The Tassal Group Limited (ASX: TGR) has struggled to outperform the ASX200 since its FY19 full-year report back in August. Its sound result was derailed by the announcement of a $108 million capital raising to fund its accelerated prawn growth strategy, which dented the company’s share price.
Things look to be on the move again, however, with Tassal shares trading 1.56% higher this morning.
So, is the Tassal Group share price in the buy zone today?
How did the company perform in FY19?
Tassal delivered pleasing numbers with record results across the board. For a company that trades at a price-to-earnings ratio of just 12, a 15.7% increase in revenue and 12.5% increase in operating net profit after tax (NPAT) is very solid. It cited that salmon demand is outpacing supply, and this is expected to continue, given consumer preferences towards healthy nutrition options.
The company has also taken the initiative to address the issue of sustainable sourcing and climate risk. In 2014, Tassal become the first salmon farming company in the world to be 100% certified by the Aquaculture Stewardship Council (ASC), which is the highest standard available for farmed seafood. Its objective is to continue to build on past successes and address present challenges including reducing marine debris and maintaining sustainability standards.
Climate plays an important role in Tassal’s operations, particularly summer water temperatures for salmon farming. The company is actively managing this risk with strategies including an increase in freezing of harvest, selective breeding, modified farming technologies and specifies diversification with prawn operations.
What does the prawn strategy bring to the table?
The company’s capital raising for its prawn growth strategy raised $108 million at a fixed price of $4.40 per share. The funds will be used to accelerate growth in prawn production, directed towards staged expansion at its Proserpine site. The company believes that there is compelling strategic and financial rationale for continued investment into its prawn business. It provides geographic and species diversification away from its salmon business in Tasmania.
Prawn farming also offers significant financial and operational opportunities due to its shorter capital and working capital cycles, as well as a shorter growth cycle (compared to salmon). The company expects that prawn earnings before interest, tax, depreciation and amortisation (EBITDA) $/kg to exceed salmon EBITDA $/kg. Once the business is fully established, it requires lower relative maintenance compared to salmon.
Tassal is targeting an annual EBITDA of $25 million within 3 years of its prawn strategy (i.e. by FY21).
The Tassal capital raising has halted its share price momentum recently, but this morning’s uptick brings its share price to $4.24 at the time of writing, a far cry from the $4.08 level it was sitting at just one week ago.
Overall, the company has been incredibly consistent in delivering reliable earnings growth in the past 5 years. Tassal fetches a reasonable valuation and its prawn expansion is a strong addition to its seafood suite.
While the share price is not as exciting as the explosive growth seen in something like the ASX tech shares, it has been reliable and a stable grower.
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Motley Fool contributor Lina Lim 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.