The Tassal Group Limited (ASX: TGR) share price has fallen roughly 20% since the beginning of August and now trades at around $4.10 per share. This share price fall coincides with Tassal raising capital through issuing shares, with the aim being to use the additional capital to fund an “accelerated prawn growth strategy”.
Tassal has issued shares on two recent occasions at prices above the current share price. In August, Tassal raised $108 million of capital through a share placement at $4.40 per share. In September, $17.4 million of capital was raised via a share purchase plan for existing shareholders. This was achieved at $4.16 per share.
Is Tassal’s strategy good for shareholders?
The information released by Tassal suggests that its prawn business could increase the return that Tassal is able generate for its shareholders. This is, in part, because prawn farming requires less ongoing capital expenditure and has quicker growth cycles than salmon farming. Based on this, accelerating the growth of its prawn business makes sense for Tassal and its shareholders.
Expanding more heavily into prawns also offers benefits to Tassal through diversification. Salmon farming, like all farming, has risks and by growing an alternative income stream Tassal will be less exposed to negative changes in this aspect of its business. This added diversification might make some risk-averse investors prefer to own Tassal shares as opposed to shares in Tassal’s competitor Huon Aquaculture Group Ltd (ASX: HUO).
I like Tassal’s strategy to accelerate growth in its prawn business and believe that it will likely create value for shareholders. I also feel that strong demand for salmon and prawns will ensure that Tassal has a bright future. However, after only delivering a return on equity (ROE) of 10% each of the last two years, the current Tassal share price appears to me to be above intrinsic value. This is even after taking into account a potential boost to ROE in the coming years from prawn farming. Therefore, I wouldn’t recommend investing in TGR shares at this stage.
At a lower price I might be more inclined to invest in Tassal shares. A lower share price would offer protection against falling salmon and prawn prices or the failure of Tassal to realise an improvement in its return.
While you wait for a further Tassal share price dip, take a look at these top dividend stocks for 2020.
When Edward Vesely -- our resident dividend expert -- has a stock tip, it can pay to listen. With huge winners like Dicker Data (up 147%) and Collins Food (up 105%) under his belt, Edward is building an enviable following amongst investors that are planning for retirement.
In a brand new report, Edward has just revealed what he believes are the 3 best dividend stocks for income-hungry investors to buy now. All 3 stocks are paying growing fully franked dividends giving you the opportunity to combine capital appreciation with attractive dividend yields.
Best of all, Edward’s “Top 3 Dividend Shares To Buy For 2020” report is totally free to all Motley Fool readers.
Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. 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 Scott Phillips.