvest/catch quantities 2011

Source: Marine Harvest Salmon Farming Handbook 2013 p. 6

108 Marine Harvest, Salmon Farming Handbook 2013, p. 11 109 Marine Harvest, Salmon Farming Handbook 2013, p. 11 110 http://files.conferencemanager.dk/medialibrary/03780496-d166-46e4-9595- 678d260fcadb/images/Hoekstra-Copenhagen-26Nov2012.pdf Slide 12 52 Both tilapia and pangasius are farmed at higher temperatures than salmon is, and are therefore not in direct competition location wise. Organized farming of tilapia began at least ten years earlier than salmon farming, and due to the more accessible areas to farm tilapia (subtropical), tilapia farming has become more than twice as large an industry. Tilapia has a very short production time and weighs substantially less than salmon at around 500-800 grams, both contributing to a high turnover. As a twist though, exactly because tilapia and pangasius need subtropical temperatures, they are often farmed in emerging countries using anything from semi-intensive to intensive production methods, whereas most farmed salmon relies on technologically advanced equipment111. Lastly, Egypt is the second largest producer of tilapia in the world; however, all of it is consumed domestically, raising the question of whether tilapia is indeed a serious contender to salmon in salmon’s traditional markets112.

The economic advantages of farming salmon are obvious when compared to sources of animal protein from land. However, there is some competition compared to tilapia and pangasius, although the production of these still seem to be very fragmented and sales seem to be geographically split as well.

5.2.2. Suppliers The bargaining power of suppliers relates to the position salmon farmers are in when negotiating with suppliers. The key is to find out whether input costs will change going forward. Therefore, the determinants of supplier power are supplier concentration, differentiation of inputs, switching costs of the salmon farmers and the costs relative to total costs in the industry113. For the main production in salmon farming, there are two types of suppliers, (1) suppliers of eggs and (2) suppliers of feed. The four largest suppliers of salmon eggs are Aquagen AS, Fanad Fisheries Ltd, Lakeland and Salmobreed AS, production can easily be scaled and the market for eggs is international114. The ownership structure of egg suppliers reveals that these are owned by subsidiaries to the peer group, e.g. LSG owns 50,7% of Sjøtroll Havbruk AS, which in turn owns 27,5% of Salmobreed, similarly GSF owns 100% of Erfjord Stamfisk AS, which owns 27,5% of Salmobreed115 and until recently Marine Harvest owned 31,3% of AquaGen AS116. These examples show how intertwined the interests in the salmon farming industry are.

111 Asche & Bjørndal, The Economics of Salmon Aquaculture, 2nd ed. 2011, Wiley-Blackwell, pp. 157 112 Asche & Bjørndal, The Economics of Salmon Aquaculture, 2nd ed. 2011, Wiley-Blackwell, p. 158 113 H. Mintzberg et al., Strategy Safari, FT Prentice Hall, 2nd edition, 2009, p. 105 114 Marine Harvest, Salmon Farming Handbook 2013, p. 38 115 LSG Annual Report 2012, p. 76 and p. 94, GSF Annual Report 2012 p. 43 and 53 116 http://www.seafoodsource.com/newsarticledetail.aspx?id=18966 53 More interestingly is the relationship salmon farmers have with feed suppliers. Going forward there are two reasons for this (1) feed producers are not related to salmon farmers as subsidiary/associated company/related party and (2) the composition of the feed. Firstly, there are three main suppliers of feed: Skretting (owned by Nutreco), BioMar (owned by Schouw & Co) and EWOS (which used to be owned by Cermaq, but which has recently been acquired by the two private equity companies Altor and Bain Capital, thus making EWOS completely independent from salmon farming companies going forward). Together the three companies make up around 95% of the market for feed, giving them reasonable power. However, as feed is a very homogenous product, this gives salmon farmers relatively low switching costs. Further, by using the FCR intelligently (i.e. by measuring the cost-efficiency of using different types of feed), salmon farmers can find the best feed among the feed producers enabling more competition to produce the best feed. Secondly, as the aquaculture industry matures, the composition of the feed will change over time to become more efficient and more sustainable. Largely three ingredients were used in 1990: fish meal (59%), fish oil (24%) and vegetable oil (17%). By now the composition is much less dependent on aquatic raw materials as vegetable meal and oil have taken over117.

Judging by the above information the supplier concentration is high, the differentiation of the raw materials over time has also increased, switching costs from using one supplier over the other are low due to the homogenous features of their products and costs of the feed relative to total costs still remain high. The relationship between suppliers and salmon farmers is even.

5.2.3. Customers The bargaining power of customers relates to the position salmon farmers are in vis-à-vis customers. The key is to find out to which degree customers can influence the pricing of salmon products. Therefore, the determinants of customer power are customers’ switching costs, substitute products and price sensitivity118. In Europe, there are two main types of customers for farmed salmon products, retail (69%) and hotels, restaurants and catering (HORECA) (31%)119. With more than two thirds of the customers being major retailers like Carrefour, Metro and Tesco, and with low switching costs the bargaining power is in the customers’ favor due to their sheer size. Additionally, the main product categories can be divided into fresh (56%) and frozen (44%), which can then be further subdivided into whole salmon, fillet, smoked salmon and other VAP. These are

117 Marine Harvest, Salmon Farming Handbook 2013, p. 44 118 H. Mintzberg et al., Strategy Safari, FT Prentice Hall, 2nd edition, 2009, p. 105 119 Marine Harvest, Salmon Farming Handbook 2013, p. 44 54 general product offerings with low possibility for product differentiation, i.e. it is easy for customers to buy the same product offering from another salmon farmer if they wish to do so. Lastly, it was shown that the indexed relative price development against substitute products has remained stable until the ISA crisis and that prices of beef, chicken and pork have risen. In spite of that, Table 5.3 shows that for the most part, salmon is still more expensive around the world, relatively. Therefore, even though salmon has become cheaper over the years, it still remains more expensive for consumers to buy than other sources of protein. Table 5.3: Relative prices in current terms

Salmon/Beef Salmon/Chicken Salmon/Pork UK 0.9 1.4 1.5 US 1.3 2.3 1.9 Japan 1.3 2.0 2.0 *Relative price of salmon in terms of other protein sources in selected major markets (snap- shot of consumer prices in selected retail stores, salmon fillet compared to beef steak, pork fillet and chicken breast fillet, April 2013) Source: Marine Harvest, Salmon Farming Handbook 2013, p. 23

Customers have relatively higher bargaining power than salmon farmers due to the size of the major retail chains, the low switching costs and the low product differentiation. Finally, taking recent years’ crisis and low economic growth environments into consideration, consumers are faced with the choice of choosing salmon that is up to two times more expensive than other protein sources.

5.2.4. Barriers to entry The threat of entry relates to the position salmon farmers have vis-à-vis new entrants. The key is to find the likelihood of potential new entrants joining the industry. Therefore, the determinants of barriers to entry are capital requirements, economies of scale, government policy, and natural barriers120. New entrants would have to gain a license through the green license system as mentioned in 5.1.1.1 Licenses, where 45 new licenses are expected to be released in H2 2013. Of these, 20 licenses are reserved to smaller players at a discounted price of around NOK 10 m121, on top of which needs to be added expenditure for facilities and other equipment. If a newcomer wants to obtain a license through trading, these will cost around NOK 20-70 m122. Needless to say, the salmon farming industry is a capital intensive industry. Traditionally, smaller players have been able to sell the discounted licenses at large gains to bigger players; equally, nothing prevents new entrants from

120 H. Mintzberg et al., Strategy Safari, FT Prentice Hall, 2nd edition, 2009, p. 105 121 http://www.undercurrentnews.com/2012/11/09/norway-suggests-handing-out-45-green-salmon-licenses/ 122 Marine Harvest, Salmon Farming Handbook 2013, p. 29 55 doing likewise. Another challenge facing new entrants would be the fact that new licensing rounds are already not only rare, but with the introduction of the green license system government requirements have increased to focus on sustainability in different aspects (as mentioned in 5.1.1.1 Licenses and 5.1.6. Environmental factors), effectively making it more expensive to operate salmon farms. To be a profitable and serious competitor within the salmon farming space, in addition to having knowledge and experience, new entrants would need to have a series of licenses and facilities to match, in order to obtain the same sort of economies of scale existing farmers have gained through years of operations. Lastly, since ideal conditions for salmon farming is only available in certain countries (Norway, Chile, Scotland, Canada and Faroe Islands), geography has become a natural barrier to entry if you are situated in a location which does not have ideal temperatures for salmon farming.

There are high barriers to entry due to the high capital requirements, government requirements and geographic availability of ideal farming locations.

5.2.5. Rivalry The four previous factors partly make up the intensity of rivalry within the industry. The key is to find out how the future industry growth rate and market shares will develop. Therefore, the determinants of rivalry are made up of industry growth, concentration, product differences and exit barriers123. Since 2000, the supply of farmed salmon has grown by an average annual rate of 7% and from 2013 to 2020, Kontali Analyse estimates supply growth to equal demand growth with an annual growth rate of 3%124. In Norway alone, the aquaculture industry as a whole has seen an annual growth from 2008 to 2012 of a staggering 16,2%125. These high rates would typically entice new entrant to join in, however, the general trend in Norway has been towards consolidation as the stakes have increased. In Norway in 1997 there were some 70 players and in 2012 this had decreased to 24, where the top 10 have a market share of almost 70%126. This is despite the fact that the Norwegian government has actively tried to prioritize a decentralized structure by for example only allowing certain licenses to small players in rural areas.

123 H. Mintzberg et al., Strategy Safari, FT Prentice Hall, 2nd edition, 2009, p. 105 124 Marine Harvest, Salmon Farming Handbook 2013, p. 12 125 Norway – Aqualculture, Marketline, June 2013, p. 8 126 Marine Harvest, Salmon Farming Handbook 2013, pp. 24 56 Figure 5.6: Estimated MAB-utilization in Norway 2009-2013e

Source: Marine Harvest Salmon Farming Handbook 2013 p. 31

To further argue for consolidation in the industry Figure 5.6 shows that the total biomass of salmon in Norway is expected to reach the limit of total MAB capacity in 2013. This could lead one to believe in further intensity of rivalry, not only in terms of acquisitions, but also by focusing more on innovation and cost-efficiency, particularly when having already established that farmed salmon as a product leaves little room for differentiation. Due to the focus on costs and economies of scale, equipment has become increasingly more complex to develop and storage of the finished products require refrigerated systems; all making it increasingly more difficult to exit the industry.

Despite having had high growth rates, reaching close to the industry MAB has caused players to consolidate and focus on gaining cost efficiencies. The intensity of rivalry has further increased as equipment has become more technologically advanced, while the exit barriers have also increased.

5.3. Value Chain Analysis To understand the internal workings of SALM, a value chain analysis will be performed to describe the activities within the company. Since most of SALM’s main activities have been presented in section 3, the value chain analysis will briefly focus on the performance relative to LSG, which by now has been established as the closest peer to SALM.

57 Table 5.4: Adapted value chain analysis127, using 2012 data

Operating COGS / SG&A / R&D Depreciation expenses / Net profit / revenue revenue /revenue /revenue revenue revenue SALM 65% 11% 0,08% 4% 87% 10% LSG 71% 11% n/a 3% 91% 5% Difference 6% 0% n/a 1% 5% 5% Source: Annual reports 2012, own research based on analytical financial statements

Table 5.4 shows that SALM spends less on COGS than LSE which is important taking recent years’ focus on the rising feed costs into consideration. SG&A are equal at 11%. Interpreting depreciation as an indicator of how much the companies invest, SALM has spent more on depreciation which could prove important to future earnings. The overall operating expenses are 5% lower than for LSG i.e. SALM is a very efficient producer, cementing what section 4.7 showed. Finally, the greater efficiency is shown in the fact that SALM’s net profit constitutes 10% of revenue, while that of LSG is only half that. Regarding R&D, SALM spends 0,08% of revenue or NOK 3.324.000 on this in 2012. This might not sound like a lot, but from 2008-2012 SALM has expensed NOK 49 m. Cf. Table 5.1, measured by the five year average R&D costs only, would qualify SALM to obtain 20-25% of the biomass in Norway, according to the scheme mentioned in section 5.1.1.1. Looking into the development of the above figures from 2007 to 2012, Table 5.4 shows that the general cost level in SALM has been rising for the past six years, except for SG&A, which has fallen a bit. R&D expenses falls dramatically, leaving the impression that management does not have any new areas of research in the future. For the past three years, overall operating expenses have risen a lot, mainly driven by COGS and other operating expenses, which is turn have been driven by higher input costs, maintenance costs and other operating costs i.e. not operational inefficiencies. Table 5.5: Common-size analysis of the value chain

2007 2008 2009 2010 2011 2012 COGS / revenue 50% 54% 49% 55% 62% 65% SG&A / revenue 13% 14% 11% 9% 10% 11% R&D /revenue 1,05% 0,90% 0,38% 0,42% 0,18% 0,08% Depreciation /revenue 4% 4% 3% 3% 4% 4% Operating expenses / revenue 70% 75% 71% 68% 80% 87% Net profit / revenue 21% 10% 20% 28% 4% 10% Source: Annual reports 2007-2012, own research based on analytical financial statements

127 As shown by Petersen. & Plenborg: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, p. 242 58 As mentioned in section 4.1, SALM does not give much additional flavor on the reported numbers, leaving analysts estimating changes to the figures. Because of SALM’s historical efficiency, management might find that being able to keep costs low a competitive advantage, and therefore not comment on these in the reports.

5.4. Conclusion of the Strategic Analysis The strategic analysis has showed that the salmon farming industry is a highly competitive industry compared to other industries producing protein and still young compared to e.g. chicken farming, and therefore has upside potential in terms of further technological innovation. Existing regulations make it increasingly difficult for new entrants to enter, and recent years’ consolidation will likely continue as rules for total MAB change, while both supply and demand are estimated to increase by approximately 5% in the coming years. If ratified, the new rules will, all else equal, make it more costly to be a player as the Norwegian government’s focus is creating a sustainable salmon farming industry with regulations in place to support this. Needless to say, the industry is already quite capital intensive, regulated and with high rivalry. Looking forward and taking recent years’ consolidation into consideration, competitors with outdated technology and liquidity problems can easily be taken over or lose their customers. SALM is well positioned for this and has historically acquired a lot of smaller players. The wider industry as such is expected to grow moderately going forward, if the salmon price also develops moderately this will lead to relatively lower revenues in the short term.

6. SWOT Analysis As seen in section 4.7 EBIT/kg, SALM has done well in terms of being cost-efficient, and has positioned itself for the future with the establishment of the InnovaMar facility. The start-up costs associated with this and minor disease outbreaks have on the other hand taken its toll on the otherwise clear margin lead. Due to SALM’s sole Norwegian exposure it has avoided the Chilean ISA crisis and has kept focus within Europe. So far there are no indications of SALM expanding production to other countries or to other fish types. In the following, the operating data and management information from section 3, the financial analysis and the strategic analysis will be synthesized.

6.1. Strengths SALM is well positioned for future growth; it has already taken the start-up costs from the InnovaMar facility, which provides a countercyclical security to farming operations. Through focus

59 on efficient operations SALM has historically been the most efficient producer and processor of salmon with a steady margin lead. SALM has a strong and young management team and a professional board in place, both with relevant experience. With Kverva AS as the majority shareholder SALM has an owner who focuses on profitable long-term development.

