The price of shares in Tassal Group Limited (ASX: TGR) jumped almost 7% last week on the back the company's release of its record first-half 2018 results.
Total revenue was up 23.7% on 1H17 to $271.3 million, EBITDA increased 6.1% to $56.7 million, and NPAT rose 2.4% to $28.4 million. The company was also able to de-risk and strengthen its balance sheet position over the last 12 months, with its ratio of net debt to equity dropping from 34.6% to 13%.
This is good news for shareholders, as it allows Tassal to increase its interim dividend to 8 cents per share, up from the 7.5 cents per share it paid out in 1H17.
What has driven the strong results?
In its October AGM, Tassal Managing Director and CEO Mark A Ryan flagged that the company would try to drive profit growth by focusing on increasing its contribution margins. He stated that Tassal would do this by improving efficiencies, farming higher quality fish with larger mass, and optimising its pricing and product mix.
Tassal has so far managed to deliver on these initiatives in first half FY18.
The company increased its proportion of domestic sales made to the higher margin wholesale market to 47%, versus 42.6% in 1H17. Its De Costi Seafoods brand also continued to drive sales of many higher margin products.
Tassal also had a more optimal salmon harvest this half, with tonnage up 62.6% to 18,648 tonnes and sales volume up 43.7% to 16,908 tonnes.
Fish biomass is a key contributor to larger contribution margin, so it was pleasing to see that the average fish size for the harvest of 5.11kg came in above Tassal's 5kg average size target. Larger fish are also more sought after by the lucrative Asian market, making Tassal's products more marketable overseas.
Environmental concerns
Tassal promotes itself as the market leader and largest producer in the Australian salmon industry, but its share price had underperformed key rival Huon Aquaculture Group Ltd (ASX: HUO) over the past 12 months.
Growing public concerns over the harmful environmental impacts of the salmon industry on Tasmania's Macquarie Harbour, as well a series of protests and legal challenges raised against Tassal's new Okehampton Bay salmon farm had hurt Tassal's share price.
Environmental groups claimed that the Okehampton farm could hurt recreational fishing in the area and damage the nearby Maria Island marine park.
Tassal is striving towards reversing this negative perception of itself and the industry. It called out its environmental partnership with the World Wildlife Fund as well as its certification with the Aquaculture Stewardship Council in its half yearly report, emphasising the importance the company places on its core values of sustainability and environmental responsibility.
It has committed to investing $275 million over the next five years in environmental benefit initiatives at each of its fish farms.
Speaking to Tassal's strong first half results, CEO Mark Ryan stated: "once again, our salmon business continues to thrive, supported by better than forecast growth in local demand and increasing domestic returns for higher quality salmon, while De Costi Seafoods continues to leverage other seafood diversification to also generate increasing returns."
Foolish takeaway
Tassal has been able to counter some of the negative press it has received over the last year with a positive growth story. It has performed strongly across all key financial metrics, and exceeded many of the targets it set for itself.
Shareholders will be pleased to see that through effective management Tassal has been able to deliver on its promise to focus on markets with higher margins. This has improved its contribution margin and set itself up for an even stronger second half.
Definitely one to watch.
