AquaBounty (NASDAQ:AQB) is now swimming in a tank full of cash that it can use to build out its salmon fish farms. This works out to almost half of its existing market value of $434 million for AQB stock. That implies that the value of the business is deeply undervalued.
By my estimate, AquaBounty now has $216.5 million in cash, minus whatever it has burned through this quarter. I estimate that is about $6 million or so. This is from the company’s recent $127 million capital raise at $8.50 per share in mid-February.
At the end of 2020, AquaBounty had $95.75 million in cash on its balance sheet. The total is $222 million, but after issue costs and cash burn, I estimate it is now about $210 million.
Therefore, since the company now has about 70.939 million shares outstanding, according to its latest 10-K, cash per share is about $2.97 per share. That represents almost half (48.5%) of the AQB stock price.
This also implies that the value of the in-tank salmon farming (AquaAdvantage salmon as they call it) is worth just $224 million (i.e. $424 million market value less $210 million in net cash).
AquaBounty’s Salmon Farm Plans
We can put this figure in some perspective. The 10-K report says on page 6 that the U.S. Department of Commerce estimates the market for salmon (including imports and farmed Atlantic salmon) is about $3.4 billion to $3.5 billion. However, only about 4.7% of that amount, or $162 million or so, was fish-tank farmed.
AquaBounty intends to change that. It will use the money to build out the capacity to farm 10,000 metric tons of Atlantic salmon (about 22 million pounds). Assuming, over several years, that the company can sell that capacity at $4.77 per pound (the department’s estimate), the value is $105 million in sales annually.
That implies that the $224 million stub value for the fish farm business in AquaBounty’s existing market value is only 2.1 times revenue. This is much too low.
Granted, the buildout will cost a good deal of money, lowering the cash per share and thereby raising the price to sales ratio by double. But even at 4-times sales, this is still too cheap.
As a result, I estimate that the stock is worth at least 50% times its March 29 price, based on a 5-times sales multiple. Five times $105 million in sales (future estimate) is $525 million. Add back the cash of $210 million less $100 million to build out its capacity and the net value is $735 million.
This is 50% higher than the existing market value of $424 million.
What to Do With AQB Stock
In other words, AQB stock is worth $9.18 per share. This is a thumbnail estimate. I could be off by a wide amount in a number of areas.
For example, it may not take $100 million to build out its capacity. The company may not receive $4.77 per pound for its Atlantic salmon. Moreover, demand for Atlantic salmon in the U.S. may not take off as quickly as its capacity expansion occurs. Other factors, including poor management, could also hamper the company.
But it is important, as I always say, to have a simple model on how to value a stock in which one plans to invest.
I am not the only one who believes that the stock is undervalued. TipRanks.com indicates that the stock has an average price target from two analysts of $15 per share. That represents a potential gain of 145% over the March 29 price of $6.12 per share.
In mid-January, AQB stock reached more than $12 per share, but the stock has fallen since then. However, as the company now has the capacity to build out its salmon farms, look for the stock to make a comeback. It is a speculative play but there is ample room for it to rise to its fair value at $9.18 per share.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
