This morning salmon and prawn farmer Tassal Group Ltd (ASX: TGR) updated institutional investors on its business progress in an attempt to persuade them the shares are worth buying.
The stock is up around 32% plus dividends of 17 cents per year over the past year, as it flags it's on track for a record fiscal 2019 profit result as the supply and demand dynamic for salmon works in its favour.
For the six months ending December 31 2018 it posted an operating profit of $31.7 million, up 22.3%, although it flagged the second half is not expected to match the first half due to the seasonality of sales.
Total salmon sales revenue over the half also shot up 33% to $285 million, as prices and the average weight of salmon sold lifted.
As we can see Tassal's profits can swing depending on salmon prices received, with rising consumer demand due to healthy eating, population growth, etc, a long-term tailwind.
It's also notable that Tassal has a reasonably strong competitive position, or moat, as salmon can only be farmed in cool and calm waters such as those in Tasmania.
Moreover, due to environmental issues, among others, the industry is heavily regulated in Tasmania with Tassal's only real competitor being Huon Acquaculture Group Ltd (ASX: HUO), with salmon farming permits hard to obtain.
This keeps a lid on supply and shows how the product is much less commoditised than something like the baby formula sold by Tasmanian business rival Bellamy's Australia Group Ltd (ASX: BAL).
Tassal also recently acquired the Fortune prawn group for $31.9 million and is targeting EBITDA of $25 million from prawns within 3 years.
It earned 18.6 cents per share over the first half meaning it sells for 13.2x annualised earnings (remembering the second half will be weaker) with a 3.5% trailing dividend yield. Debt is an issue with gearing (net debt to equity) at 20% and other risks such around its salmon harvest, such as adverse environmental impacts.
While the stock is reasonably "cheap" on conventional valuation metrics, I'm not a buyer of Tassal shares due to its balance sheet, among other factors.
