Tassal Group Limited

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 has a geographically diverse footprint across Tasmania - a beautiful island with pristine waters and a rich maritime history. The company’s vision is to be the world leader in responsible ocean farming and mission is to bring sustainable health and wellbeing to the environment and communities in which it operates.

TGR Details

Due to the essential nature of the company’s products, TGR’s activities continued at normal levels amid COVID-19 pandemic. Going forward, the company’s focus is on aligning consumer needs during and after COVID-19 and driving domestic salmon and prawn per capita consumption. In FY21, the company’s operational focus is on optimising Tassal branded sales and cost $/kg improvements from farming operations. 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.

FY20 Results Highlights: During the financial year 2020 or FY20, the company generated decent increases across operational, financial, environmental, and social parameters, while successfully steering through COVID-19. During the year, the company’s operating EBITDA grew by 23% to $138.55 million, due to the successful execution of the company’s growth strategy. Statutory EBITDA stood at $145.61 million, up 26.7% on the previous year. Further, the company’s operating NPAT increased by 13.3% to $64.2 million. The statutory NPAT stood at $69.11 million in FY20, up 18.3% on the previous year.

Over the year, the company witnessed growth in salmon and prawn production. In FY20, the company was focused on growing operating EBITDA $/kg through more efficient farming and processing operations, combined with optimising sales mix. Due to the substantial strategic capital investment, the company’s operating return on assets (ROA) and Return on Invested Capital (ROIC) decreased over FY20. These investments are expected to deliver increased earnings over the short to medium-term, with returns to be enhanced over the long-term.

Due to the planned increase in working capital costs to grow incremental inventory for both salmon and prawns stock, the operating cashflow declined by 44.5% to $49.9 million in FY20, in line with expectations. As of 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 Summary (Source: Company Reports)

Segment Wise Performance:

Salmon Segment: During the second half of FY20, the company was able to drive growth in both sales and production levels of salmon, providing a platform for planned earnings growth in FY21. 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. The average harvest size stood at 4.52kg hog in FY20, compared to 4.39kg hog in FY19. Due to the operating and supply chain efficiencies, the company was able to improve the EBITDA $/kg returns. For FY20, the company reported domestic market sales of 28,259 hog tonnes, compared to 26,860 hog tonnes in FY19. The Operating EBITDA $/kg grew by 14.0% to $3.60/kg in FY20, compared to FY19.

Prawns Segment: Prawn biomass harvest stood at 2,460 tonnes in FY20, in line with expectations. During the year, Prawn sales grew by $32.3 million to $41.4 million. In FY20, the company invested heavily in prawn production, building the infrastructure to support material earnings upside. The company expects to witness a substantial increase in FY21 prawn harvest volumes to ~4,000 tonnes which will underpin a material lift in prawn earnings. The company intends to transform the Prawns business by growing the domestic market, leveraging current relationships, and using the export market as risk mitigation. Looking ahead, the company expects to generate ROA and ROIC from its prawn farming assets above historic Group levels.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 24.15% of the total shareholding. The Vanguard Group, Inc. and Dimensional Fund Advisors, L.P. are the top two holders with 4.97% and 4.30% of the shares, respectively.

Key Metrics: For FY20,  the company’s gross margin stood at 49.7%, higher than the industry median of 40.4%. 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 1.62x, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Track Record of Paying Regular Dividends: TGR has a track record of paying decent and regular dividends to its shareholders. The company has recently declared a FY20 final dividend of 9 cents per share franked at 25%, taking the total FY20 dividend to 18 cps, in line with FY19. The final dividend is payable on 29 September 2020. From 2016-2020, the company’s dividend has grown at a CAGR of 4.66%.            

Key Risks: The COVID-19 scenario is presenting a volatile and challenging environment for the company. 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 seal population ever-increasing, the risk of seal interactions has also increased.

What to Expect: The company is currently focused on delivering better quality salmon, prawns & seafood while providing sustainable returns to shareholders. TGR intends to further improve the domestic market sales mix, focused on more profitable product lines.

The operational focus in FY21 is on optimising Tassal branded sales and cost $/kg improvements from farming operations. In terms of export market, the company expects sustainable profitable opportunities in both salmon and prawns for retail, particularly in Asia. TGR will continue to pursue these export retail opportunities in FY21. To mitigate the growing risk of COVID-19, the company is using technology to further optimise its operations. The company intends to make further investment in both salmon and prawn operations to underpin long term growth. For FY21, the company expects its total capital expenditure to be around $125.1 million. Further, the emerging favourable consumer trends are expected to support the company’s growth in the future.  Supported by the increasing harvest biomass, optimising margins, and a decent sustainable diversified operating platform, TGR seems to be well placed to navigate through COVID-19 and further grow earnings and returns in FY21.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Sales Based Market Multiple Valuation (Illustrative)

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

Historical P/E Band (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: Over the last six months, the stock of TGR has corrected by 14.88% on ASX and is trading slightly below the average of its 52 weeks price band of $2.770-$4.780, offering a decent opportunity for accumulation. On the technical analysis front, the stock of the company has an immediate support level of ~$3.517 and a resistance level at ~$4.371. We have valued the stock using Price to Sales based market multiple valuation method, and  arrived at a target price of low double-digit growth (in % terms). Considering the company’s decent FY20 operational and financial performance, its focus areas for FY21, emerging favourable consumer trends, track record of paying decent dividends, and current trading levels, we give a “Buy” recommendation on the stock at the market price of $3.660 on 20 August 2020.

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

Disclaimer

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