Company Overview: Tassal Group Limited (ASX: TGR) is a Tasmanian-based Australian seafood processing company, mainly 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. The company 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  

Decent Bottom-Line Performance in FY20 Backed by Operating Efficiency: Tassal Group Limited (ASX: TGR) is a Tasmanian-based Australian seafood processing company, mainly involved in the production and sales of premium salmon, prawn and seafood products for both the Australian and export markets. As on 28 January 2021, the company’s market capitalisation stood at ~$714.30 million. Despite the global health and economic challenges, the company has delivered a decent performance in FY20 with increasing top-line and bottom-line growth of 0.3% and 13.3%, respectively, on Y-o-Y basis. During the year, the company’s strategy was to increase operating efficiencies within salmon production to lower its costs, while diversifying operations by transferring the company’s knowledge and skills to prawns. This strategy has helped the company in generating decent increases across operational, financial, environmental and social parameters in FY20. Over the last five years (2016 to 2020), the company has witnessed significant improvement in its bottom-line with operating NPAT increasing at a CAGR of 14.08%.

Looking ahead, the company is focused 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, increasing harvest biomass, optimising margins, operating efficiencies, and a strong sustainable diversified operating platform, TGR seems well placed for long-term growth.

Five-Year Financial Summary (Source: Company Reports)

FY20 Results Highlights: For the year ended 30 June 2020, TGR reported operating EBITDA of $138.55 million, up 23% on the previous year, driven by the successful execution of the company’s growth strategy. Operating NPAT for the year stood at $64.2 million, up 13.3% on the previous year. Over the year, 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. The company also grew its prawn farming footprint by 53% in FY20.  Due to the planned increased in working capital costs to grow incremental inventory for both salmon and prawns stock, the company’s operating cashflow declined by 44.5% to $49.9 million in FY20.  As at 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 together form around 26.14% of the total shareholding while the top four constitutes the maximum holding. The Vanguard Group, Inc. and Nikko Asset Management Australia Limited are holding a maximum stake in the company at 4.92% and 4.85%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Metrics: During FY20, the company reported decent improvement in margin performance, reflecting the successful execution of its growth strategy. Gross Margin for FY20 stood at 49.2%, higher than 44.5% reported in the previous year. EBITDA margin for FY20 stood at 22.6%, higher than 20.1% in the previous year. Current ratio for FY20 stood at 3.44x, lower than 4.03x in FY19.

Growth, Profitability, and Liquidity Trend (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

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 (2016 to 2020), the company’s dividend has grown at a CAGR of 4.66%. At CMP of $3.480, TGR’s annual dividend yield stood at 5.32%, higher than the 5-year average dividend yield of 4.09%. We presume that the company will continue to maintain a decent dividend yield in future, which might attract the attention of market players.

Dividend Trend (Source: Company Reports)

Acquired Billy Creek Property: On 10 November 2020, the company announced that it had acquired Billy Creek, a circa 1,300-hectare property near TGR’s Proserpine prawn farm. The acquisition is in line with prawn growth strategy and 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. As a result of this acquisition, the company now has 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 domestic retail sales of $74.3 million, up 21.9% on pcp. The company’s domestic Wholesale sales stood at $31.0 million, down by 18.6% on pcp, impacted by COVID-19 restrictions. The company’s operating cashflow in Q1FY21 was $21.8 million better than Q1FY20. The export sales were also impacted during the quarter, as foodservice markets in many countries remain severely impacted and airfreight capacity for export markets was limited.

Change of Director’s Interest: Recently, one of the company’s directors, Mr John Watson, acquired 10,000 ordinary shares of the company at $3.3171 per share via on-market trade. He now holds 220,841 ordinary shares of the company.

Key Risks: The company is exposed to the risks and uncertainties caused by the ongoing COVID-19 pandemic. With the seal population ever-increasing, the risk of seal interactions has also increased. 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. 

Outlook: Supported by operating cashflows, debt headroom, comfortable gearing levels and a decent balance sheet, TSL is currently well placed to drive long term growth in sustainable earnings. Further, the company’s increasing harvest biomass, optimising margins, and a strong sustainable diversified operating platform, positions it well to grow earnings and returns in FY21.

For FY21, TGR intends to keep its focus on domestic sales and cost $/kg improvements for both salmon and prawn’s business. 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. On the operational front, the company is focused on increasing digitalisation of its salmon and prawn farming operations through smart farming, continued advancements in feed automation, leveraging cloud platforms and by Increasing rollout out of Internet of Things (‘IoT’) beyond environmental data systems.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of TGR has corrected by 4.13% and is trading lower than the average 52-weeks’ price level band of $2.77 and $4.70. On the technical front, the stock has a support level of ~$3.03 and resistance of ~$4.113. 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 % terms). We presume that the company can trade at a slight discount to its peer average EV/EBITDA (NTM Trading multiple), considering its impact from COVID-scenario, limited airfreight capacity for export markets, while also taking into account that the company has been trading at a discount in the past 3-years over its peer average. We have taken peers like Huon Aquaculture Group Ltd (ASX: HUO), Australian Agricultural Company Ltd (ASX: AAC), Select Harvests Ltd (ASX SHV), etc which comes under food, beverage and tobacco sector. Considering the company’s improving top-line and bottom-line trend (FY16 to FY20), decent FY20 performance, recent acquisition of Billy Creek Property, modest outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $3.48, up by 2.958% as on 28 January 2021.

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

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