The share price of Tasmanian salmon producer Tassal Group Limited (ASX: TGR), has increased by more than 20% over the past five weeks on the back of a number of positive announcements.
Although, the shares might have outperformed the S&P/ASX 200 (ASX:XJO) (Index:^AXJO) by more than 15% in that time, here are five reasons why I think there could be more gains to come:
1. De Costi Acquisition Completed – Tassal has completed the strategic acquisition of De Costi Seafooods that will now provide the company with significant leverage, scale and diversification into the broader seafood market. De Costi is one of Australia's largest seafood processors and has an established network of retail outlets. The acquisition will also improve Tassal's distribution network and provide a number of additional channels that it can directly sell its salmon products into.
2. New Retail Agreements – Tassal recently announced that is has extended its fresh salmon supply agreement with Woolworths Limited (ASX: WOW) for an additional three years beginning from October 1 2015. The salmon producer also announced it will begin supplying fresh salmon to growing supermarket chain Aldi. It appears as though Tassal is now reaping the rewards from its strategy of focusing on domestic supply and consumption and these new agreements will benefit from improved leverage from the newly acquired De Costi business.
3. Major capital expenditure completed – Tassal has invested $185 million over the past five years to build world class infrastructure that will underpin earnings growth in the future. These investments have also made Tassal a recognised leader in sustainable aquaculture. The company now has a strong platform for what at is calls 'expansionary investment' which will focus on improving bottom line profits by maximising supply growth and farm optimisation.
4. Clear Strategy – Tassal has been focused on increasing per capita consumption of salmon in the Australian market at the same time as increasing the price it receives for its products. This has proven to be successful so far, and this is likely to continue as consumers continue to look for healthier food options. In addition to its salmon products, the company is working hard to take advantage of opportunities in the broader $4.3 billion seafood industry and the De Costi acquisition is an important step in this strategy. Expansion into the seafood segment will provide an additional revenue stream, diversification of products and synergies from distribution and processing.
5. Valuation – Even though the share price has risen by more than 20% over the past five weeks, the current valuation is still attractive. The shares are trading on a price-to-earnings ratio of just 10 and investors can expect to receive a dividend yield of around 3.5%. Although some investors might be disappointed with the current yield, it should be noted that the payout ratio is currently only 35% as a result of the major capital expenditure over the past five years. With the major investments now completed, it is possible that this payout ratio could be lifted.
In my opinion, an investment in Tassal represents the best opportunity to gain exposure to the growing salmon and seafood markets. With that in mind, the shares are best suited to investors who are willing to tolerate a moderate degree of risk as there is always a high level of uncertainty in the aquaculture industry.
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