Credit Suisse warns this ASX small cap stock is likely to disappoint in February

The Huon Aquaculture Group Ltd (ASX: HUO) share price could be facing more pressure after Credit Suisse warned that the salmon producer could post a weaker than expected first half result at the February profit reporting season.

The Huon share price tumbled 1.9% to $4.55 yesterday as the broker downgraded its recommendation on the stock to “neutral” from “outperform” as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed 0.8% of its value.

There are signs that investors have dumped Huon and rotated into its rival as Tassal Group Limited (ASX: TGR) share price jumped 0.9% to $4.30 on Wednesday.

This isn’t the time to have an earnings cloud hanging over a stock as investors are feeling particularly anxious towards risk assets because economic growth seems to be faltering.

Not Getting a Bite

If there is a silver lining to the downgrade, it’s driven by rising cost and not by falling demand for Huon’s product.

“Costs are likely to only improve in 2H19 when the 2018 year class starts to be sold (which carry meaningfully lower costs than the 17YC), contributing to a 2Hskewed result,” said Credit Suisse.

“That is not unexpected, but leaves little by way of short-term positive stock catalysts and potentially modest downside risk to FY19 consensus estimates.”

At least HUO’s share price is trading on undemanding valuations and patient investors could still catch a reward in FY20 on the back of an anticipated bumper harvest.

Credit Suisse has a $4.90 price target on the stock.

Bigger Fish

Tassal may make a tastier catch for the moment, according to Credit Suisse. The TGR share price is better placed to benefit from good fish growing conditions in Tasmania and strong fish prices.

“Despite risks inherent to the sector, TGR’s long-run earnings have been relatively stable and consistent,” said the broker.

“If it achieves FY19 expectations, it will be the seventh straight year of earnings growth at an average of ~12%. At a ~13.1x FY19F PER (in line with long-run average), valuation looks undemanding.”

Credit Suisse has an “outperform” recommendation on Tassal with a price target of $4.90 a share.

The Tassal share price has been a strong performer over the past year as it delivered a gain of around 12% compared to a 2% increase in the HUO share price and a 15% drop in Clean Seas Seafood Ltd (ASX: CSS) share price.

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