6.2. Weaknesses Short term profitability has been reduced; management should focus on getting back to historical highs and recreate the historical lead. LSG has been able to gain in on SALM in recent years. Furthermore, SALM is not yet self-sufficient in smolt, and therefore is dependent on suppliers for the residual it needs. Investors should expect no dividends in the near term.

6.3. Opportunities As aquaculture is one of the fastest-growing areas of food production, SALM can take advantage of the increasing world demand for salmon. The Norwegian government’s relaxing of the regulations for total MAB provides a window of opportunity for gaining more market share in Norway (SALM is currently in third measured by harvested volume). A different approach would be to diversify geographically and mitigate risks of disease and depressed salmon price in one market versus another. Lastly, better vaccines against viruses will improve biosecurity and decrease the chances of losing large amounts of fish.

6.4. Threats SALM is highly exposed to Norway, which, in the event of a similar crisis as the one in Chile, would form a great threat for the company’s farming business. The lack of geographical dispersion will likely make SALM more vulnerable to a low Norwegian salmon price. Despite high historical supply growth, future supply growth seems to be reduced in the coming years owing to total biomass constraints. Lastly, additional focus on sustainability will translate into higher capital requirements for salmon farmers in an industry already quite capital intensive.

7. Forecast This section will firstly analyze management’s historical ability to guide investors for production, secondly, the company’s harvest volume and the salmon price will be forecasted, and finally the forecasted income statement and balance sheets will be accounted for. Due to the nature of the salmon business cycle, the forecasting period will be limited to six years. Since forecasting is an art rather than a science, the forecast will be based on assumptions grounded in the financial and

60 strategic analyses. i.e. the forecast will be subject to my assumptions. Therefore, the valuation will be followed up by several sensitivity analyses in the next section.

7.1. Harvest and Salmon Price Forecast This section will try to estimate the expected harvest and the market price for salmon throughout the forecast period. Since 2000, the industry has grown at 7% per year, and according to Kontali annual supply growth in the industry is expected to drop to 3% from 2013-2020128. As for the salmon price, market participants expect the spot price to stay above NOK 30 in both 2013 and 2014129.

7.1.1. Management’s Historical Guidance Before forecasting the company’s harvest, this section will survey management’s historical guidance versus the actual results reported in order to see the degree to which management’s own guidance can be used for forecasting and to get a feel for the intricacies of forecasting harvest. Management did not start to guide for harvest before 2010. As can be seen in Table 7.1, SALM has been able to over deliver for all segments but Central Norway. This is partly due to the identification of PD in 2011, pushing back harvesting of some volumes in 2012 to 2013 to ensure a steadier inflow to InnovaMar. Table 7.1: Reported and guided harvest, tonnes

Reported Guidance 2011 2012 2011 2012 2013 SalMar Central Norway 63.400 65.300 65.000 72.000 71.000 SalMar Northern Norway 18.700 22.400 18.000 19.000 28.000 Rauma segment 10.900 14.900 9.000 13.000 17.000 Norskott Havbruk 21.900 27.100 n/a 25.000 25.000 Source: Annual reports 2009-2012, own research

For 2013, management expects a volume weighted harvest growth of 9,7%, primarily driven by Northern Norway and the Rauma Segment130. The growth in Northern Norway is mainly fueled by the acquisition of 10 licenses in 2012, but which are still not operating at full capacity. Growth in the Rauma Segment is due to improved operations after a period with ISA and PD infections in the broodstock. Based on the above considerations, disease and the salmon price are important factors to keep in mind. In percentage terms, management has historically missed guidance by 5% when guiding for harvest, however, when excluding Norskott Havbruk (NH) management has been spot on. For my harvest

128 Marine Harvest, Salmon Farming Handbook 2013, p. 12 129 Salmar Annual Report 2012, p. 8. 130 See appendix 8 for an overview. 61 forecast, NH will be excluded from the total harvest because it is part of Income from investments in associates. Therefore, for 2013e, management’s forecast will be used, as published, excluding NH.

7.1.2. Harvest Forecast Based on management’s estimate, the harvest forecast for 2013e is estimated to be 116,000 tonnes. That corresponds to a y-o-y growth of 13,1% (ex. NH), similar to the average yearly growth the past three years. For the rest of the forecast period an average annual growth rate of 7,4% will be assumed as a result of increased consolidation and supply constraints in Norway, as highlighted in the strategic analysis.

Historically, the company’s production per license has averaged 1.285 tonnes per license, a similar level will also be assumed going forward, meaning that with the already estimated growth in the harvest, licenses will have to increase as well. Historically, licenses have grown 12,5% annually, to be able to achieve the stated growth in harvest, licenses will have to grow by an average rate of 4% annually. Quite moderate, but in line with the fact that the peak of consolidation has occurred and focusing more on costs. Figure 7.2 presents the estimated harvest and license growth.

Table 7.2: Harvest forecast, tonnes

2013e 2014e 2015e 2016e 2017e 2018e 2019e Harvest 116.000 124.493 131.624 137.548 144.425 153.090 156.152 Growth 13,1% 7,3% 5,7% 4,5% 5,0% 6,0% 6,9% Licenses 92 97 102 107 112 119 121 Growth 13,1% 7,3% 5,7% 4,5% 5,0% 6,0% 2,0% Production per license 1.261 1.283 1.290 1.285 1.290 1.286 1.291 Source: Own research

7.1.3. Salmon Price Forecast The salmon price is critical to the financial performance of the company, the financial analysis demonstrated this. Therefore it is imperative to estimate a realistic salmon price for the forecast period. In order to do so, a regression model will be set up. Historically, there has been a high historical correlation between global supply and price changes. To make the model even more precise demand will also be included, represented by European Union GDP, due to the fact that 68% of SALM’s revenues come from the European market131.

7.1.3.1. Supply As mentioned there has been a high historical correlation between the changes in the salmon price and the changes in the global supply of salmon. This correlation is negative, i.e. if the supply of salmon increases, the salmon price will decrease and vice versa. Global supply of biomass is typically

131 Cf. Figure 4.1 in the financial analysis. 62 determined by a mix of smolt releases, vaccine sales, sea water temperatures, current biomass status, biomass composition and mortality rate. This is beyond the scope of this thesis, therefore Kontali’s estimated global supply will be used instead.

Table 7.2: Global supply, 1000 tonnes

2013e 2014e 2015e 2016e 2017e 2018e 2019e Global Supply 2.024 2.157 2.259 2.327 2.397 2.468 2.518 Supply Growth 0,7% 6,6% 4,7% 3,0% 3,0% 3,0% 2,0% Source: Kontali/ABGSC, Marine Harvest Salmon Farming Industry Handbook 2013

As seen in Table 7.2, growth from 2012-2013e is expected to be weak, but should bounce back in 2014e and 2015e and then drop to 3% growth per year until 2019, in line with the expectations highlighted in section 5.

7.1.3.2. Demand To enhance the model, demand has been included. Both world and European Union GDP have been tested, where EU GDP growth had the best fit and is deemed the most appropriate parameter to use due to SALM’s exposure to Europe. The data is extracted from the IMF World Economic Outlook Database132, and similar to the supply, the yearly change will be used in the model. The data has been adjusted to constant prices to reflect the true growth excluding price inflation133. Table 7.3 shows an average estimated growth throughout the period of 1,5%, very muted at first, but with the GDP growth rate increasing sequentially.

Table 7.3: European Union GDP, USD billions

2013e 2014e 2015e 2016e 2017e 2018e 2019e European Demand 12.336 12.494 12.702 12.937 13.183 13.442 13.711 Demand Growth 0,0% 1,3% 1,7% 1,8% 1,9% 2,0% 2,0% Source: IMF WEOD, April 2013

7.1.3.3. Regression forecast As indicated the regression model should be more precise using three variables, in this case the salmon price is the dependent variable and two independent variables are supply growth and demand growth. The time series used is based on annual data from 1995-2012134, this is deemed a sufficient amount of observations to illustrate the correlations going forward.

132 http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weorept.aspx?sy=1995&ey=2018&scsm=1&ssd =1&sort=country&ds=.&br=1&c=998&s=NGDP_RPCH%2CNGDPD&grp=1&a=1&pr.x=53&pr.y=13 133 Contrary to supply, demand held at constant prices is positively correlated with the salmon price (like theory would predict), however, when data held at current prices were used, the correlation was negative. 134 See the data used for the regression model in appendix 9. 63 The above supply and demand data and the salmon price must be recalculated into yearly growth, but because all the data are in different units of measurement (NOK/KG, tonnes, billions) they have to be made comparable. This is done by calculating the logarithmic growth of each of the time series. The regression has been done in two ways 1) using all the historical data available and 2) using six years moving data135. The following table will present some of the result statistics from the two initial tests.

Table 7.4: Result statistics from regressions with 2012 = t-1

Coefficients P-value Intercept Coefficients P-value Intercept 6 observations 17 observations Supply, ln growth -1.9495838 0.04585 0.119441 -1.62142386 0.00465 0.118922 Demand, ln growth -1.70592012 0.36989 0.7340701 0.6169 Adjusted R2 0.67 0.37 Source: Own research

Stating the null hypothesis and the alternative hypothesis at the 95% confidence level, only the p- values for supply growth are statistically significant, i.e. indicate a linear relationship between the variables. As for the demand growth, the statistical relationship is rejected based on the p-values, i.e. there is deemed no linear relationship between the salmon price and GDP growth. Furthermore, the coefficients indicate the slope of the relationship between the independent variables and the dependent variable, and as expected there is a negative relationship between supply growth (SG) and the salmon price (SP) using both 6 and 17 observations, but only a positive relationship between the demand growth (DG) and the salmon price using 17 observations. Thirdly, the intercepts i.e. the first constant of the equation are 0,119441 using six observations and 0,118922 using 17. The generic multiple regression equation used will look like this:

= + + 136

଴ ଵ ଵ ଶ ଶ Where is the intercept, is the coefficientݕ ߚ forߚ ݔ supply,ߚ ݔ is the coefficient for demand, the log of the changeߚ଴ in supply andߚଵ the log of the change inߚ demand.ଶ Transferring this to theݔଵ current :model, the equation for the salmonݔଶ price growth factor (SPGF) for 2013e will look like this

( ) (DG)

Where SPGFܵ isܲ stillܩܨ = a logarithmic0,00611 + − number.1,19495 In83 order8 ∗ log toܵ getܩ + the−1 salmon,70592 price,012 ∗ thelog previous period’s salmon price is multiplied by e raised to the power of the salmon price growth factor, like this:

= ௌ௉ீி ௧ ௧ିଵ 135 Six years has been chosen because it is alsoܵܲ the lengthܵܲ of∗ a݁ business cycle. 136 Wooldridge, J. M., Introductory Econometrics, South-Western Cengage Learning, 4th ed. 2006, p.69 64 Lastly, to test the goodness of fit of the regression model R2 can normally be used. However, when dealing with multiple regressions the adjusted R2 should be used as a more appropriate measure of the explanatory variables, because it penalizes for adding more independent variables unless the absolute t-value of the added variable is greater than 1137. Here, using 6 observations the adjusted R2 is 0,67 compared to an R2 of 0,80, indicating an acceptable goodness of fit, while the adjusted R2 is 0,37 compared to R2 of 0,45, which is considered low.

The above result statistics show that there are pros and cons using both. Due to the high linear relationship between supply growth and salmon price and the relatively higher adjusted R2, the model using six-year moving data is preferred.

Presented in Table 7.5 is the forecasted salmon price together with analyst estimates. The forecasted salmon price is expected to be flat around NOK 30/KG for 2013e and 2014e, in line with current expectations138. From 2015e the salmon price rises steadily throughout. With only two to three years forecast it is clear that even seasoned analysts cannot uniformly agree on a price.

Table 7.5: Salmon price forecast

2013e 2014e 2015e 2016e 2017e 2018e 2019e Salmon price NOK/KG 30.01 30.45 31.80 33.72 36.61 39.87 38.76 ABG Sundal Collier 34.00 34.00 32.00 N/A N/A N/A N/A Arctic Securities 35.90 35.00 N/A N/A N/A N/A N/A DNB Markets 36.50 35.50 36.00 N/A N/A N/A N/A Swed Bank First Securities 37.50 34.00 N/A N/A N/A N/A N/A Source: Own research, ABGSC, Arctic Securities, DNB Markets, Swed Bank First Securities

7.1.3.4. Testing the model There are several critique points one could raise on the model:

1) the appropriateness of EU GDP growth as a proxy for demand seems low given the low coefficient of 0,73407 (-1,70592 using six observations), yet including the demand dimension into the model did increase model accuracy significantly; 2) the lack of observations due to limited access to data (from a statistical point of view), however, using 17 observations only clarified that there is a historical linear relationship between demand growth and salmon price, nonetheless using only 6 observations did improve the share of the variation in the salmon price that is explained by both supply and demand, and;

137 Wooldridge, J. M., Introductory Econometrics, South-Western Cengage Learning, 4th ed. 2006, pp. 200 138 SalMar Annual Report 2012, p. 8 65 3) the fact that the model only seems to forecast upwards trending salmon prices, when supply exceeds demand does not follow theory. To answer the latter and to confirm the accuracy of the model, the model has been back tested to compare how it would fare starting in 2001. The result is shown in Figure 7.1, and indicates that given six years of historical price, supply and demand changes, the model yields a high level of historical accuracy.

Figure 7.1: Actual, forecasted and back tested salmon price

40

30

20

10

0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Actual salmon price Forecasted price Back tested price

Source: Own research

Conclusions from testing the model are that given six-year observations, the model yields results very close to the actual price. Further, the basic methodology of the model is used by equity analysts139. The adjusted model will be used because it work very well and the objective is to be approximately right, not precisely wrong. Consequently, given the high historical accuracy and taking the forecasted supply and demand growth assumptions as valid inputs, the model output is considered suitable for analytical purposes.

7.2. Financial Statements With the biomass and the salmon price forecasted and making up the revenue, the financial statements can be forecasted to get to the free cash flow. The forecast is based on a value driver set-up. A value driver set-up works well in industries with stable prices because the development in revenue correlates with the underlying activity in operations. Since the salmon price is volatile, some items have been found to correlate better with the development in harvested volume, number of licenses, etc.

139 Equity Research Analyst Georg Liasjø of ABG Sundal Collier 66 7.2.1. Forecast Period The length of the forecast period is imperative to the valuation as 75% of the value is typically found in the terminal value140. Equity analysts141 typically only publish a forecast of three years in their research i.e. the next twelve quarters. However, in their actual valuation models this can be up to 8- 10 years. Since the salmon cycle is six years, this is considered an appropriate forecasting period to capture the value of the company, including an additional year for the terminal period.

7.2.2. Income Statement Items Section 7.1 laid the ground for the revenue forecast, with that done the rest of the income statement items will be forecasted one by one. All the forecasted line items will be summarized in a table at the end of this subsection.

Cost of goods sold: Table 4.4. showed that out of all the operating expenses, this is by far the biggest component in terms of revenue. However, when forecasting this item, measuring COGS as a percent of harvest volume leads to a better relationship. In 2012, it made up 2,3%, but historically this was 1,88%. As mentioned in the subsection on raw materials, prices on the currently used raw materials are expected to increase in the long-term, while simultaneously feed producers will improve the feed composition in order for the farmers to become less exposed to fluctuations in the prices of raw materials. Managements own outlook for raw material prices is that upon the rise in 2012, they are not likely to decrease in 2013e. Because management expects the salmon price to stay above NOK 30 in the coming years, the company will focus on increasing biological control and cost effectiveness142. In the mix of all this, it is assumed that COGS will decrease slightly for 2013e until 2015e, but that increases in raw material prices will increase the ratio from 2015e onwards. Since COGS also contains costs related to combating diseases, the item is not completely correlated to the development in raw materials, diluting some of the effect of hikes in raw material prices143.

