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Go Fishing – Tassal Group

Health’s a big thing these days. Everyone’s keen to keep fit and maintain a healthy diet. As many of you would know, a dish that ticks a lot of health boxes is salmon. What you may not know is that salmon could also generate healthy returns for your portfolio.

The salmon in question is Atlantic Salmon, which does not exist naturally in the waters around or anywhere near Australia. Just to be clear, what’s called Australian salmon is not salmon at all and not particularly tasty either. Global salmon demand is primarily supplied through aquaculture. But salmon have very particular standards when it comes to water temperature and other conditions, which means that salmon farms can only exist in a few areas around the world. Norway is a major producer, as is Chile. In this neck of the woods, it’s good old Tasmania that is the only viable location for salmon farming. New Zealand could do it, but they farm Pacific Salmon, which is again, a different product.

The Australian salmon farming industry is comprised of 2 major players, Tassal (TGR) and Huon (HUO). There is also a third unlisted company called Petuna, but they are very small and the Australian industry is effectively a duopoly. The great thing from an investment perspective is that it is a protected duopoly. It is illegal to bring salmon eggs or live fish into Australia, making the risk of a new entrant close to zero. Even if fish could be secured from an incumbent (which would be an act of insanity on behalf of said incumbent), salmon farms are strictly controlled through a lease system, with all capacity absorbed by the current companies.

That’s a pretty solid industry structure. But what about cheap imports I hear you ask? Well, the Australian market is 15-20% under-supplied and imports have been filling the gap. But of critical importance is that fish can only be imported into Australia sans head and gut. Once the head is removed, the fish deteriorates much faster than it otherwise would. This makes it an unattractive product for supermarkets due to a short shelf life. The fish markets and restaurants don’t like headless fish either, as the eyes are the best gauge of fish quality.

Both Tassal and Huon are ramping up production over the next several years with the intention of pushing out imports. There is some concern around the impact on pricing that an over-supply situation could bring. But both companies understand the value of the industry structure and their need to protect it through rational pricing behaviour. Moreover, if current trends in salmon consumption continue, along with population growth, then a supply deficit is likely to remain.

In terms of whether to play this theme through an investment in Huon or Tassal, the latter’s stock price has recently pulled back. This is due to some short term weakness in wholesale salmon prices, fears of a capital raising for the potential acquisition of De Costi Seafoods and the announcement of a Federal Senate inquiry into Tasmanian aquaculture.

In terms of pricing, Tassal recently announced a $1/kg wholesale price rise, which will benefit FY16 and highlights the short term nature of current softness. Importantly though, Tassal primarily sells into the retail market (Coles and Woolies) and wholesale sales represent only around 20% of the business. The inverse is true for competitor Huon, which is why the stock downgraded significantly last week.

With regards to De Costi, should it occur, the acquisition is unlikely to require a capital raising or disrupt the dividend policy. The deal makes sense conceptually as it would allow Tassal to fully integrate its supply chain into the supermarkets, to the benefit of profitability.
As for the Senate inquiry, Tassal is officially recognised as one of the leading salmon farmers in the world and is the only one to have World Wildlife Fund accreditation. Have a look at their recently released sustainability report if in any doubt.

The bottom line is that the current weakness presents a buying opportunity in Tassal, which is our preferred exposure of the two. I think it’s worth over $4, which would put it on around 14.8x and a 4% yield. At current levels of 12x and a 4.5% yield (which is moving towards full franking), investors should swallow this one hook, line and sinker!

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