Shares in salmon farmer Tassal Group Limited (ASX: TGR) are up 5% to $4.51 today on reports that salmon prices are climbing due to supply restrictions related to environmental contamination on farms across Chile, Scotland and Norway.
The UK’s Financial Times paper is also reporting that a deadly algae bloom has hit Chilean salmon farms as part of a chain of adverse environmental events that has knocked global salmon supply 9% lower compared to last year.
Rising salmon prices could benefit Australia’s two large-scale salmon farmers in Tassal Group and Huon Aquaculture Group Ltd (ASX: HUO), which both rely on the cool waters of Tasmania to provide the right conditions to farm salmon.
Both businesses also enjoy the tailwind of growing per capita consumption of salmon in Australia, with Tassal supplying the retail sector via deals with the likes of Coles and Woolworths Limited’s (ASX: WOW) supermarkets, while Huon services the wholesale restaurant supply industry to a greater extent.
Neither business exports their salmon outside Australia much, but rising global benchmark prices are likely to flow through to the Australian market and prices that wholesalers are forced to pay. In turn this could flow through to the prices consumers pay at the supermarket and restaurants.
Should you buy?
Tassal and Huon enjoy certain competitive advantages and high barriers to entry as the salmon farming industry in Tasmania is heavily regulated, whereby commercial licenses are strictly controlled by the state government in order to manage the environmental impact of the farms.
This is a positive for the companies as it restricts competition and the fish cannot be farmed outside the cool waters of Tasmania (in Australasia). Although of course both businesses carry the risk of a sea lice or algae outbreak destroying their core product. If this risk were to eventuate it could decimate their share prices, which is why investors should only ever consider buying these businesses as a small part of a balanced investment portfolio.
Both trade on reasonable earnings multiple with handy dividend yields and decent outlooks in my opinion thanks to the supply and demand equation, alongside their competitive advantages.
Of the two Tassal looks to be on a marginally better valuation, although I would not be surprised to see both continue to receive investor support over the short term.
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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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