Exceptional biological items: As a corollary to management’s statement about increased biological control, this item is expected to be zero now that the company will have higher biological control.

Change in inventory and biological assets: Through the years, this item has shown no clear trend; therefore the best estimate for this is the average of 0,25% of harvested volume. Historically, it has always been positive.

140 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 270 141 ABG Sundal Collier, Arctic Securities, DNB Markets and Pareto Securities 142 Salmar Annual Report 2012, p. 8. 143 According to Note 15 in AR’12, the Exceptional biological events are the culling of stock as ordered by the authorities and the escape of substantial numbers of fish. 67 Salary and personnel expenses: Measured in percent of harvested volume because of the cost relation to the production. This item has been stable and has on average made up 0,38% per year. It is assumed that the company will be able to reduce these costs due to increased focus on cost- effectiveness.

Other operating expenses, adjusted: Also measured as a percent of harvest, Other operating expenses have historically averaged 0,53%. This item includes expenses related to maintenance, operating equipment, direct input factors, delivery costs and other operating costs. Because the share of this item has risen each year since 2007, the current level will be assumed as of 2013e, gradually decreasing throughout the period as the focus on costs will ripple through. On top of that, the already calculated imputed lease expense from section 4.2.2, will be subtracted for the remainder of the period144.

EBITDA: The above assumptions render an average EBITDA margin of 20,4%, 4,8% below the historical mean, but in-line with the more muted outlook.

Depreciation, adjusted: Depreciation is assumed to be 11,6% of property, plant and equipment, corresponding to the current level. In addition to this, the implied depreciation from the operating leases will be added to the total depreciation expense as well as the yearly depreciation on the NOK 250 m. investment145.

Fair value adjustment of the biomass: This item is already highly subjective and difficult to forecast, the historical figures show no clear trend, while the historical average has been 0% of harvested volumes. Consequently, this item will be assumed to be zero.

Income from investments in associates: SALM’s investments in associated companies paid close to NOK 94 m. in 2012. Because management has guided for roughly the same harvest in Norskott Havbruk as in 2012 and the salmon price is estimated to be 12% higher in 2013e, this item is increased by 12% to NOK 105 m. on account of the rise in price. Management does not guide for other associates, but because NH by far makes up the largest component of all the associates, this is a reasonable assumption. Since management has not indicated any changes to associates the NOK 105 m. are assumed to stay constant going forward.

Tax rate: The historical effective tax rate will be used as it best reflects the company’s actual tax rate going forward, i.e. a tax rate of 22,3% will be assumed.

144 See section 7.2.3 for the assumptions on the capitalized operating lease. 145 See section 7.2.3 for the forecast of the items comprising PP&E items. 68 NOPAT: With the above assumptions, the NOPAT-margin will average 14,2%, 4,6% lower than the historical average.

Net financial items: As for interest income, financial income and financial expenses, all will be assumed to be at the 2012 level. Interest expenses will be calculated as the implied interest rate on the company’s interest-bearing debt146 plus the implied interest expense from the capitalized operating lease. The unadjusted interest expense is based on the current interest expense level for 2012, while it is assumed that the company will use the current interest rate throughout. The interest expense from the operating lease is added to the unadjusted interest expense, giving the company’s adjusted interest expense. The reason for the increase in the interest expense in 2013e is due a larger than usual interest payment on the financial leasing equipment147. The resulting forecasted income statement is show below.

Table 7.6: Forecasted analytical income statement

Analytical Income Statement 2013e 2014e 2015e 2016e 2017e 2018e 2019e Total operating revenues 3.481 3.791 4.185 4.638 5.288 6.104 6.052 Cost of goods sold -2.492 -2.662 -2.802 -2.955 -3.204 -3.504 -3.683 Exceptional biological items 0 0 0 0 0 0 0 Chg. in inv. and biological assets 289 310 327 342 359 381 389 Salary and personnel expenses -423 -442 -454 -461 -498 -543 -570 Other operating expenses, adj. -794 -866 -925 -960 -1.001 -1.041 -1.047 Growth (5,8%) 9,1% 6,8% 3,8% 4,3% 4,0% 0,6% EBITDA 60 131 332 604 943 1.397 1.141 Depreciation, adjusted -219 -202 -198 -198 -198 -202 -190 Growth 18,1% (7,8%) (2,0%) (0,2%) 0,2% 1,9% (5,9%) Operational EBIT -159 -71 134 407 745 1.195 951 Fair value adjustment of the biomass 0 0 0 0 0 0 0 Income from inv. in associates 105 105 105 105 105 105 105 EBIT -54 34 239 512 851 1.300 1.056 Taxes on EBIT 12 -8 -53 -114 -190 -290 -235 Effective tax rate 22,3% 22,3% 22,3% 22,3% 22,3% 22,3% 22,3% NOPAT -42 26 186 398 661 1.010 821 Interest income 3 3 3 3 3 3 3 Financial income 50 50 50 50 50 50 50 Interest expenses, adjusted -200 -197 -195 -194 -187 -178 -160 Financial expenses -27 -27 -27 -27 -27 -27 -27 Net financial items -174 -171 -169 -168 -161 -152 -134 Growth 15,2% (1,8%) (1,3%) (0,5%) (3,9%) (6,0%) (11,3%) Taxes on net financial items 39 38 38 37 36 34 30

146 See section 7.3.3 for the forecast of the items comprising interest-bearing debt. 147 SalMar Annual Report 2012, Note 2 Financial Risk, p.69 69 Net financial items after tax -135 -133 -131 -131 -125 -118 -105 Growth 13,2% (1,8%) (1,3%) (0,5%) (3,9%) (6,0%) (11,3%) Profit for the year -177 -107 55 267 536 892 716 Source: Own research

7.2.3. Balance Sheet Items In order to give as exact a valuation as possible, most of the line items from the balance sheet will be forecasted, some more intricately than others, although the different items for interest-bearing debt will be collected into one. Each line item is discussed in order of appearance in the analytical balance sheet.

Licenses, patents, etc.: As measured over harvest, this item will stay unchanged from 2012 in 2013e due to no increases in licenses. From 2014e onwards, this item rises in relation with new licenses acquired.

Goodwill: Arising when an acquiring company pays a premium for a target company, exceeding the book value of the target. Because SALM has acquired 15 companies since the IPO in 2007, it could easily be advocated that the company continue to do so. It is, however, difficult to do so, as historical acquisitions have been lumpy and because any acquisition depends on the acquirer and the target to be able to consent to a mutual beneficial agreement. New licenses will be modeled going forward, but no new goodwill will be assumed.

Land, buildings and other real estate: SALM’s total CAPEX has on average grown by 28,7% annually. Historically, this line item has been 18,6% of CAPEX, and has on average grown 31%. Because SALM has now finished building the InnovaMar facility, this line item is expected to remain constant at 0,18% of harvest, i.e. increasing by an average of 3% per year.

Plant machinery and other operating equipment: Historically, this line item has been 75% of CAPEX, and has on average grown 28%. It is expected to grow by NOK 250 m. during 2013148, but otherwise remain at level of 0,07% of harvest. The NOK 250 m. investment will be depreciated using straight- line and an economic life of 10 years149.

Other operating equipment: Historically, this line item has been 6,4% of CAPEX, and has on average grown 31%. It contains vessels, vehicles, etc., and has historically averaged 0,05% of harvested volume, although the current level is at 0,08%. This will also be the assumption going forward.

148 SalMar Annual Report 2012, p. 51 149 SalMar Annual Report 2012, p. 74 70 Investments in associates: Similar to Income from investments in associates, this line item will be assumed constant at NOK 948.575.000 going forward, as no forward looking statements have been on this.

Other receivables: Constitutes trade and other receivables related to financial derivatives, long-term receivables falling due in more than one year and long-term receivables related to pension assets. The current level of 0,1% of revenue will be assumed for 2013e, decreasing until 2016e where it will remain at 0,07% of revenue, due to managements focus on optimizing working capital as stated in the financial analysis.

Leased equipment, capitalized: This represents the operating lease that was capitalized earlier, and the already calculated book value will be used taking the implied depreciation expense into consideration each year. No new leases will be assumed in this item, i.e. the item will be phased out, and all equipment going forward will be assumed bought by the company when current leases end.

Biological assets: As a percent of harvest, biological assets has averaged 1,55% with a few minor deviations. The current level is 1,71% of harvest, for 2013e the ratio will be 1,69% decreasing to 1,65% for the remaining period due to higher efficiency in operations. This is justified in the fact that the company still does not have full capacity utilization at its Central Norway sites, but should be able to regain that.

Inventory: Inventory constitutes raw materials (4%), goods in progress (87%) and finished good (9%). Historically, inventory has been 0,17% of harvest, while the current level is at 0,26%. Having already discussed raw material prices, due to the rather small share raw materials make up in total, it is assumed that inventory will stay at 0,26% for throughout, i.e. any price changes to raw materials will be offset by the higher focus on costs.

Receivables: Accounts receivable are measured in relation to revenue because of the relation to the salmon price. AR has had an average of 11,5%, however, as noted in section 4.6.1. management has been working actively with its working capital. Therefore, the current level of 15,7% will be the assumed for 2013e, decreasing to 15,4% by 2019e. The same is the assumption for Other receivables as it too was included in the DSO calculation.

Cash and cash equivalents: Cash has historically been around 2,7% of revenues, however, this has been 1,5% lower in recent years (1,3%), this level will also be assumed going forward.

71 Accounts payable: Measured in relation to revenue, AP makes up an increasingly larger share due to the company’s focus on working capital, therefore, with the current level at 18,1%, it is assumed that management will keep increasing it another percent.

Current tax liabilities: This line item shows no clear trend over the historical period, therefore it will be assumed to maintain the average level of 3,4% of revenues.

Public charges payable: Have been fairly stable on around 1,2% of revenues historically, consequently this level will be assumed for the forecasted number.

Deferred tax liabilities: Measured in terms of revenue, deferred tax liabilities have averaged 23% historically, although this has been 20,8% in the past four years, which is also the current level. With InnovaMar on track, no significant new investments are expected, so the past years’ level is assumed.

Pension liabilities: Liabilities related to the company’s defined-contribution scheme, in terms of revenue has shown no clear trend historically, and the best estimate going forward would be the current level of NOK 528.000.

Interest-bearing debt: For forecasting purposes, interest-bearing debt is Long-term bank borrowings, Finance lease liabilities, Short-term bank borrowings and Other current liabilities. This excludes deferred tax liabilities, pension liabilities and Lease obligation (capitalized operating leases). The reason is because of the latter three items’ distinct characteristics and the former four items’ similarity and overlapping characteristics. Interest-bearing debt has on average been 36% of invested capital. The current level at 43% is assumed to decrease slowly as the company is able to generate more equity financing and redeem some of its outstanding debt.

Lease obligation: The lease obligation from the capitalized operating lease is assumed to phase out in proportion with the associated depreciation expenses. Similar to the asset side, this company is not assumed to enter any new operating leases.

Investments in shares and other securities: The company’s investments in securities have not been kept at a steady level historically, and rose from NOK 762.000 in 2011 to NOK 15.760.000 in 2012. Management does not mention this increase in neither the quarterly nor annual accounts, therefore the current level is assumed as the future level.

Pension fund assets: Assets related to the company’s defined-contribution scheme, in terms of revenue, this item has shown no clear trend historically, and the best estimate going forward would be the current level of NOK 2.492.000.

72 Lastly, based on the discussion from the strategic analysis, the model also includes the payment of dividends of 30% of profits as of 2014e. The resulting forecasted balance sheets are show below150.

Figure 7.7: Forecasted analytical balance sheet

Invested capital 2013e 2014e 2015e 2016e 2017e 2018e 2019e NON-CURRENT ASSETS Licenses, patents, etc. 1.702 1.810 1.898 1.967 2.048 2.153 2.175 Goodwill 433 433 433 433 433 433 433 Land, buildings and other real estate 234 241 245 246 247 251 243 Plant machinery and other operating equipment 1.198 1.102 1.111 1.111 1.115 1.130 1.102 Other operating equipment 87 94 99 103 109 115 63 Investments in associates 949 949 949 949 949 949 949 Other receivables 3 4 4 4 5 6 6 Leased equipment, capitalized 167 150 138 125 111 96 80 Total non-current assets 4.773 4.783 4.877 4.938 5.018 5.132 5.050 Growth 5,0% 0,2% 2,0% 1,3% 1,6% 2,3% (1,6%) CURRENT ASSETS 0 0 0 0 0 0 0 Biological assets 2.026 2.099 2.186 2.250 2.326 2.428 2.434 Inventory 315 338 357 374 392 416 462 Accounts receivable 548 596 658 730 832 960 954 Parent company receivables 0 0 0 0 0 0 0 Other receivables 203 221 244 271 309 356 355 Cash and cash equivalents 46 50 55 61 70 80 80 Total current assets 3.138 3.304 3.501 3.685 3.929 4.240 4.284 Growth (3,5%) 5,3% 6,0% 5,2% 6,6% 7,9% 1,0% NON-INTEREST BEARING DEBT 0 0 0 0 0 0 0 Accounts payable 631 687 758 840 958 1.106 1.064 Current tax liabilities 119 129 143 158 180 208 176 Public charges payable 36 39 43 48 54 63 63 Total non-interest bearing debt 785 855 944 1.046 1.192 1.376 1.302 Invested capital / Net operating assets 7.126 7.232 7.435 7.577 7.754 7.996 8.033 Growth 2,0% 1,5% 2,8% 1,9% 2,3% 3,1% 0,5%

Total equity 2.790 2.716 2.754 2.941 3.316 3.941 4.442 NET-INTEREST BEARING DEBT Deferred tax liabilities 722 787 868 962 1.097 1.266 1.256 Pension liabilities 1 1 1 1 1 1 1 Long term bank borrowings Finance lease liabilities Short-term bank borrowings Other current liabilities Aggregated interest bearing debt 3.464 3.597 3.692 3.567 3.247 2.711 2.273

150 The assumptions to the financial statements are shown in appendix 10 73 Lease obligation 167 150 138 125 111 96 80 Interestbearingdebt 4.354 4.535 4.699 4.655 4.456 4.073 3.609 Investments in shares and other securities 16 16 16 16 16 16 16 Pension fund assets 2 2 2 2 2 2 2 Interest bearing assets 18 18 18 18 18 18 18 Net-interestbearingdebt 4.336 4.516 4.681 4.636 4.438 4.055 3.591 Invested capital / Financing 7.126 7.232 7.435 7.577 7.754 7.996 8.033 Growth 2,0% 1,5% 2,8% 1,9% 2,3% 3,1% 0,5%

Source: Own research

8. Valuation With the forecast assumptions laid out, the valuation itself will be performed in this section. To come from the forecasted financial statements to the intrinsic value of SALM, a risk adjusted discount rate needs to be calculated in the form of the weighted average cost of capital (WACC). Following that, a discounted cash flow (DCF) valuation and an Economic Value Added (EVA) valuation will be made. Since these two valuation methods are theoretical equivalents, they will show the same result, which is why a multiple valuation using the peer group also will be performed as “sanity check”. The valuation models were critiqued in section 1.3.

