Australia | Jun 10 2008
By Chris Shaw
Rising prices have increased investor interest in so-called soft commodity stocks and while fish doesn’t come under the same category as grains it is another food market where demand continues to increase, leaving those better established players in the aquaculture sector well placed.
Tassal Group ((TGR)) is one such company given it holds around 65% of the Atlantic Salmon market in Australia, a position broker Austock Securities suggests in its initiation of coverage on the stock is unlikely to be eroded given significant barriers to new entrants on both the production and imported product sides of the market.
Also an advantage for the company is its establised supply channels, with the broker noting the result being 90% of earnings are generated in the domestic market where it has a 65% market share via brands such as Tassal Pure Tasmania and Superior Gold, with the rest of earnings coming from exports.
Looking forward Austock expects solid earnings growth to continue thanks to a combination of improved processing efficiency on the back of a greater use of on-site harvesting and automated processing, while improvements to the breeding program are expected to produce an increase in fish size and volumes.
An increased emphasis on healthier eating by the general public should also benefit the company in the broker’s view, while putting to use some of its spare capacity should maximise the group’s earnings potential.
There are of course some issues, one being the fact the group is reliant on salmon for its operations and earnings and this lack of diversification puts the company at greater risk if there is a shift in consumer behaviour, while also increasing overall agricultural risks such as potential disease impact on profits.
As well the broker notes the company is integrating an expansion program of around $50 million and this capital expenditure on expanded processing facilities and the construction of a new hatchery presents some execution risk. History may also play a role with respect to investor sentiment as the company’s corporate predecessor went into receivership in 2002, though as the broker points out that was during a time of irrational competition within the sector.
With some risks to earnings the broker’s assessment is a valuation based one, its Hold rating reflecting the fact the stock is trading on around 14x estimated earnings per share (EPS) of 21.3c for FY09, which reflects solid growth from its FY08 EPS forecast of 15.6c and the actual FY07 outcome of 13.7c.
The broker’s estimates may prove to be slightly conservative, as the FNArena database shows consensus earnings per share forecasts of 18.3c this year and 24.1c in FY09. The database shows a total of three Buy ratings and two Holds, with an average price target of $3.63, which compares to a median price target according to Thomson One Analytics of $3.04.
Shares in Tassal Group today are little changed despite the broader market falling heavily and as at 2.10pm the stock was off just 1c at $2.98. This compares to a trading range over the past 12 months of $2.08 to $4.44.
