Tide Turning For Tassal

By James Dunn | More Articles by James Dunn

At home, Tassal commands about half of an under-supplied – and growing – market for salmon. Feeding this domestic market means that Tassal’s historical reliance on lower-margin export sales has been replaced by higher-margin domestic sales.

Tasmanian-based fish farmer Tassal Group (TGR) has been a big success story in the global aquaculture world, getting the most knowledgeable fish buyers in the world – at the Osaka and Tokyo fish markets – to pay a premium for its Atlantic salmon. But the company has wound down its export operations, for a very good reason: the domestic market can’t get enough of the product.

Until the mid-2000s, Tassal exported about 15% of its production – mostly to Japan but also to New Zealand and the United Arab Emirates – but two years ago, it decided to scale down its export operation because of growing international competition. Only 1% of fish volume was exported in 2014, with export revenue down 94% to just $750,000.

At home, Tassal commands about half of an under-supplied – and growing – market for salmon. Feeding this domestic market means that Tassal’s historical reliance on lower-margin export sales has been replaced by higher-margin domestic sales. And driven by changes in Tassal’s business – which led this year to it being the first aquaculture company to receive full Aquaculture Stewardship Council certification from the World Wide Fund for Nature (WWF), effectively recognition that its sustainable fish farming practices are world-leading – Tassal is now earning much more per fish. Earnings per kilogram of fish are up from $2.14 in FY12 to $3.30 in FY14.

Tassal’s business is vertically integrated, running from freshwater hatcheries and saltwater aquaculture, through salmon processing and value-adding stages through to distribution and wholesaling (the company also owns two retail outlets, in Hobart and Melbourne.) It has six diverse marine farming locations, in the Huon and Derwent river estuaries, Macquarie Harbour and at sea off Bruny Island, on the southern Tasmanian coast. The company’s own brands are Tassal, Superior Gold and Tasmanian Smokehouse.

Global salmon prices used to dictate whether Tassal exported production or tried to sell domestically, but demand – and therefore pricing – is much more favourable in the domestic market than the export market. With the domestic market estimated to be 5%–10% under-supplied, the global salmon price, and the exchange rate, no longer influence Tassal’s earnings.

In FY14, Tassal, which is capitalised at $560 million, posted a 22.7% increase in net profit, to $41 million despite a 2.4% decline in revenue, to $266 million. Operating cash flow rose by 1.8% to $50.6 million. After the hot summer of 2012-13, which affected fish growth, it was expected that supply would be hit in FY14: volume was down 12.2% to 19,268 hog equivalent tonnes (the FY14 figure was down 15% from FY12).

But after that hot summer, Tassal over-hauled its smolt (young salmon) input and feeding strategies to underpin supply growth from FY15 onwards. The company expects to lift its production tonnage to 24,500 in the current year.

Operating revenue, at $260.8 million, was flat, while the core domestic market revenue slid by 2%, to $260.4 million. Retail market sales revenue was up by 11.3%, on a 3.9% rise in volume; while wholesale market sales were limited by fish supply, with volume down 40% and revenue down 30%.

The final FY 2014 dividend was 6 cents at a 50% franking rate. The total annual payout was 11.50 cents per share, up 21.1% on the prior year. The company’s gearing ratio came down from 18.4% to 15.4% – gearing has more than halved since FY10.

Salmon farming is a capital-intensive industry, and like any farming, there are risks, particularly the disease risk. At any time, Tassal has three “year class” generations of salmon at different points of their lifecycle, and getting fish through summer is a challenge. The depredations of seals are a big problem: the company says “managing seal interactions is a complex, costly and ever-changing challenge, with no easy answer.” The Tasmanian Fisheries & Wildlife Department has taken seals caught in Tassal’s pens after a gluttonous meal around to Bass Strait for release – only to have them back pigging-out in the salmon pens a week later.

The retail market is expected to drive sales and volumes going forward. Tassal is one of the few suppliers that have been able to increase their profit margins when dealing with the majors, Coles and Woolworths, but that is because salmon is a high-margin product that is considered highly nutritional, and more health and taste-oriented Australians are increasing their fish consumption.

The company knows that to meet the domestic market, it needs to double the capacity of its hatcheries from its current level of about five million fish. Tassal has invested $166.6 million over the past five years to make its business more sustainable, and at present ticks all the boxes that the Greenest Tasmanian community member could apply to it – but it always needs to stay on top of this “social licence” to operate, hence the massive spend on sustainability.

The only problem is that return on assets (ROA) and return on equity (ROE) have been poor in recent years, but Tassal appears to have reversed the decline. ROA has risen from 9.2% in FY12 to 11.8% in FY14, while ROE is up from 9.5% to 12% over the same period. Tassal says it is targeting a ROA of 15%. If it can achieve that ROA target, the resulting earnings growth could be very impressive.

According to Thomson Reuters, the analysts that follow Tassal reckon it could lift earnings per share (EPS) by 45% this year, to 26.64 cents, and boost dividend per share (DPS) by 22%, to 14 cents a share.

At $3.80, that prices Tassal on 14.3 times FY15 expected earnings, and on a prospective dividend yield of 3.7% (50% franked). While that does not appear screamingly cheap, the analysts’ consensus target price, at $4.11, implies at least about 8% upside from here.

James Dunn

About James Dunn

James Dunn was founding editor of Shares magazine and has also written for Business Review Weekly, Personal Investor, The Age and Management Today. He was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au.

View more articles by James Dunn →