8.1. WACC To discount the cash flows in the two valuation models, two discount rates need to be found, the Cost of Capital and the WACC. The Cost of Capital is the required rate of return on equity while the WACC reflects the return requirement for the company as a whole. The WACC equation is expressed by: WACC = r ( ) + r , where NIBD is the market value of the company’s ( ) ( ) ୒୍୆ୈ ୉ debt, E is the market୒୍୆ୈା୉ valueୢ 1 − oft the company’s୒୍୆ୈା୉ ୗ୅ equity,୐୑ r is the interest rate on NIBD, t is the tax rate and r is shareholder’s required rate of return. Eachୢ of the components to the WACC will be discussedୗ୅୐୑ in the subsequent subsections.

8.1.1. Capital Structure The calculation of the capital structure will be done using market values for both the debt and the equity, reflecting the true opportunity cost of investors and lenders151. The market value of the equity will be based on historical prices. However, since SALM does not have any listed corporate bonds, the average NIBD figures will be used instead. The historical capital structure looks as follows:

151 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 305 74 Table 8.1: Historical capital structure using market values

2007 2008 2009 2010 2011 2012 Average E/(NIBD+E) 74% 60% 73% 68% 45% 56% 63% NIBD/(NIBD+E) 26% 40% 27% 32% 55% 44% 37% Source: Bloomberg, own research

Table 8.1 shows that SALM’s historical capital structure has not been stable, and since SALM does not have an explicit policy on target capital structure, the most recent will be used as this reflects the company’s current capital situation, which must be most be assumed to be constant based on the conclusion of the financial analysis which indicate that the company is at a stable point in time with large debt facility secured.

8.1.2. Cost of Equity The cost of equity will be calculated using the Capital Asset Pricing Model (CAPM), which is expressed by: r = r + ß (r ), where r expresses the risk free rate, ß the systematic risk onୗ୅୐ SALM୑ ୤ and ୗ(r୅୐୑ ୫ )−ther୤ market risk୤ premium. RSALM expresses investors’ୗ୅୐୑ required rate of return. Each component୫ − r୤ will be discussed in the following subsections.

8.1.2.1. Market Risk Premium The market risk premium is made up of the return on the market (r ) less the risk free rate (r ), and expresses the expected rate of return by investors investing in a market୫ portfolio. ୤

Because SALM is based in Norway and listed on the Oslo Stock Exchange, Norwegian government bonds will be assumed to be risk-free and used to estimate the risk free rate. A 10-year government bond has been chosen to avoid illiquidity affecting the yield152. Based on this, the 10-year Norwegian government bond as of the date of analysis was 2.00%153.

Professors Pablo Fernandez, Javier Aguirreamalloa and Luis Corres have estimated market risk premiums for 82 countries in 2012 using 7.192 answers154. Based on 58 answers for Norway, the market risk premium for 2012 is estimated to be 5,8 %. With a risk free rate of 2.0 % and a market risk premium of 5,8%, the implicit return on the Norwegian market portfolio must be 7.8 %. Comparing this with Professor Aswath Damodaran’s results is spot on, as his equity risk premium for Norway is also 5,8%155, which is why this is a reasonable estimate.

152 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 308 153 http://www.norges-bank.no/en/price-stability/interest-rates/government-bonds-yield-daily-observations/ at April 30 2013. 154 Fernandez et al., Market Risk Premium used in 82 countries in 2012: a survey with 7,192 answers, 2013, IESE Business School 155 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html Last updated January ‘13 75 8.1.2.2. Beta The estimated beta value has been calculated using regression analyses between SALM vs. OSE OBX and SALM vs. Norway All Share. The total return has been used to capture dividend payments. Figure 8.1 shows the results of the regression analyses using two years, three years, five years and since the IPO (May 8 2007) historical data with monthly observations. As can be seen SALM vs. OBX All Share has the greatest explanatory power, even though the explanatory power generally is low. Further, the explanatory power decreases over time, while it seems like two years is too brief a period. Given the consolidation the industry has been through, choosing a period of three years seems appropriate, as the risk profile of the company has changed a lot in the past five years. The beta of 1,3 indicates that the returns of the SALM share have greater systematic risk than the market portfolio156.

Table 8.2: Estimated beta and R2

Since IPO 5 years 3 years 2 years SALM vs. OSE OBX 0.61 0.59 1.18 1.29 Explanatory power (R2) 25.2% 22.5% 40.7% 33.4% SALM vs. OBX All Share 0.65 0.65 1.31 1.37 Explanatory power (R2) 25.7% 23.1% 41.2% 32.4% Number of observations 71 60 36 23 Source: Bloomberg

Since the R2 was only 41 %, improving the beta estimate by reducing estimation errors can be done using Marshall Blume’s research article, Betas and Their Regression Tendencies. Blume observed that betas tend to revert to 1, which is why he came up with the following formula as a means of “smoothing” the beta: ß = ß , where the two constants were derived

157 by Blume himself . By usingୟୢ୨୳ୱ୲ thisୣୢ formula,୳୬ୟୢ୨୳ୱ the୲ୣୢ beta∗ 0,6 for7 + SALM0,33 becomes 1,1.

Having derived the components for the CAPM, the required rate of return on equity for SALM can be calculated to be 8,4 %.

8.1.3. Cost of Debt The cost of debt is determined by r = r + r , where r is the risk premium on debt158. This could be observed if the company had anyୢ listed୤ bonds,ୱ butୱ since it does not, the cost of debt will be estimated from the interest payments on the company’s long-term debt, similar to Table 7.1.

156 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 309 157 Marshall E. Blume, Betas and Their Tendencies, The Journal of Finance, 1975 158 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 325 76 Table 8.3: Implied interest rate on debt, 1000 NOK

2007 2008 2009 2010 2011 2012 Avg. Interest bearing debt 1,632,255 1,808,875 1,718,266 3,013,006 3,775,920 4,036,519 Interest expenses, adj. 74,030 99,104 59,004 76,523 125,717 177,150 Implied cost of debt 4.5% 5.5% 3.4% 2.5% 3.3% 4.4% 4.0% Source: Annual reports 2007-2012, own research based on analytical financial statements

8.1.4. Tax rate As mentioned in 4.3.1, the corporate marginal tax rate is 28 % for Norway and has been so for many years. Historically, the effective tax rate has been very close to the marginal tax rate, with the exception of the past two years. Therefore, assuming a tax rate of 28 % is reasonable.

Having derived all the components for the WACC, this can now be calculated to be 5,9 %159. The terminal growth rate for the model will be two percent, in line with Kontali’s estimates.

8.2. DCF Valuation The above factors will be used as inputs into both of the of the present value models. For the DCF model, the estimated free cash flows will be discounted to the present using the WACC, and will be calculated as follows:

FCFF FCFF FCFF FCFF 1 EV = + + ( ) (1 + ଶ଴ଵଷ ) (1 + ଶ଴ଵସ ) (1 + ଶ଴ଵ଼ ) ( ୘ୣ୰୫ ୧୬ୟ)୪ (1 + ) ଶ଴ଵଶ ଶ + ⋯ + ଺ ∗ ଺ ܹ ܣܥܥ ܹ ܣܥܥ ܹ ܣܥܥ ܹ ܣܥܥ − ݃ ܹ ܣܥܥ Using the above methodology results in an enterprise value of roughly NOK 12,3 bn. Subtracting the NIBD gives an estimated value of equity of NOK 8.3 bn., which gives a share price of NOK 73,49 per share when divided by the number of shares outstanding, as table 8.4 shows. The intrinsic value of NOK 73,49 per share is NOK 15,49 higher than the current market value of the share and gives investors an upside of 27%. It should be noted that 85% of the value in SALM is in the terminal period, which is mostly due to the cost-efficiencies being realizing toward the end of forecasting period.

Table 8.4: DCF valuation

NOK 1000 2013e 2014e 2015e 2016e 2017e 2018e 2019e FCFF 301 -93 177 378 646 1.003 604 WACC 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% Discount factor 0,94 0,89 0,84 0,79 0,75 0,70 0,66 Present value, FCFF 284 -82 148 299 482 706

PV of FCFF in forecast horizon 1.836 PV of FCFF in terminal period 10.508

159 See appendix 11 for the CAPM and WACC calculations. 77 Estimated enterprise value 12.344 Net interest bearing debt -4.018 Estimated market value of equity 8.326

Number of shares 113.300 Price per share 73,49 Source: Own research

8.3. EVA Valuation Contrary to the DCF model, the EVA model is able to give an overview of the value creation. It does so by discounting to present all the future EVAs, which are defined as:

EVA = ( ) .

݌݅ݐ݈ܽ୲ଵܽܥݐ݁݀ݏݒ݁݊ܫ ∗ ܥܥܣ ܹ − ܥܫܱܴ ୲ I.e. future EVAs are positively affected by a lower WACC and/or a higher ROIC. The enterprise value resulting from the EVA will be calculated as follows:

EVA EVA EVA EVA 1 EV = + + ( ) (1 + ଶ଴ଵଷ ) (1 + ଶ଴ଵସ ) (1 + ଶ଴ଵ଼ ) ( ୘ୣ୰୫ ୧୬ୟ୪) (1 + ) ଶ଴ଵଶ ܫܥଶ଴ଵଶ ∗ ଶ + ⋯ + ଺ ∗ ଺ ܹ ܣܥܥ ܹ ܣܥܥ ܹ ܣܥܥ ܹ ܣܥܥ − ݃ ܹ ܣܥܥ

Table 8.5: EVA valuation

NOK 1000 2013e 2014e 2015e 2016e 2017e 2018e 2019e NOPAT -42 26 186 398 661 1.010 821 Invested capital, beg 6.986 7.126 7.232 7.435 7.577 7.754 7.996 ROIC -0,6% 0,4% 2,6% 5,4% 8,7% 13,0% 10,3% WACC 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% Spread -6,6% -5,7% -3,5% -0,7% 2,7% 7,0% 4,2% EVA -464 -404 -251 -51 203 542 338 Discount factor 0,94 0,89 0,84 0,79 0,75 0,70 Present value of EVA -438 -359 -210 -41 152 381

Invested capital, 2012 6.986 PV of EVA in forecast horizon -516 PV of EVA in terminal period 5.874 Estimated enterprise value 12.344 Net interest bearing debt -4.018 Estimated market value of equity 8.326

Number of shares 113.300 Price per share 73,49 Source: Own research

78 The EVA model yields exactly the same result as the DCF model did, cementing the fact that they are theoretically equivalent. As can be seen from Table 8.5, SALM will generate negative EVAs for the four years, owning to a low ROIC. This is of course due to the relatively low salmon price and high costs, but as the company is able to lower costs in time and the salmon price also rises, the EVAs turn positive. As opposed to the DCF model, terminal value in the EVA model accounts for 48% but the invested capital for 57%, meaning that more than half of the value in the share is from the already invested capital.

8.4. Peer Valuation To provide a sanity check on the estimated share price so far, three peer valuations will be performed in the form of EV/EBITDA and EV/KG. The peer valuations are based on SALM’s three main peers: LSG, GSF and MHG. Three types of averaging the multiples have been used; mean, median and harmonic mean. For the final valuation the harmonic mean has been used because research has showed that it generates more accurate results than the mean or median160.

Besides from the chosen multiples there is a wealth of other multiples that can be used. The EV/EBITDA has been chosen because it focuses on operations and mitigates any issues in connection with capital structure. EV/KG has been chosen because it is specific to the salmon farming industry and reveals the relative performance to peers.

Table 8.6 shows the multiples of each of the peers. EV/Revenue yields a value of NOK 53 per share, 8,6% below the current market price of NOK 58. This is likely due to the fact that EV/Revenue does not capture the efficiency potential in SALM beyond revenues. EV/EBITDA on the other hand, trading at 15,7x EBITDA, generally means that there is more value potential to be had from the operating expenses in this industry. Finally, the EV/KG is just 4,7% above the current market value at NOK 60,7, representing that SALM has had higher than expected costs in recent years

Table 8.6: Peer valuation

Share price NOK '000 NOK '000 date of Market Enterprise EV / EV / EV / Ticker analysis Capitalization Value Revenue EBITDA KG LSG 180,0 9.826.938 10.773.618 1,2x 13,9x 70,2x GSF 14,5 1.594.029 3.803.103 1,8x neg. 54,3x MHG 6,0 22.490.040 21.838.900 1,4x 18,0x 55,7x

Mean 1,5x 15,9x 60,1x Harmonic mean 1,4x 15,7x 59,3x

160 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, p. 288 79 High 1,8x 18,0x 70,2x Low 1,2x 13,9x 54,3x

Valuation (Harmonic Mean) 53,03 69,09 60,73 Potential to current valuation (NOK 58) (8,6%) 19,1% 4,7% Source: Bloomberg, own research

Figure 8.1 shows the indicative value range of given the above multiples high and low ranges, with the green line indicating the current market price and the blue line indicating the intrinsic value of the share.

Figure 8.1: Indicative Value Range based on Peer Multiples

EV / KG

EV / EBITDA

EV / Revenue

30 40 50 60 70 80 90

Source: Own research

The reason for the higher derived intrinsic share price than the current market price and those of the of the EV/Revenue and the EV/KG is most likely due to the very explicitly modeled rise and fall in the price of raw materials, the expected improvements to the general cost level in the operating expenses as well as implications of the rising salmon price throughout.

9. Sensitivity Analysis The above valuation is based on certain assumptions as to WACC, terminal growth rate and salmon price. This section will challenge these three input factors, as these are deemed the most critical factors, by measuring the sensitivity in the share price when changing these. The sensitivity analysis has been made using data tables, enabling prospective investors to come up with a price using their own assumptions.

80 9.1. Salmon Price and Growth In section 7.1.3 the salmon price was forecasted based on rather simple multiple regression model, which nonetheless showed a high historical accuracy. Since the salmon price one of the most important input factors to the valuation of SALM, it is important to test the sensitivity in the estimated share price against changes in the salmon price. Equally important are the assumptions surrounding the WACC. The WACC was calculated assuming a static capital structure and the calculation of the beta contains a certain bias when choosing the length in period and reference index.

Table 9.1 shows the effects of changes in the terminal salmon price compared to the WACC. A change of NOK 1 in the terminal salmon price will lead to a change in the share price of NOK 18,6, i.e. the share price is highly sensitive to changes in the salmon price. The fact that the share price is highly dependent on the salmon price does not come as a major surprise, although NOK 18,6 is considered high. One possible reason could be the fact that the salmon price tested is the terminal period salmon price and that 85% of the enterprise value is in the terminal period. Changes in the terminal growth rate are more moderate at NOK 5,8. This sensitivity illustrates the type of business SALM is in, and adds to recent years share price fluctuations on account of changes in the salmon price.

Table 9.1: Sensitivity in price compared to changes in the terminal salmon price and terminal growth

Terminal Salmon Price 37,8 38,8 39,8 40,8 41,8 Terminal 1,50% 46,72 63,28 79,84 96,40 112,96 Growth 1,75% 50,56 68,08 85,61 103,13 120,66 Rate 2,00% 54,88 73,49 92,10 110,71 129,32 2,25% 59,77 79,60 99,44 119,28 139,11 2,50% 65,34 86,58 107,82 129,06 150,29 Source: Own research

To put the high importance of value in the terminal period into perspective, a NOK 1 change in the salmon price in 2013 will lead to a change in the share price of NOK 0,75 and NOK 0,76 in 2014. The DCF valuation model is typically criticized exactly because most of the value can be “pushed“ to the terminal period161.

