Company Overview: Tassal Group (ASX: TGR) is a seafood processing company involved primarily in the farming of Atlantic Salmon and Tiger Prawns and the processing and marketing of salmon, prawns and other seafood. The company farms the ocean and land to produce high quality and healthy source of food, leveraging its industry-leading scientific know-how, that promotes sustainability and efficiency in its production. TGR’s world-class farms, processing facilities, and support teams cover Tasmania, New South Wales and Queensland.

TGR Details

Improvement in Financial Metrics: Tassal Group Limited (ASX: TGR) is a leading seafood processing company in Australia, which produces and sells premium salmon, prawn and seafood products for both the Australian domestic and export markets. The company is a globally recognized leader in sustainability with world-leading technology, product quality, research and development programs. The company intends to achieve growth through innovation, value addition and capitalising on increased consumption of farmed seafood in the restaurants and homes of Australians. TGR intends to generate strong growth across its financial, operational, environmental and social parameters. Over the last five years, the company has witnessed significant improvement in its top line as well as the bottom line. From 2015 to 2019, the company’s revenue has increased at a CAGR of ~15.99% and its operating NPAT has increased at a CAGR of ~12.77%.

Although the long-term impacts of COVID-19 pandemic on the global economy and on consumer behavior are still unknown, early indications are showing some trends which are positive for Tassal Group. Further, the overall market dynamics for salmon remain positive. Moving forward, the company’s strategic focus in the salmon business is to capitalise on the greater biomass and size by delivering increasing harvest and sales. Earnings and returns in the salmon business are forecasted to grow for FY20 and beyond. The company’s investment in both salmon and prawn operations will continue to underpin long term growth.

FY19 Results Highlights: During FY19, the company saw strong growth in salmon sales while continuing to focus on driving cost efficiencies and optimising its sales mix. Over the year, total salmon sales volume increased by 10.3% to 33,856 Hog tonnes. For FY19, the company reported consolidated revenue of ~$551.81 million, compared with ~$474.07 million in FY18. Further, the company reported statutory NPAT of ~$58.4 million. Operating NPAT for the year stood at $56.6 million, up 12.5% on FY18, reflecting the strength of TGR’s platform to generate continued, sustainable growth in shareholder returns.

During the year, the company’s operating cashflow increased by 104.9% to $89.9 million, reflecting the strength of Tassal’s underlying business and operational strategy. It is worth noting that the strong operating cashflow supports the company’s strategic investment in salmon and prawn biomass as well as capital infrastructure.

H1FY20 Highlights: In the first half of FY20, the company executed its operational strategy to keep salmon in the water to grow both biomass and size, which will underpin its long-term growth in earnings and returns. Over the period, the company also executed a specific strategy to harvest and sell less salmon, to deliver strong harvest biomass, sales and earnings growth in the second half of FY20 and FY21. As a result of lesser salmon sales, the company’s total revenue declined by 15.8% to $274.49 million. For the period, the company reported operating NPAT of $30.64 million.

Despite lower sales volume in 1H20 due to the lower harvesting and sales undertaken, the company was able to grow its operating EBITDA $/kg and achieve a net profit similar to that achieved in 1H19. The company’s operating cashflow was in line with expectations at $41 million. During the period, Salmon live biomass saw a growth of 15.5%, driven by the management’s focus on sustainable farming and fish health practices. 

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 23.69% of the total shareholding. The Vanguard Group, Inc. and Dimensional Fund Advisors, L.P. hold maximum interest in the company at 4.97% and 4.17%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s gross margin stood at 49.7%, higher than the industry median of 41.9%. Further, the company’s net margin stood at 15.1%, higher than the industry median of 11.4%. The company has a current ratio of 3.18x, higher than the industry median of 1.73x, demonstrating that the company is well equipped to pay its short-term obligations. The company has an asset to equity ratio of 1.77x, lower than the industry median of 1.91x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Growing Dividends: For FY19, the company paid a total dividend of 18 cents per share (25% franked), up 2 cents per share on FY18. For the first half of FY20, the company declared an interim dividend of 9.0 cps franked at 25%, in line with pcp. From 2015-2019, the company’s dividend has grown at a CAGR of 6.48%. The annual dividend yield of the company is about 3.89% on a five-year average basis (FY15-19). Considering the continuity in payment of dividends and growth strategy for FY20 and beyond, we presume that the company will continue to reward its shareholders in years to come.

Dividend Trend (Source: Company Reports)

Accelerating Prawn Growth Strategy: Last year, in the month of August, the company raised around $125.8 million to fund an acceleration of the company’s prawn growth strategy, under which, the company had announced the acceleration of a number of growth initiatives and the acquisition of a strategically located property, Exmoor Station, that are expected to support the long-term prawn production target of 20,000t p.a. The company expects to generate a return on assets and return on invested capital from its prawn farming assets above historic group levels. As per the recent updates, Prawn biomass growth is on track to deliver a harvest of circa 2,500 tonnes for FY20. Further growth is expected in FY21 onwards through the staged expansion of farming operations.

Appointment of Director: The company recently announced the appointment of James Fazzino as a Non-Executive Director. Previously, Mr. Fazzino has held senior executive roles with Incitec Pivot Limited. From 2009 to 2017, he was Managing Director and Chief Executive Officer of Incitec Pivot Limited.

Key Risks and Challenges: As a growing company in an expanding industry, TGR faces many challenges, including reducing marine debris from its operations, fostering environmental stewardship among its employees, suppliers and contractors, and ensuring its salmon and prawn operations meet the highest sustainability standards. The company’s operations are exposed to risks of climate change as climate plays an important role in Tassal’s operations, particularly summer water temperatures for salmon farming. With the ever-increasing seal population, the risk of seal interactions has also increased as they are attracted to salmon farms.

What to Expect: In the first half of FY20, the company was focused on capitalising on the greater biomass and size to deliver increasing harvest and sales in the second half and FY21. In the Prawn business, the biomass growth is on track to deliver a harvest of circa 2,500 tonnes for FY20, in line with the company’s Prawn growth strategy. Currently, the overall market dynamics for salmon remain positive with favourable volume levels in domestic retail. Early trends regarding customer behaviour are also positive for the company as there is an increased consumer demand on sustainable products that have open traceability.

The company’s delivery of its salmon growth strategy, its strategic investment in prawns, positive market dynamics, along with growth in salmon biomass and size, is expected to drive increased in FY20 earnings and beyond. Further, the company has a well-balanced strategic growth program in place with species, geographic and earnings diversification that will help it in delivering decent returns for shareholders.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last six months, the stock of TGR has corrected by 11.37% on ASX and is inclined towards its 52 weeks low price of $2.77, offering a decent opportunity for accumulation. The company’s delivery of its salmon growth strategy, positive market dynamics and its strategic investment in prawns, is expected to drive long-term growth in earnings and returns. We have valued the stock using EV/sales multiple based illustrative relative valuation method and have arrived at a target price with low double-digit upside (in % terms). Considering the company’s salmon growth strategy, its strategic investment in prawns, its track record of paying dividends, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.70, down by 1.07% on 9 July 2020. 

TGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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