Tassal Makes Headway In Key Markets

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-Pricing the main FY16 risk
-Expands wholesale share
-More upside from De Costi?
 

By Eva Brocklehurst

Salmon producer Tassal Group ((TGR)) has made a substantial recovery in terms of volumes over the past 12 months, and stronger second half retail sales and recent contract agreements suggest FY16 is shaping up well. 

Revenue grew 17% in FY15 and earnings grew 15%. Pricing weakness was mainly confined to the wholesale and export market. The company provided no quantified guidance for FY16 but expects further operating efficiencies amid continued integration of the De Costi acquisition. Contracts with Woolworths ((WOW)) and Aldi will start on October 1.

The company's retail focus is considered an advantage and a means to mitigate the volatility in wholesale markets. Having expanded market share in wholesale over FY15, the company now has a domestic retail/wholesale mix around 70/30. Credit Suisse expects an uplift from the De Costi acquisition will support earnings growth around 10%. Pricing is the main risk for FY16 and first half growth may be weak, the broker warns.

Credit Suisse understands that despite higher global salmon prices in recent months – which are based in Norwegian krone – and a weaker Australian dollar, export prices are still not high enough for this channel to be anything other than an opportunistic outlet in the short term.

Without assuming upside beyond the De Costi base case, Credit Suisse continues to view the stock favourably and has an Outperform rating and $3.95 target. The broker envisages De Costi as a way of improving margins and growing Tassal's market while helping to push back against imports.

JP Morgan was a little disappointed with the result because of the decrease in operating earnings per kilogram but expects this to improve on the back of the selective breeding program. The domestic market is currently balanced but the broker suggests exports may improve enough to take the extra volumes.

The broker also suspects De Costi could offer more in synergies than is currently being acknowledged. The acquisition of De Costi allows Tassal to improve vertical integration and optimise current processing facilities.

Salmon prices are not expected to rise domestically but global prices have improved. JP Morgan has previously estimated that at a price of $7.50/kg, domestic salmon producers make a reasonable margin from the export market, similar to the retail market. 

JP Morgan believes there could be upside in the near to medium term if Tassal can win share back from imports, or if the export price improves. The stock is considered good value and the broker has a Buy rating and $4.20 target.

There are two Buy ratings and one Hold (Morgans) on FNArena's database. The consensus target is $3.97, suggesting 8.8% upside to the last share price. The dividend yield is 4.5% on FY16 forecasts and 5.0% for FY17.
 

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