9.2. WACC and Growth Because the cash flows are discounted at the WACC, this input factor is also important to test for sensitivity. In Table 9.3 the changes in share price due to changes in the WACC are shown to be

161 Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010, pp. 270 81 relatively less than that of the terminal salmon price, although still quite sensitive at around NOK 14. Similar to changes in the terminal salmon price, one likely explanation for the high sensitivity is the high proportion of the enterprise value in the terminal period.

Table 9.3: Sensitivity in price compared to changes in the terminal growth and the WACC

WACC 5,0% 5,5% 6,0% 6,5% 7,0% Terminal 1,50% 95,12 77,76 63,28 52,68 44,00 Growth 1,75% 103,86 84,20 68,08 56,45 47,02 Rate 2,00% 114,06 91,56 73,49 60,63 50,34 2,25% 126,11 100,06 79,60 65,31 54,01 2,50% 140,57 109,97 86,58 70,56 58,08 Source: Own research

Despite the high sensitivity to the terminal salmon price, the share price estimate of NOK 73,49 is deemed valid due to the explicitly modeled rise and fall in the price of raw materials, the expected improvements to the general cost level in the operating expenses as well as implications of the rising salmon price throughout. Nevertheless, investors should keep the high sensitivity to the salmon price in mind when considering investing in not only SALM, but in salmon farming companies in general.

10. Conclusion and Investment Recommendation This thesis set out to determine the intrinsic value of SalMar ASA as of 30 April 2013, the date of the release of its annual report for 2012. By way of introduction, an overview of the salmon farming industry, SalMar and its peers was given. Herein was underscored the high historical correlation between the salmon price and the price of the SalMar share as well as selected historical developments in the company. These sections served to answer the first sub question: Which processes go into the production of salmon and how is value created? High biological control, competitively composed feed and VAP operations where all processes in salmon that support value creation. However, rising raw material prices and a fluctuating salmon price pose uncertainty to the cash flows. Strategy, business areas and management were also accounted for in this section.

Sub question two: How has the financial situation in SalMar developed for the years 2007 to 2012? This was answered in the financial analysis by using the Du Pont model for decomposing profitability ratios. Here it was shown that in the past two years, the profitability compared to peers had decreased, not as a result of a lower salmon price, but as a result of poor operating performance, herein low biological control, higher raw material costs and higher operating expenses throughout.

82 Short and long term liquidity ratios were also used to evaluate the liquidity situation, which was satisfying but more moderate than what the profitability ratios showed.

Sub question three: Which macro- and microeconomic factors will affect SalMar’s future growth potential? Here the PESTLE framework and Porter’s Five Forces were used to show that the salmon farming industry is a highly competitive, but young industry with upside potential in terms technology. Despite the total biomass in Norway being close to the upper limit, new initiatives from the Norwegian government might allow companies like SalMar to get higher biomass in regions such as Northern Norway, effectively increasing its market share in the medium term. It also showed that the consolidation is likely to continue on account of smaller players with liquidity issues, maintaining the high rivalry within the industry.

Sub question four asked: How is SalMar expected to fare going forward? The forecast answered this by evaluating the cost base going forward and estimating a future salmon price based on a multiple regression model. It was assumed that COGS, especially due to high feed costs would remain high throughout. Otherwise, the general cost level was expected to decrease due to efficiency improvements made by management. The salmon price was estimated to increase slightly in 2013e and 2014e to keep increasing steadily until 2019e where it will decrease slightly. In addition to that, licenses where assumed to increase with the level in harvested volumes based on certain market share criteria for SalMar and on an average target rate for production per license.

Finally, the intrinsic value of the share price on 30 April 2013 was estimated to be NOK 73,49. This was estimated using both a DCF model and an EVA model. The underlying assumptions to the present value models were derived using an estimated WACC of 6,0%, a cost of equity of 8,4%, cost of debt of 4% and a beta of 1,1. The capital structure was calculated to be 55,8% for equity and 44,2% for debt. The value estimate of the present value models was checked using peer multiples where it was indicated that a share price of NOK 73,49 was in the high end, yet realistic considering the positive outlook for efficiency gains and a long term rising salmon price. The sensitivity tests of the estimated share price showed a large sensitivity to the terminal salmon price due to the large amount of value in the terminal period. Testing the terminal growth rate and WACC showed less sensitivity.

Based on the above assumptions, the investment recommendation is a buy. The intrinsic value of NOK 73,49 leaves a value potential of 27% to the market price of NOK 58. This might seem like a lot; however, this is nothing more than a good investment opportunity. Because the objective of the thesis was to find the intrinsic value of the share, investors should perceive the estimated share

83 price as the value they can get, and the market price as the price they should pay, which is most notoriously quoted by Warren Buffet, who said: “Price is what you pay, value is what you get”.

84 Bibliography

Articles Fernandez et al., Market Risk Premium used in 82 countries in 2012: a survey with 7,192 answers, 2013, IESE Business School

Blume, M., Betas and Their Tendencies, The Journal of Finance, 1975

Books Asche & Bjørndal: The Economics of Salmon Aquaculture, 2nd ed. 2011, Wiley-Blackwell

Henry, A.: Understanding Strategic Management, Oxford University Press, 1st ed. 2008

Mintzberg et al.: Strategy Safari, FT Prentice Hall, 2nd edition, 2009

Petersen, C. & Plenborg, T.: Financial Statement Analysis, Thomson Reuters, 1st ed. 2010

Viebig, Podig, Varmaz: Equity Valuation, Wiley Finance, 1st ed. 2008.

Wooldridge, J. M.: Introductory Econometrics, South-Western Cengage Learning, 4th ed. 2006

Company Reports Cermaq Q4 Report 2012

Lerøy Seafood Group Annual Report 2012

SalMar Annual Report 2008

SalMar Annual Report 2009

SalMar Annual Report 2010

SalMar Annual Report 2011

SalMar Annual Report 2012

SalMar Annual IPO Prospectus

SalMar Q2 2008

SalMar Q3 2008

Financial Data Providers Bloomberg

85 FactSet

Thomson Reuters Datastream

Reports Arctic Securities: We stick to Arctic Buy, target raised to NOK65, 18 February 2013

DNB Markets: Back in the front seat in Norway, 28 February 2013

DNB Markets: No.1 producer in Norway again, 1 March 2013

DNB Markets: Contest for control of Villa Organic, 10 April 2013

Marine Harvest, Salmon Farming Industry Handbook 2012

Marine Harvest, Salmon Farming Industry Handbook 2013

Norway – Aqualculture, Marketline, June 2013

Norwegian Ministry of Fisheries and Coastal Affairs, Strategy for an Environmentally Sustainable Norwegian Aquaculture Industry, 2009

Norwegian Seafood Federation: Aquaculture in Norway

Pareto Securities: Q4 12 on the positive side, 28 February 2013

Webpages Encyclopedia of Global Industries: Aquaculture: http://go.galegroup.com.esc- web.lib.cbs.dk/ps/retrieve.do?sgHitCountType=None&sort=RELEVANCE&inPS=true&prodId=GVRL&u serGroupName=cbs&tabID=T003&searchId=R1&resultListType=RESULT_LIST&contentSegment=&se archType=BasicSearchForm¤tPosition=1&contentSet=GALE%7CCX2895800008&&docId=GALE |CX2895800008&docType=GALE http://www.fishpool.eu http://pages.stern.nyu.edu/~adamodar/ http://www.bakkafrost.com/default.asp http://www.dn.no http://www.efsa.europa.eu

86 http://www.fhl.no http://www.fno.no/ http://www.ft.com http://www.griegseafood.no http://www.huffingtonpost.com http://www.iasplus.com http://www.imf.org http://www.leroyseafood.com http://www.kystkompetanse.no/ http://www.mainstreamcanada.ca http://www.marineharvest.com http://www.norges-bank.no http://www.regjeringen.no http://www.salmar.no http://www.salmobreed.no http://www.seafoodsource.com http://www.undercurrentnews.com http://www.who.int http://infosurhoy.com

87 Appendix

Appendix 1: Historical Acquisitions

Company Year Arctic Salmon AS 2007 Halsa Fiskeoppdrett AS 2007 Henden Fiskeoppdrett 2007 Straumen Havbruk AS 2008 Volstad Seafood AS (34%) 2008 Volstad Seafood AS (66%) 2009 Rauma Gruppen (75.54%) 2010 Stettefisk AS 2010 P/f Bakkafrost (23.29%) 2010 Fjord Salmon AS 2010 Bringsvor Laks AS 2011 Krifo Havbruk AS 2011 Villa Miljølaks AS 2011 Frøyas AS 2011 Villa Arctic AS 2012 Source: Own research

Appendix 2: Geographical Breakdown of Revenues Geographic breakdown of sales revenue based on the location of the customer 2007 2008 2009 2010 2011 2012 Asia 336 446 499 892 980 1.026 Russia 453 446 309 240 253 223 USA/Canada 0 0 48 240 138 88 Europe, incl. Norway 889 823 1.521 2.058 2.458 2.868 Total 1.678 1.714 2.377 3.429 3.829 4.205 Source: SALM annual reports Appendix 3: Leasing Calculations

Appendix 3a: Leasing Overview

Total future leasing payments, other off-balance sheet liabilities < 1 year 2-5 years > 5 years Total 2007 5.444 19.496 885 25.825 2008 6.263 17.032 0 23.295 2009 11.529 126.123 376.147 513.799 2010 34.921 131.013 391.587 557.521 2011 39.648 154.825 470.615 665.088 2012 43.122 173.377 428.299 644.798 Source: SALM annual reports, note 2

88 Appendix 3b: Capitalization of Operating Leases

Implied BV of Interest interest Implied leased Year rate expense depreciation equipment 2007 9,4% 26.926 15.924 269.980 2008 9,4% 26.926 15.924 254.057 2009 9,4% 26.926 15.924 238.133 2010 9,4% 26.926 15.924 222.210 2011 9,4% 26.926 15.924 206.286 2012 9,4% 26.926 15.924 190.362 2013e 13,7% 39.060 23.099 167.263 2014e 10,2% 29.236 17.289 149.974 2015e 7,3% 20.945 12.386 137.587 2016e 7,6% 21.701 12.834 124.753 2017e 7,9% 22.471 13.289 111.465 2018e 9,4% 26.926 15.924 95.541 2019e 9,4% 26.926 15.924 79.618 2020e 9,4% 26.926 15.924 63.694 2021e 9,4% 26.926 15.924 47.771 2022e 9,4% 26.926 15.924 31.847 2023e 9,4% 26.926 15.924 15.924 2024e 9,4% 26.926 15.924 0 Source: Own research

Appendix 3c: Adjustments to the Historical Annual Accounts

NOK 1000 2007 2008 2009 2010 2011 2012 Other operating expenses 191.270 253.701 311.973 517.067 705.891 885.983 Less "imputed" lease expense 42.850 42.850 42.850 42.850 42.850 42.850 Other operating expenses, adjusted 148.420 210.851 269.123 474.217 663.041 843.133

Depreciation 50.671 55.225 66.578 93.962 132.000 169.621 Plus implied depreciation 15.924 15.924 15.924 15.924 15.924 15.924 Depreciation, adjusted 66.595 71.149 82.502 109.886 147.924 185.545

Interest expenses 47.104 72.178 32.078 49.597 98.791 150.224 Plus implied interest expense 26.926 26.926 26.926 26.926 26.926 26.926 Interest expenses, adjusted 74.030 99.104 59.004 76.523 125.717 177.150 Source: Own research

89 Appendix 4: SalMar Historical Annual Accounts

Income Statement NOKm OPERATING REVENUES AND OPERATING EXPENSES 2006 2007 2008 2009 2010 2011 2012 Sales revenues 1.241 1.666 1.704 2.376 3.400 3.796 4.180 Other operating revenues 8 12 10 1 30 33 24 Total operating revenues 1.249 1.678 1.714 2.377 3.429 3.829 4.205 Change in inventory and biological assets (at cost) -132 -48 -104 -26 -402 -396 -390 Excess value of inventory from acquisitions 9 18 9 0 34 20 0 Cost of goods sold 644 837 922 1.162 1.899 2.373 2.715 Salary and personnel expenses 132 218 240 266 313 392 483 Depreciation 38 51 55 67 94 132 170 Impairment losses 0 0 0 12 2 1 1 Other operating expenses 111 191 254 312 517 706 886 Total operating expenses 801 1.266 1.377 1.793 2.457 3.228 3.864 Operational EBIT 447 411 337 585 973 601 341 Fair value adjustment of the biomass 64 94 -33 -5 185 -357 290 Onerous contracts 0 0 0 0 -4 4 0 Exceptional biological items 0 0 0 0 0 -60 -55 Badwill related to business combination in Finnmark 0 0 0 0 0 0 62 Earnings before interest and taxes (EBIT) 511 506 304 580 1.154 188 639 FINANCIAL INCOME AND FINANCIAL EXPENSES Income from investments in associates 92 32 12 57 147 98 94 Interest income 1 5 3 0 6 5 3 Financial income 12 0 0 30 18 3 50 Interest paid to group companies -7 0 0 0 0 0 0 Interest expenses -22 -47 -72 -32 -50 -99 -150 Financial expenses -9 -14 -14 -1 -15 -35 -27 Net financial items 66 -24 -70 54 107 -28 -30 Earnings before taxes 577 481 235 634 1.261 160 609 Taxes -132 -129 -66 -163 -303 -13 -127 Profit for the year 445 352 169 471 958 147 481

90 Balance Sheet NOKm ASSETS 2006 2007 2008 2009 2010 2011 2012 NON-CURRENT ASSETS Intangible assets Licenses, patents, etc. 712 845 914 936 1.315 1.484 1.702 Goodwill 56 198 197 205 373 433 433 Total intangible assets 768 1.043 1.111 1.141 1.688 1.917 2.136 PROPERTY, PLANT AND EQUIPMENT Land, buildings and other real estate 51 58 67 103 179 206 234 Plant machinery and other operating equipment 225 274 320 404 637 846 948 Other operating equipment 31 16 29 27 56 74 87 Total property, plant and equipment 307 348 416 533 872 1.126 1.269 NON-CURRENT FINANCIAL ASSETS Investments in associates 262 258 258 269 867 919 949 Investments in shares and other securities 1 1 1 1 1 1 16 Pensionfundassets 0 2 2 5 4 2 2 Other receivables 9 5 5 13 12 5 4 Total non-current financial assets 272 266 266 287 884 926 971 Total non-current assets 1.346 1.658 1.793 1.962 3.444 3.970 4.375 CURRENT ASSETS Biological assets 701 906 971 1.012 1.581 1.421 1.986 Inventory 53 64 98 103 129 228 304 Total inventory 754 970 1.069 1.115 1.710 1.649 2.290 RECEIVABLES Accounts receivable 110 147 149 252 410 505 661 Parent company receivables 0 0 1 0 0 0 0 Other receivables 51 38 34 73 136 145 246 Total receivables 162 185 183 325 546 650 906 Cash and cash equivalents 7 48 24 148 107 48 55 Total current assets 923 1.203 1.276 1.589 2.363 2.347 3.252 TOTAL ASSETS 2.270 2.860 3.068 3.550 5.807 6.316 7.627

