Company Overview: Tassal Group Limited (ASX: TGR) is a seafood processing company primarily involved in the farming of Atlantic Salmon and Tiger Prawns and the processing and marketing of salmon, prawns and other seafood. TGR’s world-class farms, processing facilities, and support teams cover Tasmania, New South Wales and Queensland. The company’s vision is to be the world leader in responsible ocean farming and its mission is to bring sustainable health and wellbeing to the environment and communities in which it operates.
TGR Details
Improving Top-line and Bottom-Line: 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. As on 1 October 2020, the company’s market capitalisation stood at ~$726.24 million. In FY20, the company was focused on increasing operating efficiencies within salmon production to lower its costs, while diversifying operations by transferring the Company’s knowledge and skills to prawns. This strategy helped the company in generating decent increases across operational, financial, environmental and social parameters in FY20. Over the last five years, the company has witnessed decent improvement in operating EBITDA and NPAT with CAGR of 13.95% and 14.08%, respectively.
Five-Year Financial Summary (Source: Company Reports)
Despite the emergence of COVID-19 pandemic which created several sales challenges, the company was able to enhance shareholders’ value through optimising margins via sales mix and operating efficiencies. Due to the essential nature of the company’s product, TGR continued its operations throughout the pandemic. In FY21, the company will focus on improving its farming operations through optimising biomass growth and size and sales mix, in order to reduce its cost $/kg for both salmon and prawns. The company expects to generate further growth in FY21, in terms of both harvest and sales volumes and subsequently, operating and capital returns. With diversification strategies across customers and consumers, growing and processing areas, and species and products, combined with the focus on sustainability, the company seems to be well positioned for long-term growth.
FY20 Results Highlights: During the year ended 30 June 2020 or FY20, the company was focused on growing operating EBITDA $/kg through more efficient farming and processing operations, combined with optimising sales mix. For the full year, the company reported operating EBITDA of $138.55 million, up 23.4% on previous year, driven by the successful execution of the company’s growth strategy. Further, the company’s operating NPAT stood at $64.17 million, up 13.3% on the previous year. The statutory NPAT stood at $69.11 million in FY20, up 18.3% on the previous year. Due to the planned increase in working capital costs to grow incremental inventory for both salmon and prawns stock, the company’s operating cashflow declined by 44.5% to $49.85 million in FY20.
During FY20, the company optimized salmon growth by leaving fish in the water to grow in the key growing time of July to October. As a result, the average harvest size stood at 4.52kg hog in FY20, compared to 4.39kg hog in FY19. For FY20, the company reported domestic market sales of 28,259 hog tonnes, up 5% on FY19. The Operating EBITDA $/kg grew by 14.0% to $3.60/kg in FY20, compared to FY19. In FY20, the company invested heavily in prawn production, building the infrastructure to support material earnings upside. During the year, prawn sales grew by $32.3 million to $41.4 million. As on 30 June 2020, the company reported an improved gearing ratio of 25.1% (pre AASB 16 Leases), reflecting the company’s successful $125.8 million capital raising in 1H20.
FY20 Results (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 27.34% of the total shareholding. The Vanguard Group, Inc. and Nikko Asset Management Australia Limited are the top two holders with 4.96% and 4.90% of the shares, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: For FY20, the company’s gross margin stood at 49.7%, higher than the industry median of 41.8%. Further, the company reported a net margin of 12.5%, higher than the industry median of 8.3%. The company has a current ratio of 3.44x, higher than the industry median of 1.64x, demonstrating that the company is well equipped to pay its short-term obligations.
Key Metrics (Source: Refinitiv, Thomson Reuters)
History of Paying Regular Dividends: TGR has a track record of paying decent and regular dividends to its shareholders. For FY20, the company paid a final dividend of 9 cps franked at 25%, taking the total dividend for the full year to 18 cps franked at 25%, in line with FY19. Over the last five years, the company’s dividend has grown at a CAGR of 4.66%.
Dividend Trend (Source: Company Reports)
Change of Director’s Interest: Recently, the company disclosed that one of its directors, James Fazzino, who had a direct interest in the company had acquired 1,413 ordinary shares for a consideration of $3.49 per share. He now holds 56,213 ordinary shares of the company.
Accelerating Prawn Growth Strategy: In August 2019, 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. From its prawn farming assets, the company expects to generate a return on assets and return on invested capital above historic group levels.
Outlook: In FY21, the company is focused on growing its domestic per capita consumption. In Salmon business, the company is focused on optimising Tassal branded sales and reducing cost $/kg via the improvements in its farming operations. In prawn business, the company is expecting growth in planned prawn harvest volumes to around 4,000 tonnes and increase prawn earnings. The company plans to leverage its current relationships to grow its domestic and export markets. Further, the company will continue to pursue sustainable profitable opportunities in both salmon and prawns for retail, particularly in Asia. It intends to make further investment in both salmon and prawn operations to underpin long term growth. Further, the emerging favourable consumer trends are expected to support the company’s growth in the future.
The company is expecting to generate further growth in FY21, in terms of both harvest and sales volumes and subsequently, operating and capital returns. With decent operating cashflows, debt headroom, and robust balance sheet, the company seems to be well placed for long-term growth.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price/Sales Based Market Multiple Valuation (illustrative)
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Price/Sales Based Market Multiple Method (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: On a YTD basis, the stock of TGR has corrected by 16.79% and it is currently trading below than the average 52-weeks’ price level band, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$3.42 and resistance of ~$3.8. We have valued the stock using Price to Sales based market multiple valuation method and have arrived at a target price of low double-digit upside (in % terms). Considering the company’s improving top-line and bottom-line, its decent FY20 performance, FY21 outlook and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.480, up by 0.288% on 1 October 2020.
TGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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