What we do and don’t like about Tassal
Atlantic Salmon producer, Tassal Group (ASX: TGR) has caught our eye recently. Although the business does not have a great economic track record, it appears that performance has been steadily progressing, following a period of substantial capital investment and management focus, and the half year result just released shows a continuing improvement trend.
Based on these improving numbers, a case can be made that TGR currently represents reasonable value, but before we consider value we need to get comfortable with quality.
TGR’s lacklustre track record likely reflects the fact that it is, to some extent, a commodity producer. While there is scope to build brand loyalty over time, a large fraction of consumers are likely to be persuaded to try alternatives if the price is right, so the barriers to competition are probably not high. This means that TGR’s fortunes are largely at the mercy of supply and demand, and the relevant investment considerations include its cost of production, and the strength and growth of its end markets.
One of the drivers of improving performance for TGR has been improvements in its production process – the ability to grow salmon more quickly and to a larger size. Initiatives like a selective breeding program and investments in infrastructure appear to be paying dividends, with more recent generations of TGR’s Salmon showing more robust growth than their predecessors.
That’s all well and good, but there is a slight catch.
You see, the more recent generations of Salmon are yet to be harvested. Under accounting standards, TGR’s profit for the current year includes an estimate of the increase in the value of its biological assets during the year. A good rate of growth during the year translates directly into higher reported net profit, even though those fish are still underwater, so to speak.
That makes sense from an accounting standpoint, but it does mean that there are some additional things to consider in interpreting the accounting numbers. Some particular questions that arise include:
- Is there anything that could happen to the salmon between now and harvest that might prevent the accounting profit from being converted into cash; and
- Are the assumptions used to value the salmon the right ones? For example, if a significantly increased volume of Salmon comes onto the market following harvest, can it be sold at the prices assumed in the accounts, or might there need to be some discounting?
There may be very good answers to these questions, but it is difficult for an outside investor to be completely comfortable with them, and for us, that is a reason not to invest. TGR may well go from strength to strength, but it’s not an easy one to judge.
Call us lazy, but we prefer the easy investment decisions.
Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To learn more about our funds please click here.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Jimmy Wang
:
Is there any chance for Tassal to grow up bigger with doing export their products after government signed FTA with China?
Blackmore’s share has jumped from $23 to $150 with 11 months, as huge demand from China.
John Emmi
:
At my local woolies, there is another imported salmon brand that is given prominence in the main freezer section. There is no Tassal product there. You have to go to a more discrete other freezer section to find Tassal product but the other brand is there also. The other brand is also cheaper and probably a higher margin for woolies.
But I do try and support the local product where possible and price difference isn’t too great.
Roger Montgomery
:
From a US Seafood Health Facts.org website: “Wild salmon get their pink or reddish flesh color through their diet of krill, plankton, and other small organisms. These organisms contain astaxanthin, which is a natural antioxidant in the same family as the beta-carotene found in carrots. Astaxanthin and beta-carotene are classified as carotenes, which are a subclass of carotenoids, and are the pigments responsible for the red, orange, and yellow colors found in foods and nature. Similarly to wild-caught salmon, farm-raised salmon are provided color through their diets by ingesting these same carotenes, primarily astaxanthin and a similar compound canthaxanthin. These compounds, which are added to salmon feed, are approved by the U.S. Food and Drug Administration (FDA) for use as color additives in food. Currently, most of the astaxanthin and canthaxanthin used in salmon feed is synthetic, although research is being done to improve the process of natural synthesis using microorganisms.
Salmon and trout have the unique ability to retain carotenes in their flesh. A white flesh fish species, such as catfish, does not have this ability and it is not necessary to include these compounds in the diet of farm-raised catfish. In order for farm-raised salmon and trout to be acceptable to consumers, their color must be similar to the wild-caught fish consumers are familiar with. Recently, it is required to label farm-raised salmon as ‘color added’ because of the addition of carotenes in their feed, seafood companies do not add dyes directly to the flesh of the fish.”
Stuart cook
:
Great post Tim. Live in Hobart and Tassal get a lot of press down here but worth noting (1) two major customers in Wollies and Coles and I believe the contract terms for each are only a few years which create risk and (2) the growth of Salmon is impacted by water temperature. So, whilst we haven’t had much summer and the water has been somewhat chilly for swimming it is good for Salmon growth but a warm summer will reduce the size and growth rate of the fish. As you note, probably better options around. Cheers.
Roger Montgomery
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Thanks STuart. ALways great to get some feedback from the coalface!
andrew-legget
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Good post Tim. I remember looking at Tassal years ago as a result of a post by a commentator on this blog and came up with many of the same thoughts.
As someone who quite enjoys his salmon, I have to admit that I have never actually had a Tassal product. I do the typical Aussie thing and go for the easier cheaper option. As its a commodity product the difference between salmon A and salmon B is likely to be negligible. It is also so much easier to find non-Tassal salmon in Coles and Woolworths.
Your questions are right on the money as well. As salmon are living things they are prone to impacts from adverse weather and at risk of disease etc. although I am certain that a producer like Tassal has taken steps to mitigate this obvious risk there it will never be completely eliminated and if that 3 sigma event comes then the damage to the underwater assets could result in a huge write off to that profit you speak of.
Secondly it is a commodity so if the supply of salmon increases without a similar rise in demand than the value of the product will obviously fall.
I don’t see a lot to like in this company and as I said, that is coming from someone who eats his fair share of seafood and particularly salmon.
Roger Montgomery
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Thanks for sharing your thoughts again Andrew.
jason clark
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Not to mention a history of paying an unfranked dividend with an underwritten Dividend Reinvestment Plan. One of Roger’s favourite capital management techniques no doubt. Not!
I just glanced they are now 50% franked I didnt look into DRP.
Roger Montgomery
:
On the money Jason!
Patrick Poke
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Hi Roger,
On this note, I’m curious what your feelings are towards IMF’s recent announcement about their dividend. I totally agree with your feelings towards underwritten DRPs, however IMF seems to have a fairly genuine case for using it from time to time.
Roger Montgomery
:
Thanks for the question Patrick. If you aggregate the numbers over time, thereby smoothing out the lumpiness, it doesn’t seem as unsettling.