91 EQUITY AND LIABILITIES 2006 2007 2008 2009 2010 2011 2012 EQUITY PAID-IN EQUITY Share capital 25 26 26 26 26 26 28 Treasury shares 0 0 0 0 0 0 0 Share premium fund 0 113 113 113 113 113 415 Other paid-in equity 0 7 16 20 26 38 50 Total paid-in equity 25 145 154 159 164 177 493 RETAINED EARNINGS 0 0 0 0 0 0 0 Distributable reserve 860 1.142 1.160 1.540 2.187 1.916 2.338 Total retained earnings 860 1.142 1.160 1.540 2.187 1.916 2.338 Non-controlling interests 1 1 1 1 118 122 136 Total equity 885 1.287 1.315 1.700 2.469 2.215 2.968 LIABILITIES Other non-current liabilities 0 0 0 0 0 0 0 Pension liabilities 3 5 5 6 2 1 1 Deferred tax liabilities 336 460 482 499 762 738 872 Long term bank borrowings 525 687 758 746 1.761 2.029 2.098 Finance lease liabilities 97 77 66 68 109 173 125 Total other non-current liabilities 962 1.229 1.311 1.318 2.633 2.942 3.096 CURRENT LIABILITIES Short-term bank borrowings 149 88 184 118 51 502 596 Accounts payable 148 99 133 204 351 413 763 Current tax liabilities 79 90 46 146 148 66 7 Public charges payable 11 22 19 20 48 53 43 Other current liabilities 34 45 60 44 107 126 154 Total current liabilities 422 344 442 532 705 1.160 1.563 Total liabilities 1.384 1.573 1.753 1.851 3.338 4.102 4.659 TOTAL EQUITY AND LIABILITIES 2.270 2.860 3.068 3.550 5.807 6.316 7.627

92 Appendix 5: Analytical Historical Annual Accounts for SALM and Peers

Income Statement, NOKm Analytical Income Statement 2006 2007 2008 2009 2010 2011 2012 Sales revenues 1.241 1.666 1.704 2.376 3.400 3.796 4.180 Other operating revenues 8 12 10 1 30 33 24 Total operating revenues 1.249 1.678 1.714 2.377 3.429 3.829 4.205 Cost of goods sold -644 -837 -922 -1.162 -1.899 -2.373 -2.715 Exceptional biological items 0 0 0 0 0 -60 -55 Change in inventory and biological assets (at cost) 132 48 104 26 402 396 390 Salary and personnel expenses -132 -218 -240 -266 -313 -392 -483 Other operating expenses, adjusted -111 -148 -211 -269 -474 -663 -843 EBITDA 494 523 445 706 1.145 737 499 Depreciation, adjusted -38 -67 -71 -83 -110 -148 -186 Operational EBIT 456 456 374 623 1.035 589 314 Fair value adjustment of the biomass 64 94 -33 -5 185 -357 290 Income from investments in associates 92 32 12 57 147 98 94 EBIT 611 582 353 675 1.367 330 698 Taxes on EBIT -140 -156 -99 -174 -328 -27 -146 NOPAT 471 425 254 502 1.039 303 552 Interest income 1 5 3 0 6 5 3 Financial income 12 0 0 30 18 3 50 Interest expenses, adjusted -22 -74 -99 -59 -77 -126 -177 Financial expenses -9 -14 -14 -1 -15 -35 -27 Net financial items -18 -83 -109 -30 -67 -153 -151 Taxes on net financial items 4 22 31 8 16 12 32 Net financial items after tax -14 -61 -78 -22 -51 -140 -120 Profit for the year 457 365 176 479 988 163 433

93 Invested capital 2006 2007 2008 2009 2010 2011 2012 NON-CURRENT ASSETS Licenses, patents, etc. 712 845 914 936 1.315 1.484 1.702 Goodwill 56 198 197 205 373 433 433 Land, buildings and other real estate 51 58 67 103 179 206 234 Plant machinery and other operating equipment 225 274 320 404 637 846 948 Other operating equipment 31 16 29 27 56 74 87 Investments in associates 262 258 258 269 867 919 949 Other receivables 9 5 5 13 12 5 4 Leased equipment, capitalized 0 270 254 238 222 206 190 Total non-current assets 1.345 1.925 2.044 2.194 3.661 4.173 4.547 CURRENT ASSETS Biological assets 701 906 971 1.012 1.581 1.421 1.986 Inventory 53 64 98 103 129 228 304 Accounts receivable 110 147 149 252 410 505 661 Parent company receivables 0 0 1 0 0 0 0 Other receivables 51 38 34 73 136 145 246 Cash and cash equivalents 7 48 24 148 107 48 55 Total current assets 923 1.203 1.276 1.589 2.363 2.347 3.252 NON-INTEREST BEARING DEBT Accounts payable 148 99 133 204 351 413 763 Current tax liabilities 79 90 46 146 148 66 7 Public charges payable 11 22 19 20 48 53 43 Total non-interest bearing debt 239 211 198 370 547 532 813 Invested capital / Net operating assets 2.030 2.917 3.121 3.412 5.477 5.988 6.986

Total equity 885 1.287 1.315 1.700 2.469 2.215 2.968 NET-INTEREST BEARING DEBT Deferred tax liabilities 336 460 482 499 762 738 872 Pension liabilities 3 5 5 6 2 1 1 Long term bank borrowings 525 687 758 746 1.761 2.029 2.098 Finance lease liabilities 97 77 66 68 109 173 125 Short-term bank borrowings 149 88 184 118 51 502 596 Other current liabilities 34 45 60 44 107 126 154 Lease obligation 0 270 254 238 222 206 190 Interest bearing debt 1.146 1.632 1.809 1.718 3.013 3.776 4.037 Investments in shares and other securities 1 1 1 1 1 1 16 Pensionfundassets 0 2 2 5 4 2 2 Interest bearing assets 1 3 3 6 5 3 18 Net-interest bearing debt 1.144 1.629 1.806 1.712 3.008 3.773 4.018 Invested capital / Financing 2.030 2.917 3.121 3.412 5.477 5.988 6.986

94 Lerøy

Analytical Income Statement 2006 2007 2008 2009 2010 2011 2012 Revenues 5.616.592 6.290.898 6.057.053 7.473.807 8.887.671 9.176.873 9.102.941 Cost of materials -4.105.186 -4.698.675 -4.279.152 -5.042.424 -5.612.160 -5.866.180 -6.442.319 Salaries and other personnel costs -399.999 -579.004 -664.377 -690.477 -777.845 -967.789 -1.031.872 Other operating costs -342.943 -472.158 -579.295 -586.743 -691.791 -858.107 -853.884 EBITDA 768.464 541.061 534.229 1.154.163 1.805.875 1.484.797 774.866 Ordinary depreciation 84.707 153.846 197.023 204.007 219.624 271.899 291.768 Operational EBIT 683.757 387.215 337.206 950.156 1.586.251 1.212.898 450.098 Income from affiliated company 128.982 35.509 13.716 62.744 122.006 19.741 24.831 Adjustment of biomass to fair value 85.938 15.838 -36.369 60.483 298.538 -615.767 294.735 EBIT 898.677 438.562 314.553 1.073.383 2.006.795 616.872 769.664 Taxes on EBIT -215.605 -106.139 -70.935 -279.563 -528.402 -180.236 -208.530 NOPAT 683.072 332.423 243.618 793.820 1.478.393 436.636 561.134 Net financial items -40.294 -69.736 -150.507 -86.105 -66.272 -81.884 -95.153 Taxes on net financial items 9.667 16.877 33.941 22.426 17.450 23.925 25.780 Net financial items after tax -30.627 -52.859 -116.566 -63.679 -48.822 -57.959 -69.373 Profit for the year 652.445 279.564 127.052 730.141 1.429.571 378.677 491.760

Balance Sheet, NOK 1000 Invested capital 2006 2007 2008 2009 2010 2011 2012 NON-CURRENT ASSETS Buildings, land and operating assets 695.062 1.149.128 1.294.818 1.225.399 1.586.334 1.836.384 2.094.539 Immaterial assets 1.922.348 2.832.305 2.959.927 2.959.611 3.847.760 3.878.873 3.972.053 Shares in affiliated companies 308.592 289.474 277.455 272.970 338.864 329.168 331.056 Long-term receivables 604 1.216 6.743 11.928 8.129 8.453 8.607 Deferred tax assets 0 0 0 4.461 3.697 6.546 21.545 Total non-current assets 2.926.606 4.272.123 4.538.943 4.474.369 5.784.784 6.059.424 6.427.800 CURRENT ASSETS Biological assets 1.052.319 1.494.133 1.676.164 1.858.562 2.706.733 2.370.938 2.724.941 Other inventories 189.326 265.008 223.158 236.311 290.379 328.045 326.225 Accounts receivable 752.676 690.800 772.440 876.127 1.013.932 934.443 995.289 Other receivables 169.539 219.885 159.844 130.734 176.282 148.395 199.083 Cash and equivalents 509.872 537.738 388.486 707.989 1.357.096 1.597.429 1.082.797 Total current assets 2.673.732 3.207.564 3.220.092 3.809.723 5.544.422 5.379.250 5.328.335 NON-INTEREST BEARING DEBT Accounts payables 468.529 508.294 544.757 615.996 638.213 705.165 826.677 Public duties payable 32.963 37.743 49.014 55.671 74.312 62.386 66.915 Taxes payable 153.513 76.154 16.631 93.551 395.233 322.105 88.925 Total non-interest bearing debt 655.005 622.191 610.402 765.218 1.107.758 1.089.656 982.517 Invested capital / Net operating assets 4.945.333 6.857.496 7.148.633 7.518.874 10.221.448 10.349.018 10.773.618

Total equity 2.340.719 3.778.843 3.764.343 4.300.256 5.994.274 5.797.766 5.963.956 NET-INTEREST BEARING DEBT Deferred tax 451.172 643.529 669.327 834.877 1.260.028 1.083.693 1.230.458 Long-term interest bearing debt 1.577.997 1.724.699 1.672.761 1.504.707 2.221.701 2.429.365 2.402.770 Other long term debt 0 0 4.150 826 1.312 0 0 Pension liabilities 8.869 12.012 13.211 14.990 9.025 7.812 7.646 Other long term liabilities 0 0 0 0 0 7.168 44.788 Short term loans 382.003 566.594 841.921 646.105 434.121 760.977 911.887 Other short term liabilities 190.310 158.242 206.081 240.228 323.976 285.410 230.400 Interest bearing debt 2.610.351 3.105.076 3.407.451 3.241.733 4.250.163 4.574.425 4.827.949 Shares available for sale 5.737 26.423 23.161 23.115 22.989 23.173 18.281 Interest bearing assets 5.737 26.423 23.161 23.115 22.989 23.173 18.281 Net-interest bearing debt 2.604.614 3.078.653 3.384.290 3.218.618 4.227.174 4.551.252 4.809.668 Invested capital / Financing 4.945.333 6.857.496 7.148.633 7.518.874 10.221.448 10.349.018 10.773.624

95 Grieg

Analytical Income Statement 2006 2007 2008 2009 2010 2011 2012 Revenue 543.460 1.068.352 1.487.503 1.621.445 2.455.888 2.063.760 2.078.229 Changes in inventories of work in progress 40.497 205.859 51.637 158.085 -10.412 197.753 -182.750 Raw materials and consumerables used -306.582 -746.174 -903.678 -900.581 -932.118 -1.087.430 -1.019.564 Salaries and personnel expenses -53.696 -136.246 -165.148 -193.300 -238.409 -238.382 -276.103 Other operating expenses -53.890 -196.814 -332.645 -410.541 -592.752 -603.585 -642.374 Share of profit from assiciated companies and joint ventures0 0 0 377 4747 13704 12744 Impairment of fixed assets 0 0 -38.012 0 0 0 0 Impairment of goodwill and licenses 0 0 -161.988 0 0 0 0 Reversal of previous amortisation of licences 0 0 0 0 72.385 0 0 EBITDA 169.789 194.977 -62.331 275.485 759.329 345.820 -29.818 Depreciation -39.343 -72.486 -106.144 -118.300 -115.912 -136.984 -157.075 Amortisation of licenses and other intangible assets-4.804 -1.155 -4.378 -3.282 -3.662 -3.222 -4.270 Operational EBIT 125.642 121.336 -172.853 153.903 639.755 205.614 -191.163 Income from associated companies -66 -1.897 700 1.608 7.590 25.165 -913 Fair value adjustments of biological assets 42.367 -44.075 -35.747 115.276 207.629 -395.180 98.063 EBIT 167.943 75.364 -207.900 270.787 854.974 -164.401 -94.013 Taxes on EBIT -53.376 33.806 45.856 -73.890 -225.989 60.686 25.631 NOPAT 114.567 109.170 -162.044 196.897 628.985 -103.715 -68.382 Financial income 3.544 26.488 37.207 136.333 54.675 31.141 3.173 Financial expeses -32.481 -65.815 -271.172 -89.606 -51.882 -61.963 -111.520 Net financial items -28.937 -39.327 -233.965 46.727 2.793 -30.822 -108.347 Taxes on net financial items 9.197 -17.641 51.605 -12.750 -738 11.378 29.539 Net financial items after tax -19.740 -56.968 -182.360 33.977 2.055 -19.444 -78.808 Profit for the year 94.826 52.202 -344.404 230.873 631.039 -123.159 -147.188

96 Balance Sheet, NOK 1000 Invested capital 2006 2007 2008 2009 2010 2011 2012 NON-CURRENT ASSETS Goodwill 105.556 138.661 43.616 87.583 90.540 105.373 105.108 Licenses 445.117 849.838 831.921 818.340 926.170 987.596 976.740 Other intangible assets 0 0 8.205 5.578 3.160 4.618 3.800 Property, Plant & Equipment 300.629 639.092 794.346 819.110 923.546 1.126.699 1.141.317 Investments in associated companies 10.729 10.879 11.579 13.619 33.456 37.387 49.229 Loans to associated companies 3.871 2.897 2.410 1.923 3.449 996 1.020 Other non current receivables 12.667 10.275 1.790 0 1.958 311 53 Total non-current assets 878.569 1.651.642 1.693.867 1.746.153 1.982.279 2.262.980 2.277.267 CURRENT ASSETS Inventories 17.091 34.927 44.592 49.180 58.409 67.355 65.692 Biological assets 551.637 1.067.574 1.073.341 1.367.061 1.564.041 1.404.934 1.310.142 Accounts receivable 60.589 111.893 157.876 188.052 265.350 223.682 124.657 Other current receivables 34.073 82.578 48.488 57.051 43.265 58.139 51.299 Cash and cash equivalents 12.692 24.318 68.146 139.778 143.727 152.622 239.885 Total current assets 676.082 1.321.290 1.392.443 1.801.122 2.074.792 1.906.732 1.791.675 NON-INTEREST BEARING DEBT Accounts payable 63.703 197.356 214.687 233.443 253.305 303.196 246.119 Tax payable 193 9.402 0 0 0 -6.442 0 Accrued salary expense and public tax payable 8.436 8.619 13.611 13.869 25.104 22.514 19.720 Total non-interest bearing debt 72.332 215.377 228.298 247.312 278.409 319.268 265.839 Invested capital / Net operating assets 1.482.319 2.757.555 2.858.012 3.299.963 3.778.662 3.850.444 3.803.103

