Tassal has had a remarkable year. The shareprice increased over 2013 from $1.43 to $3.30, an increase of 130%. Profit after tax and dividends over FY 2013 were up over 18%, despite revenue being flat. This was mainly because of the significant reduction in borrowings. A few years ago borrowings were over 60%, with the funds used to develop the salmon farm at Macquarie Harbour in western Tasmania. At the beginning of FY 2013, borrowings were an already respectable 25% of equity and reduced over the year to 18%.
There were a number of successes for the company. Warmer summer sea temperatures on the west coast had been threatening growth of fish for harvest, but the company overcame this with a revised harvest regime. At the same time, the sales and marketing emphasis changed from international sales to domestic sales. This was highly successful, with Tassal being credited with increasing the domestic per-person consumption of salmon. Demand now outstrips supply and Tassal is the main producer. Couple this with the better terms of trade from the falling dollar which has increased the price of international salmon, mainly from Scandinavia, Tassal is now in an enviable position.
With a PE of just 14.2 and a dividend yield of 3% (just 40% of earnings) there would appear to be room for an increase in the dividend. Cashflow is even greater than earnings, with a cashflow yield in the latest year of 10.8% on current prices.
However, a new growth in business size is projected. Tassal has been granted an increase in harvest limit from 1.4M fish to 2.1M fish. To what extent this will be covered by the current rate of cashflow is not clear. Capital expenditure to fill the gap will cut in from the 2015 financial year, with resulting increase in borrowing. Dividends may be held back to pay off the borrowings, as had been done in the past.
For an agricultural company there are always risks. Disease in their farmed fish has been conrolled well, though new threats are always possible. Domestic consumption of salmon seems likely to increase, if recent trends are indication, but this is not guaranteed. Likewise, the exchange rate movement has been in Tassal's favour, but this is also not guaranteed to continue.
There may be risks, but there is also the possibility of improved pricing and the option to start international sales again. Medium term, the size of the business in projected to increase by 50%, with a subsequent increase in earnings from 2020 onwards. Overall, we see good value in this company now, with the possibility of even better times to come.
Kindly contributed by August Investments. You can read the original research from August Investments from when the share price was around $1.30.
Both the Author if this article and I (Claude) own shares in August Investments and therefore have an indirect interest in Tassal. Nothing on this website is advice, ever.
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