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THE STORY

CEO INTERVIEW | Australis Aquaculture Limited Joshua Goldman, CEO
Australis Aquaculture, Ltd.
[ASX:AAQ; OTC:AUQCF]
June 12, 2008
Analyst Notes:
Rick Grubbs, CFA

Meeting the Global Demand for Sustainable Seafood: Five-Year Revenue Goal of $100MM

Australis Aquaculture (ASX: AAQ; OTC:AUQCF) is a producer and marketer of healthy, sustainable, farm-raised seafood. The company has led the introduction of Barramundi, a premium white fish indigenous to Australia and Southeast Asia and now has added preferential US supply agreements for ‘Basa’ another white fish that many industry experts believe will become one of the principal replacements for declining wild fishery products such as cod and haddock. The company has established baseline Barramundi production capacity of 1,000 metric tons per year in Massachusetts, and recently received approval to build a larger facility in Vietnam with annual Barramundi production capacity of 10,000 metric tons, which could, at full capacity, equal approximately $50 million in annual revenue. Australis is a rapidly growing company that has significant growth potential in both revenue and cash flow. The company’s products are currently distributed through over 150 wholesalers in both fresh and frozen forms and are available at leading restaurants and retailers under “The Better Fish ® ” brand. Based on projected demand, management expects revenue to reach approximately $100 million within five years. At that time, assuming outstanding shares of 88 million and using the current revenue multiple of 4.5x, the company could be valued between $5 and $6 per share.

Value Drivers

Industry Outlook: Commercial Aquaculture

Recent estimates of the market size of aquaculture products in the US have been around $1 billion dollars, but growing steadily at about 9% CAGR. However, the growth rate may accelerate. For years, the supply of seafood has been under pressure from overfishing, and in some cases, pollution. Harvest levels of wild fish have been static since 1996 while commercial aquaculture has been growing rapidly and now supplies more than 50% of world fish consumption. Many fisheries experts believe that overfishing will result in an accelerating pace of decline, and higher petroleum prices will add additional costs to traditional sources of supply. In some cases, the FDA has issued limits on consumption of wild-caught fish due to high levels of mercury and other contaminants. As a result of these factors, food service and retail seafood buyers have sought to diversify their sources and have increasingly turned to commercial aquaculture as an expandable and more price-stable source of supply.

Business Strategy

Tapping into the growing demand for healthy, sustainably produced fresh and frozen seafood, Australis built its first farm in Turner Falls, Massachusetts and recently expanded the facility to a capacity of about 1,000 metric tons, or 2.2 million pounds of Barramundi per year, a level that is expected to be reached in late 2008. Revenues for the fiscal year ended 2007(June), were $3.4 million, and due to increases in production and supply the company expects to post revenue of about $5.5 million for fiscal year 2008. The National Marine Fisheries Service (NMFS) estimates the U.S. market size for aquaculture products is over $1 billion in annual sales, compared to over $70 billion globally. Australis is well positioned to increase sales and market share in this growing market.

In 2004, the United States ranked 10 th in annual aquaculture production, after China, India, Vietnam, Thailand, Indonesia, Bangladesh, Japan, Chile, and Norway.

As growing conditions in Southeast Asia are perfect for large-scale marine farms, the company sought and recently received approval to build a major new marine production facility in Vietnam that will have 10x the capacity of the company’s existing US facility, or some 22 million pounds of annual production. Australis also has established proprietary contract production arrangements with approximately 300 farms and several processing facilities in Vietnam and elsewhere in Southeast Asia. Together, these facilities could be used as a base for further expansion of supply, creating product destined for US and European markets.

Brand Positioning

Australis’ The Better Fish brand ® is at the forefront of the emerging health and sustainability sector of the US seafood market. The company has established national distribution serving top tier restaurants and recently introduced its premium fresh and packaged frozen seafood line to leading US retailers including Costco, Whole Foods, Harris Teeter, Wakefern and Kroger. According to the company, discussions are also underway with numerous large US supermarket chains and retailers and wholesalers in the UK, France and other world markets. The combination of the expansion of the company’s US production facility and the results of its global supply creation initiatives are expected to support rapid sales growth to these customers.

Health & Sustainability Aspects

Australis uses no hormones, antibiotics or colorants in their feed, water, or any part of their production facilities. Artesian well water is continuously filtered and purified, resulting in a healthier fish without contamination and minimal environmental impacts. Proprietary nutritional formulations allow the company to increase beneficial omega-3 levels in its Barramundi to approximately 5-fold the levels in other farmed Barramundi (comparable to Coho Salmon) with minimal reliance on fish oil. Australis Barramundi has just 7.5 grams of fat and 195 calories per 5 ounce serving.

Financial Strength

As of the last financial report, Australis had about $6 million in cash, and only $1.4 million in debt. The company projects 5-year revenues of $100 million with strong EBITDA margins.

Consumer Acceptance and Demand Accelerates

The company anticipates global consumer acceptance and demand will continue to grow dramatically due to several factors. Buyers that procure seafood for food service and retail markets have seen the effects of overfishing and the decline in maximum sustainable yield levels from most of the major fisheries around the world. According to Josh Goldman, CEO, these buyers “increasingly recognize the need to shift their buying patterns and this effect has started to accelerate in the last 12 months. Barramundi and Basa are broadly recognized as the key new species that will supply world markets as traditional sources of supply become more expensive and harder to find.” The worldwide sustainable seafood movement has also gained significant momentum on a wholesale and retail level, benefiting Australis.

Management Execution

The Australis management team has recognized the opportunity to lead the introduction of new, sustainably-produced seafood products as consumers shift to healthy diets and as seafood buyers respond to an increasingly constrained set of choices. The company’s technology and knowledge about how to undertake large-scale production, Australis’ demonstrated ability to introduce new species to consumers, and its successful market positioning are at the core of the company’s business strategy. Australis feels that they have “a very powerful brand message which resonates with consumers” according to Mr. Goldman.

RISK FACTORS

Building Supply in Southeast Asia

Australis currently has proprietary sourcing operations in Southeast Asia that provides product to US markets today. Volume from these operations is growing rapidly and availability is expected to reach 3,000-5,000 tons per year within 24 months.

Australis’ Vietnam production project is moving forward as the company was awarded a license from the Vietnamese government to build out its production facilities there. The company projects a capacity of 10,000 metric tons of fish annually within five to seven years from Company-owned Vietnam farms. To meet its revenue goals, the company will need to deliver, within the timeframe and budgets set out for the project. Management expects the first harvest to occur within nine to 12 months.

As the company continues its expansion, access to capital will be vital.

SUMMARY

Australis has spearheaded the introduction of sustainable seafood in the US market and has developed world-class sustainable aquaculture operations that draw on its patented re-circulating technologies. The company maintains pristine farming conditions while protecting the environment, allowing a healthy, sustainable product to be delivered to the market. Australis has continued to expand its available supply through sourced product and will create a new production operation in Vietnam.

The company has targeted $100 million in revenue within five years based on the investments made to date, the distribution channels in place, and product reputation that continues to expand rapidly. At that time, assuming outstanding shares of 88 million and using the current revenue multiple of 4.5x, the company could be valued between $5 and $6 per share.