Total equity 579.255 1.266.083 928.603 1.374.421 1.982.405 1.690.150 1.513.230 NET-INTEREST BEARING DEBT Deferred tax liabilities 206.567 281.294 207.020 331.995 531.498 486.702 426.781 Pension obligations 3.523 4.369 4.161 1.927 2.051 1.557 1.110 Cash settlement 0 0 0 1.351 5.845 194 9.267 Subordinated loans 0 9.800 13.517 13.548 14.581 18.287 0 Borrowings 427.730 563.484 8.065 711.419 646.686 592.685 975.844 Financial leasing liabilities 72.197 123.352 213.117 198.167 168.856 179.670 156.150 Other non current liabilities 1.962 19.096 5.882 691 3.292 2.701 0 Bank overdraft 175.354 337.957 0 0 0 0 0 Short term loan 0 0 496.702 482.989 260.000 700.000 500.000 Current portion of long term borrowings 26.115 76.184 807.827 85.295 79.000 79.983 109.542 Current portion of financial leasing liabilities 19.034 52.498 35.305 37.383 41.726 44.662 44.730 Derivatives and other financial instruments 0 50 122.532 9.672 1.605 7.887 13.805 Other current liabilities 11.281 25.535 23.702 72.400 41.674 48.452 53.982 Interest bearing debt 943.764 1.493.619 1.937.830 1.946.837 1.796.814 2.162.780 2.291.211 INTEREST BEARING ASSETS Available for sale financial assets 40.700 156 178 945 557 1.307 1.337 Derivatives and other financial instruments 0 1.991 8.243 20.350 0 1.178 0 Interest bearing assets 40.700 2.147 8.421 21.295 557 2.485 1.337 Net-interest bearing debt 903.064 1.491.472 1.929.409 1.925.542 1.796.257 2.160.295 2.289.874 Invested capital / Financing 1.482.319 2.757.555 2.858.012 3.299.963 3.778.662 3.850.445 3.803.104

97 MHG

Analytical Income Statement 2006 2007 2008 2009 2010 2011 2012 Revenue 5.641 14.092 13.487 14.620 15.281 16.133 15.464 Cost of materials -3.297 -9.104 -8.734 -8.797 -7.781 -8.399 -9.667 Salary and personnel expenses -840 -2.165 -2.140 -2.167 -2.203 -2.178 -2.419 Other operating expenses -871 -1.304 -1.394 -1.448 -1.454 -2.063 -2.164 Restructuring costs -41 -196 -241 -170 -4 -22 -1 EBITDA 592 1.322 978 2.038 3.840 3.471 1.214 Depreciation and amortization -306 -792 -685 -688 -653 -667 -677 Operational EBIT 286 530 293 1.350 3.187 2.805 537 Income/loss from associated companies 24 67 6 70 202 -9 88 Impairment losses 0 -12 -1.579 -373 -5 -67 -1 Fair value adjustment on biological assets 552 -350 -279 301 1.092 -1.514 350 EBIT 862 234 -1.559 1.348 4.476 1.215 975 Taxes on EBIT 622 -136 191 -291 -1.204 -230 -465 NOPAT 1.484 98 -1.368 1.057 3.272 985 510 Interest expenses -51 -381 -485 -404 -380 -406 -383 Net currency effects 171 344 -845 682 367 236 523 Other financial items 33 -8 -452 35 -195 343 -320 Net financial items 153 -45 -1.782 313 -209 174 -180 Taxes on net financial items 110 26 218 -67 56 -33 86 Net financial items after tax 263 -19 -1.563 245 -153 141 -94 Profit for the year 1.747 79 -2.932 1.302 3.119 1.126 416 *Income from discontinued operations/assets held for sale has been removed due to its transitory nature.

Balance Sheet, NOK 1000 Invested capital 2006 2007 2008 2009 2010 2011 2012 NON-CURRENT ASSETS Licenses 5.913 5.567 5.767 5.410 5.443 5.578 5.435 Goodwill 3.555 3.345 2.240 2.143 2.112 2.146 2.116 Deferred tax assets 618 27 231 55 119 160 74 Other intangible assets 224 136 160 136 133 123 114 Property, plant and equipment 4.212 3.895 4.244 3.518 3.885 4.168 4.112 Investments in associated companies 0 0 514 520 679 624 647 Other shares 592 829 79 119 124 92 1.009 Other non-current assets 0 0 0 0 3 26 73 Total non-current assets 15.113 13.798 13.233 11.900 12.496 12.917 13.580 CURRENT ASSETS Inventory 956 917 1.075 743 776 783 820 Biological assets 6.312 5.554 5.621 5.351 7.278 6.285 6.208 Trade receivable 2.444 1.883 1.903 1.672 1.845 1.915 1.782 Other receivables 211 668 532 552 815 610 593 Cash and cash equivalents 2.183 363 373 172 319 279 335 Total non-current assets 12.105 9.385 9.504 8.490 11.032 9.872 9.738 NON-INTEREST BEARING DEBT Trade payables 1.787 1.350 1.729 1.340 1.450 1.482 1.453 Current tax liabilities 0 0 70 51 50 87 26 Total non-interest bearing debt 1.787 1.350 1.799 1.391 1.500 1.568 1.479 Invested capital / Net operating assets 25.430 21.833 20.937 18.999 22.029 21.220 21.839

Total equity 13.542 12.484 9.625 11.461 12.571 10.842 11.689 INTEREST BEARING DEBT Deferred tax liabilities 1.867 1.200 733 1.143 2.238 2.352 2.544 Non-current interest bearing debt 7.956 5.857 6.748 5.117 5.107 6.589 5.339 Other non-current liabilities 203 136 117 100 571 99 415 Current interest-bearing debt 1.625 1.249 1.366 130 430 157 378 Other current liabilities 764 907 2.350 1.049 1.112 1.180 1.475 Interest bearing debt 12.414 9.349 11.313 7.538 9.458 10.378 10.150 Net interest bearing debt 12.414 9.349 11.313 7.538 9.458 10.378 10.150 Invested capital / Financing 25.956 21.833 20.937 18.999 22.029 21.220 21.839 *Assets held for sale and Liabilities held for sales have been excluded as this was deemed transitory in nature

98 Appendix 6: Indexed Annual Accounts for SALM

SalMar Income Statement Analytical Income Statement 2006 2007 2008 2009 2010 2011 2012 Sales revenues 100% 134% 137% 192% 274% 306% 337% Other operating revenues 100% 154% 127% 13% 374% 422% 309% Total operating revenues 100% 134% 137% 190% 275% 307% 337% Cost of goods sold 100% 130% 143% 181% 295% 369% 422% Exceptional biological items ------Change in inventory and biological assets (at cost) 100% 36% 79% 19% 305% 301% 297% Salary and personnel expenses 100% 165% 182% 201% 237% 297% 366% Other operating expenses 100% 134% 190% 243% 428% 598% 761% EBITDA 100% 106% 90% 143% 232% 149% 101% Depreciation and amortisation 100% 176% 188% 218% 290% 391% 490% Operational EBIT 100% 100% 82% 137% 227% 129% 69% - Fair value adjustment of the biomass 100% 148% -52% -7% 290% 560% 456% Income from investments in associates 100% 34% 13% 62% 161% 107% 102% EBIT 100% 95% 58% 110% 224% 54% 114% Taxes on EBIT 100% 112% 71% 124% 234% 19% 104% NOPAT 100% 90% 54% 106% 220% 64% 117% Interest income 100% 638% 472% 45% 764% 715% 401% Financial income 100% 3% 3% 246% 151% 23% 411% Interest paid to group companies ------Interest expenses 100% 340% 455% 271% 351% 577% 813% Financial expenses 100% 148% 145% 12% 158% 371% 288% Net financial items 100% 454% 597% 163% 369% 836% 828% Taxes on net financial items 100% 533% 731% 183% 386% 298% 755% Net financial items after tax 100% 431% 557% 157% 363% 996% 850% Profit for the year 100% 80% 38% 105% 216% 36% 95%

99 SalMar Balance Sheet

Invested capital 2006 2007 2008 2009 2010 2011 2012 NON-CURRENT ASSETS Licences, patents, etc. 100% 119% 128% 132% 185% 209% 239% Goodwill 100% 353% 351% 366% 664% 772% 772% Land, buildings and other real estate 100% 115% 132% 203% 354% 407% 461% Plant machinery and other operating equipment 100% 122% 142% 180% 283% 376% 422% Other operating equipment 100% 52% 94% 85% 179% 238% 279% Investments in associates 100% 99% 98% 103% 331% 351% 362% Other receivables 100% 57% 59% 137% 132% 49% 43% Leased equipment, capitalized ------Total non-current assets 100% 143% 152% 163% 272% 310% 338% CURRENT ASSETS Biological assets 100% 129% 139% 144% 226% 203% 283% Inventory 100% 120% 183% 193% 242% 427% 569% Accounts receivable 100% 134% 135% 229% 372% 459% 600% Parent company receivables 100% 56% 187% 28% 0% 0% 0% Other receivables 100% 74% 66% 143% 266% 283% 479% Cash and cash equivalents 100% 688% 339% 2136% 1540% 685% 796% Total current assets 100% 130% 138% 172% 256% 254% 352% NON-INTEREST BEARING DEBT Accounts payable 100% 67% 90% 138% 237% 278% 514% Current tax liabilities 100% 114% 59% 185% 187% 84% 9% Public charges payable 100% 194% 168% 173% 423% 466% 380% Total non-interest bearing debt 100% 88% 83% 155% 229% 223% 341% Invested capital / Net operating assets 100% 144% 154% 168% 270% 295% 344%

Total equity 100% 145% 149% 192% 279% 250% 335% NET-INTEREST BEARING DEBT Deferred tax liabilities 100% 137% 143% 148% 227% 220% 260% Pension liabilities 100% 134% 156% 172% 51% 36% 16% Long term bank borrowings 100% 131% 144% 142% 335% 386% 399% Finance lease liabilities 100% 80% 68% 70% 112% 178% 129% Short-term bank borrowings 100% 59% 123% 79% 34% 336% 399% Other current liabilities 100% 132% 177% 129% 316% 373% 453% Lease obligation ------Interest bearing debt 100% 142% 158% 150% 263% 330% 352% Investments in shares and other securities 100% 131% 128% 135% 187% 100% 2068% Pension fund assets 100% 587% 544% 1629% 1296% 672% 828% Interest bearing assets 100% 260% 246% 558% 501% 262% 1717% Net-interest bearing debt 100% 142% 158% 150% 263% 330% 351% Invested capital / Financing 100% 144% 154% 168% 270% 295% 344%

100 Appendix 7: Common-sized Annual Account for SALM

SalMar Income Statement Analytical Income Statement 2006 2007 2008 2009 2010 2011 2012 Sales revenues 99% 99% 99% 100% 99% 99% 99% Other operating revenues 1% 1% 1% 0% 1% 1% 1% Total operating revenues 100% 100% 100% 100% 100% 100% 100% Cost of goods sold -52% -50% -54% -49% -55% -62% -65% Exceptional biological items 0% 0% 0% 0% 0% -2% -1% Change in inventory and biological assets (at cost) 11% 3% 6% 1% 12% 10% 9% Salary and personnel expenses -11% -13% -14% -11% -9% -10% -11% Other operating expenses, adjusted -9% -9% -12% -11% -14% -17% -20% EBITDA 40% 31% 26% 30% 33% 19% 12% Depreciation and amortisation, adjusted -3% -4% -4% -3% -3% -4% -4% Operational EBIT 37% 27% 22% 26% 30% 15% 7% Fair value adjustment of the biomass 5% 6% -2% 0% 5% -9% 7% Income from investments in associates 7% 2% 1% 2% 4% 3% 2% EBIT 49% 35% 21% 28% 40% 9% 17% Taxes on EBIT -11% -9% -6% -7% -10% -1% -3% NOPAT 38% 25% 15% 21% 30% 8% 13% Interest income 0% 0% 0% 0% 0% 0% 0% Financial income 1% 0% 0% 1% 1% 0% 1% Interest paid to group companies ------Interest expenses, adjusted -2% -4% -6% -2% -2% -3% -4% Financial expenses -1% -1% -1% 0% 0% -1% -1% Net financial items -1% -5% -6% -1% -2% -4% -4% Taxes on net financial items 0% 1% 2% 0% 0% 0% 1% Net financial items after tax -1% -4% -5% -1% -1% -4% -3% Profit for the year 37% 22% 10% 20% 29% 4% 10%

101 Invested capital 2006 2007 2008 2009 2010 2011 2012 NON-CURRENT ASSETS Licences, patents, etc. 35% 29% 29% 27% 24% 25% 24% Goodwill 3% 7% 6% 6% 7% 7% 6% Land, buildings and other real estate 2% 2% 2% 3% 3% 3% 3% Plant machinery and other operating equipment 11% 9% 10% 12% 12% 14% 14% Other operating equipment 2% 1% 1% 1% 1% 1% 1% Investments in associates 13% 9% 8% 8% 16% 15% 14% Other receivables 0% 0% 0% 0% 0% 0% 0% Leased equipment, capitalized 0% 9% 8% 7% 4% 3% 3% Total non-current assets 66% 66% 65% 64% 67% 70% 65% CURRENT ASSETS Biological assets 35% 31% 31% 30% 29% 24% 28% Inventory 3% 2% 3% 3% 2% 4% 4% Accounts receivable 5% 5% 5% 7% 7% 8% 9% Parent company receivables 0% 0% 0% 0% 0% 0% 0% Other receivables 3% 1% 1% 2% 2% 2% 4% Cash and cash equivalents 0% 2% 1% 4% 2% 1% 1% Total current assets 45% 41% 41% 47% 43% 39% 47% NON-INTEREST BEARING DEBT Accounts payable 7% 3% 4% 6% 6% 7% 11% Current tax liabilities 4% 3% 1% 4% 3% 1% 0% Public charges payable 1% 1% 1% 1% 1% 1% 1% Total non-interest bearing debt 12% 7% 6% 11% 10% 9% 12% Invested capital / Net operating assets 100% 100% 100% 100% 100% 100% 100%

Total equity 44% 44% 42% 50% 45% 37% 42% NET-INTEREST BEARING DEBT Deferred tax liabilities 17% 16% 15% 15% 14% 12% 12% Pension liabilities 0% 0% 0% 0% 0% 0% 0% Long term bank borrowings 26% 24% 24% 22% 32% 34% 30% Finance lease liabilities 5% 3% 2% 2% 2% 3% 2% Short-term bank borrowings 7% 3% 6% 3% 1% 8% 9% Other current liabilities 2% 2% 2% 1% 2% 2% 2% Lease obligation 0% 9% 8% 7% 4% 3% 3% Interest bearing debt 56% 56% 58% 50% 55% 63% 58% Investments in shares and other securities 0% 0% 0% 0% 0% 0% 0% Pension fund assets 0% 0% 0% 0% 0% 0% 0% Interest bearing assets 0% 0% 0% 0% 0% 0% 0% Net-interest bearing debt 56% 56% 58% 50% 55% 63% 58% Invested capital / Financing 100% 100% 100% 100% 100% 100% 100%

102 Appendix 8: Management’s Historical Guidance vs. Reported Harvest

Reported Guidance 2009 2010 2011 2012 Avg. 2011 2012 SalMar Central Norway 50.300 47.200 63.400 65.300 65.000 72.000 y/y growth n/a -6% 34% 3% 10% dev. -2% -9% SalMar Northern Norway 14.000 13.600 18.700 22.400 18.000 19.000 y/y growth n/a -3% 38% 20% 18% dev. 4% 18% Rauma segment n/a 4.200 10.900 14.900 9.000 13.000 y/y growth n/a n/a 160% 37% 98% dev. 21% 15% Norskott Havbruk (50%) 26.500 27.100 21.900 27.100 n/a 25.000 y/y growth n/a 2% -19% 24% 2% dev. n/a 8% Total 64.300 65.000 93.000 102.600 92.000 104.000

