Company Overview: Tassal Group Limited (ASX: TGR) is a seafood processing company involved in the production and sales of premium salmon, prawn and seafood products for both the Australian domestic and export markets. The company is known for providing high quality Australian grown sustainable products for consumers. TGR has a geographically diverse footprint across Tasmania, making it an integral contributor to regional communities. 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 Profitability by Increasing Operating Efficiencies: Tassal Group Limited (ASX: TGR) is a leading seafood processing company in Australia mainly involved in the processing and marketing of salmon, prawns and other seafood. As on 19 November 2020, the market capitalisation of the company stood at ~$777.07 million. The company intends to achieve growth through innovating, value adding and capitalising on increased consumption of farmed salmon and prawns in the homes of Australians. From 2016 to 2020, the company’s operating EBITDA and operating NPAT grew at a CAGR of 13.95% and 14.08%, respectively, reflecting the benefits of TGR’s growth strategy which focuses on increasing its operating efficiencies in salmon and prawn business.
Five-Year Operating results Summary (Source: Company Reports)
Amid the ongoing COVID-19 pandemic, the company seems to be well placed to continue its growth trajectory as it continues to benefit from its diversification strategies across customers and consumers, growing and processing areas, and species and products. Looking ahead, the company intends to maintain its focus on increasing salmon biomass, achieving production efficiencies and optimising sales mix to grow EBITDA margin $/kg. Supported by decent operating cashflows, debt headroom, comfortable gearing levels and a healthy balance sheet, the company seems well placed to make further growth investment and withstand and respond to a range of economic scenarios while supporting its salmon and prawn operations.
FY20 Result Highlights: During FY20, the company was focused on increasing its operating efficiencies within salmon production to reduce costs, while diversifying operations by transferring the company’s knowledge and skills to prawns. In Salmon business, the company optimised its performance by leaving fish in the water to grow in the key growing time of July to October, which increased the average harvest size and delivered a substantial increase in live biomass at the end of FY20. During the year, the company grew its prawn farming footprint by 53%, setting up for further success for FY21. The company’s Farming operations grew from c190ha to c270ha over FY20.
For FY20, the company reported operating NPAT of $64.17 million, up 13.3% on the previous year, driven by optimisation of operations and sales mix. Further, the company’s operating EBITDA stood at $138.6 million, up 23% on pcp, demonstrating the successful execution of growth strategy. Despite COVID-19 implications, the domestic salmon sales mix and pricing kept up throughout the year.
The company’s operating cash flow stood at $49.9 million in FY20, down by 44.5% on the previous year, mainly due to a planned increase in working capital costs to grow incremental inventory for both salmon and prawns stock for earnings in FY21.
FY20 Results (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 26.26% of the total shareholding. The Vanguard Group, Inc. and Nikko Asset Management Australia Limited are the top two holders with 4.92% and 4.85% of the shares, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: For FY20, the company’s net margin stood at 12.5%, higher than the industry median of 8.3%. Further, the company reported EBITDA margin of 22.6%, higher than the industry median of 17.1%. The company’s current ratio for FY20 stood at 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)
Track Record of Paying Decent Dividends: TGR has a history of paying decent and regular dividends to its shareholders. For FY20, the company paid a total dividend of 18 cents per share (25% franked, in-line with previous year). From 2016 to 2020, the company’s dividend has increased at a CAGR of 4.66%.
Dividend Trend (Source: Company Reports)
Acquisition of Billy Creek: In line with its prawn growth strategy, the company recently acquired Billy Creek, a circa 1,300-hectare property near TGR’s Proserpine prawn farm. The combination of Proserpine and Billy Creek provides the company with an opportunity for an additional circa 350 hectares of ponds, supporting a total of circa 800 hectares of ponds across the wider precinct. Further, the company will now have a more economical farming path and portfolio of land assets to support the delivery of its strategic goals.
Q1FY21 Update: For Q1FY21, the company reported total sales revenue of $132.4 million, up 31.1% on the previous corresponding period (pcp). The company’s domestic retail sales stood at $74.3 million in Q1FY21, up 21.9% on pcp, benefitting from the change in consumer behavior since the introduction of COVID-19 restrictions. During the quarter, the company’s domestic wholesale sales and export sales were impacted by the COVID-19 restrictions. The company’s operating cashflow in Q1FY21 was $21.8 million better than Q1FY20.
Key Risks: 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. Further, the ongoing COVID-19 pandemic continues to present a volatile and challenging environment for the company. 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 seal population ever-increasing, the risk of seal interactions has also increased.
Outlook: For FY21, TGR intends to keep its focus on domestic sales and cost $/kg improvements for both salmon and prawns. Supported by the significant biological performance in FY20, the salmon biomass growth for FY21 is currently tracking to levels targeted for FY26 in a strategic planning context. The company expects to achieve growth in its FY21 operating earnings and returns. Further, the company expects its FY21 operating cashflow to grow as working capital build from FY20 is converted into cash. The company 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.
By optimising its sales mix and reducing its cost of growing and processing $/kg, the company intends to achieve growth in its operating earnings and returns from its salmon assets through to 2030. Notably, Prawn biomass growth is on a plan for delivery of the targeted 20,000 tonnes per annum by 2030. The company’s farming operations are expected to grow to c350ha in FY21, which will support in delivering decent returns over the medium term.
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 forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
Stock Recommendation: The stock of TGR has corrected by ~4.69% in the past six months period and is currently trading lower than the average 52-weeks price level band, offering a decent opportunity for accumulation. On the technical analysis front, the stock of the company has an immediate support level of ~$3.49 and a resistance level at ~$4.119. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in percentage terms). For the purpose, we have taken peers like Huon Aquaculture Group Ltd (ASX: HUO), Select Harvests Ltd (ASX: SHV), Australian Agricultural Company Ltd, etc. Considering the company’s decent performance in FY20, modest outlook, current trading levels, and track record of paying a decent dividend, we give a “Buy” recommendation on the stock at the closing price of $3.660, down by 0.544% on 19 November 2020.
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TGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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