Appendix 9: Regression Model for Forecasted Salmon Price

Global Salmon Salmon Supply, 1000 EU GDP, $ price, ln Supply, ln EU GDP ln Year price tonnes billions growth growth growth 1995 32,59 446 9.205 1996 28,72 544 9.395 -0,1264 0,1986 0,0204 1997 27,86 626 9.662 -0,0304 0,1404 0,0281 1998 29,07 681 9.943 0,0425 0,0842 0,0286 1999 30,38 786 10.238 0,0441 0,1434 0,0292 2000 34,73 873 10.644 0,1338 0,1050 0,0389 2001 28,11 988 10.885 -0,2115 0,1237 0,0224 2002 25,74 1.057 11.040 -0,0881 0,0675 0,0142 2003 23,18 1.143 11.222 -0,1048 0,0782 0,0163 2004 21,73 1.206 11.518 -0,0648 0,0537 0,0261 2005 25,72 1.249 11.782 0,1687 0,0350 0,0227 2006 32,32 1.270 12.205 0,2285 0,0167 0,0353 2007 25,76 1.397 12.625 -0,2269 0,0953 0,0338 2008 26,35 1.492 12.694 0,0226 0,0658 0,0055 2009 30,87 1.468 12.182 0,1583 -0,0162 -0,0412 2010 37,26 1.475 12.432 0,1881 0,0048 0,0203 2011 31,99 1.644 12.631 -0,1525 0,1085 0,0159 2012 26,58 2.009 12.335 -0,1853 0,2005 -0,0237

103 Appendix 10: Assumptions for the Forecasted Financial Statements

Income Statement 2013e 2014e 2015e 2016e 2017e 2018e 2019e Revenue growth, total (17,2%) 8,9% 10,4% 10,8% 14,0% 15,4% (0,8%) Harvest growth 13,1% 7,3% 5,7% 4,5% 5,0% 6,0% 2,0% Cost of goods sold / Harvested volume (2,15%) (2,14%) (2,13%) (2,15%) (2,22%) (2,29%) (2,36%) Exceptional biological items 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% Change in inventory and biological assets / Harv. Vol. 0,25% 0,25% 0,25% 0,25% 0,25% 0,25% Salary and personnel expenses / Harvested volume (0,37%) (0,36%) (0,35%) (0,34%) (0,35%) (0,36%) (0,37%) Other operating expenses, unadjusted -856.220 -912.680 -958.385 -994.635 -1.037.145 -1.084.065 -1.090.131 Other operating expenses, unadjusted /Harvested volume (0,74%) (0,73%) (0,73%) (0,72%) (0,72%) (0,71%) Less imputed lease expense from operating lease 62.160 46.525 33.332 34.535 35.759 42.850 42.850 Other operating expenses, adjusted / Harv. Vol. (0,68%) (0,70%) (0,70%) (0,70%) (0,69%) (0,68%) (0,67%) EBITDA-margin 1,7% 3,4% 7,9% 13,0% 17,8% 22,9% 18,8% Depreciation, unadjusted 195.965 209.608 210.508 209.716 209.619 210.770 198.917 Depreciation, unadj. / PP&E (11,6%) (11,6%) (11,6%) (11,7%) (11,7%) (11,7%) (11,7%) Plus implied depreciation from operating lease -23.099 -17.289 -12.386 -12.834 -13.289 -15.924 -15.924 Depreciation, adj. / PP&E (13,0%) (12,7%) (12,4%) (12,5%) (12,5%) (12,7%) (12,8%) Operational EBIT-margin (4,6%) (1,9%) 3,2% 8,8% 14,1% 19,6% 15,7% Fair value adjustment of the biomass / Harvested volume 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% Income from investments in associates 3,0% 2,8% 2,5% 2,3% 2,0% 1,7% 1,7% EBIT-margin (1,6%) 0,9% 5,7% 11,0% 16,1% 21,3% 17,4% Efficient tax rate 22,3% 22,3% 22,3% 22,3% 22,3% 22,3% 22,3% NOPAT-margin (1,2%) 0,7% 4,4% 8,6% 12,5% 16,6% 13,6% Interest income 0,1% 0,1% 0,1% 0,1% 0,1% 0,0% 0,0% Financial income 1,4% 1,3% 1,2% 1,1% 0,9% 0,8% 0,8% Interest expenses, unadjusted -161.092 -167.781 -173.860 -172.221 -164.888 -150.705 -133.528 Interest rate, unadj. as % of interest bearing debt (3,7%) (3,7%) (3,7%) (3,7%) (3,7%) (3,7%) (3,7%) Plus implied interest expense from operating lease -39.060 -29.236 -20.945 -21.701 -22.471 -26.926 -26.926 Interest rate, adj. as % of interest bearing debt (4,6%) (4,3%) (4,1%) (4,2%) (4,2%) (4,4%) (4,4%) Financial expenses (0,8%) (0,7%) (0,6%) (0,6%) (0,5%) (0,4%) (0,4%) Net financial items (5,0%) (4,5%) (4,0%) (3,6%) (3,1%) (2,5%) (2,2%)

104 Balance sheet

2013e 2014e 2015e 2016e 2017e 2018e 2019e Licenses, patents, etc. / Harv. Vol. 1,47% 1,45% 1,44% 1,43% 1,42% 1,41% 1,39% Land+Buildings / Harvest 0,20% 0,19% 0,19% 0,18% 0,17% 0,16% 0,16% PPE / Harvest 0,72% 0,70% 0,69% 0,68% 0,67% 0,66% 0,64% PP&E investment + depreciation 250.000 25.000 25.000 25.000 25.000 25.000 25.000 Other operating equipment / Harv. Vol. 0,08% 0,08% 0,08% 0,08% 0,08% 0,08% 0,04% Other receivables / Revenue 0,10% 0,10% 0,10% 0,10% 0,10% 0,10% 0,10% Biological assets / Harvest 1,71% 1,69% 1,66% 1,64% 1,61% 1,59% 1,56% Inventory / Harv. Vol. 0,27% 0,27% 0,27% 0,27% 0,27% 0,27% 0,30% Accounts receivable / Revenue 15,73% 15,73% 15,73% 15,73% 15,73% 15,73% 15,76% Other receivables / Revenue 5,84% 5,84% 5,84% 5,84% 5,84% 5,84% 5,87% Cash and cash eq. / Revenue 1,32% 1,32% 1,32% 1,32% 1,32% 1,32% 1,32% Accounts payable / Revenue 18,12% 18,12% 18,12% 18,12% 18,12% 18,12% 17,58% Current tax liabilities / Revenue 3,40% 3,40% 3,40% 3,40% 3,40% 3,40% 2,90% Public charges payable / Revenue 1,03% 1,03% 1,03% 1,03% 1,03% 1,03% 1,04% Deferred tax liability / Revenue 20,75% 20,75% 20,75% 20,75% 20,75% 20,75% 20,75% "Interest-bearing debt" / Invested Capital 48,61% 49,74% 49,66% 47,07% 41,88% 33,90% 28,30%

105 Appendix 11: CAPM and WACC Calculations

Historical Share Price and Reference Indices

Date SALM NO Equity OSEBX Index OSEAX Index 30-04-2010 57 383,02 434,1 31-05-2010 53,5 344,23 395,72 30-06-2010 50,2 328,12 379,07 30-07-2010 54,906 358,41 405,19 31-08-2010 50,2 352,66 395,87 30-09-2010 54,383 381,43 423,43 29-10-2010 60,658 404,62 446,31 30-11-2010 56,475 396,07 438,93 31-12-2010 64,319 439,72 486,48 31-01-2011 67,456 430,24 480,36 28-02-2011 67,979 446,16 498,09 31-03-2011 69,025 445,41 501,28 29-04-2011 71,117 447,74 504,93 31-05-2011 66,933 440,91 494,28 30-06-2011 59,613 421,33 472,22 29-07-2011 55,001 417,65 465,38 31-08-2011 47,24 378,47 428,66 30-09-2011 37,117 348,28 397,6 31-10-2011 38,242 384,22 438,1 30-11-2011 38,242 380,85 436,75 30-12-2011 33,743 384,95 442,46 31-01-2012 35,992 397,36 452,05 29-02-2012 36,78 429,85 487,95 30-03-2012 32,731 426,61 481,84 30-04-2012 33,743 421,21 475,75 31-05-2012 32,618 384,36 437,22 29-06-2012 35,43 407,09 458,32 31-07-2012 34,98 423,31 473,01 31-08-2012 40,716 435,22 486,03 28-09-2012 38,242 445,92 495,33 31-10-2012 39,817 442,18 486,54 30-11-2012 46,115 442,08 486,51 31-12-2012 50,277 444,09 490,52 31-01-2013 58,488 465,79 514,69 28-02-2013 65,799 473,07 520,53 29-03-2013 58,769 471,21 518,7 30-04-2013 65,236 480,13 524,81 Source: Thomson Reuters Datastream

106 Ln Returns for Historical Share Price and Reference Indices

Date SALM NO Equity OSEBX Index OSEAX Index 30-04-2010 31-05-2010 -0,063369614 -0,10677717 -0,092568032 30-06-2010 -0,063666627 -0,04793064 -0,042986006 30-07-2010 0,089607605 0,088298187 0,066635208 31-08-2010 -0,089607605 -0,01617316 -0,023270218 30-09-2010 0,080036578 0,078422928 0,067302337 29-10-2010 0,109199926 0,059021007 0,052625567 30-11-2010 -0,071453469 -0,02135739 -0,016673831 31-12-2010 0,130057015 0,104547197 0,102855844 31-01-2011 0,047620456 -0,02179497 -0,012659968 28-02-2011 0,0077233 0,03633444 0,036244961 31-03-2011 0,015269924 -0,00168243 0,006384044 29-04-2011 0,02985765 0,0052175 0,007254979 31-05-2011 -0,060634289 -0,01537193 -0,021317648 30-06-2011 -0,115818448 -0,0454244 -0,04565718 29-07-2011 -0,080522304 -0,00877261 -0,014590703 31-08-2011 -0,152110376 -0,09850695 -0,082190212 30-09-2011 -0,241165906 -0,08313006 -0,075217589 31-10-2011 0,029859302 0,098208551 0,09700072 30-11-2011 0 -0,00880971 -0,003086246 30-12-2011 -0,1251614 0,010707859 0,012989116 31-01-2012 0,064523703 0,031729215 0,021442728 29-02-2012 0,021657528 0,07859364 0,076420148 30-03-2012 -0,116631578 -0,00756606 -0,012600833 30-04-2012 0,030450347 -0,01273873 -0,012719603 31-05-2012 -0,033908705 -0,09155191 -0,084456005 29-06-2012 0,082694636 0,057454678 0,047131129 31-07-2012 -0,012782449 0,03907048 0,0315489 31-08-2012 0,151844666 0,027746879 0,02715382 28-09-2012 -0,062686748 0,024287913 0,018953857 31-10-2012 0,040359569 -0,00842252 -0,017905089 30-11-2012 0,14684432 -0,00022618 -6,16618E-05 31-12-2012 0,086409439 0,004536383 0,008208596 31-01-2013 0,151273889 0,047707644 0,048098725 28-02-2013 0,117783036 0,01550848 0,011282746 29-03-2013 -0,112990136 -0,00393951 -0,003521842 30-04-2013 0,104396959 0,018753046 0,011710611

107 SALM vs. OSEAX, 36 observations 0,15 y = 0,3139x + 0,0041 R² = 0,4122 0,1

0,05

0 -0,3 -0,25 -0,2 -0,15 -0,1 -0,05 0 0,05 0,1 0,15 0,2

-0,05

-0,1

-0,15

Beta adjustment WACC Components Beta 1,31 Cost of equity 8,4% Adjustment ß*0,33+0,67 Cost of debt 4,0% Adjusted beta 1,10 Equity weight 55,8% Debt weight 44,2% CAPM Tax rate 22,3% Risk free rate 2,0% WACC 6,0% Adj. beta 1,10 MRP 5,8% Return on equity 8,4%

Appendix 12: Aquaculture Specific Terms Alevins: Juvenile fish with the yolk sac still present.

Atlantic salmon:

Aquaculture: Human cultivation of organisms in water, distinguished from other aquatic production by the degree of human intervention and control used.

Broodstock: A fish which is kept for the purpose of reproducing and supplying juveniles.

Coho salmon:

FAO: Food and Agriculture Organization, founded in 1945 and one of the largest specialized agencies in the United Nations.

Farmed salmon: Atlantic salmon, coho and salmon trout.

108 Fry: Juvenile fish in the next stage of development after alevins. The fry will begin to eat and feed some four to six weeks after hatcing, which is also when they will be moved to larger freshwater tanks.

HOG: Head on gutted

MAB: Maximum standing biomass, maximum biomass live weight allowed per licence in Norway. Typically set to 780 tonnes (except for Troms and Finnmark where it is set at 900 tonnes).

Primary processing: Slaughtering and gutting of the salmon.

Roe: The salmon eggs, hatch after about 60 days in an incubator tray kept at 8 oC.

Salmon trout:

Secondary processing: Cutting the head off, filleting, fillet trimming, portioning, smoking, etc.

Smolt: Having undergone smoltification, the salmon weigh around 60-100 grams, have been in fresh water for 10-16 months, and are ready to be moved to net pens at sea.

Smoltification: This is a physiological process, which allows the salmon to migrate from freshwater to seawater as part of its lifecycle.

VAP: Value-added products, this pertains to the secondary processing.

Appendix 13: Subsidiaries and Associated Companies Subsidiaries and Associated companies Consolidated companies Voting Share SalMar Tunet AS 100% Astamarin AS 100% SalMar Settefisk AS 100% Langsteinfisk AS 60% Straumsnes Settefisk AS 100% SalMar Farming AS 100% Reistad Eiendom AS 100% Rauma Gruppen AS 75,5% Rauma Stamfisk AS 75,5% Rauma Sætre AS 75,5% Rauma Eik AS 75,5% Rauma Misund AS 75,5% Vikenco AS 51% SalMar Organic AS 100% Fjord Salmon AS 100% SalMar Nord AS 100% Troms Stamfiskstasjon AS 100% SalMar Finnmark AS 100% SalMar Processing AS 100%

109 SalMar Japan K.K. 100% Frøya AS 66% SalMar Sales AS 100% Volstad Seafood AS 100%

Associated companies Norskott Havbruk AS 50% Bakkafrost P/F 25,2% Nordskag Næringspark AS 42,5% Trøndersk Kystkompetanse AS 20% MarineTech AS 39%

Appendix 14: Major Shareholders Name Shares % KVERVA AS 60 500 000 53,40% FOLKETRYGDFONDET 9 441 309 8,40% PARETO AKSJE NORGE 4 876 257 4,30% ODIN NORGE 4 093 706 3,60% LIN AS 2 505 105 2,20% PARETO AKTIV 2 062 104 1,80% SALMAR ASA 1 300 000 1,10% PARETO VERDI VPF 1 098 677 1,00% FORSVARETS PERSONELLSERVICE 695 000 0,60% CENTRA INVEST AS 688 819 0,60% VERDIPAPIRFONDET DNB 607 668 0,60% The Bank of New York BNY MELLON 500 000 0,50% DNB LIVSFORSIKRING ASA 487 107 0,40% STOREBRAND VERDI 470 398 0,40% KLP AKSJE NORGE INDEKS VPF 458 565 0,40% KAS DEPOSITARY TRUST COMPANY 446 059 0,40% STOREBRAND AKSJE INNLAND 400 292 0,40% STOREBRAND NORGE 395 449 0,30% MP PENSJON PK 388 531 0,30% GOLDMAN SACHS INT. 387 126 0,30% Totaltop20 91802172 81,00% Others 21 497 827 19,00% Total 113299999 100,00%

110