Shares in Tassal Group (ASX:TGR) have bounced more than 10 per cent since their lows in December. We looked at Tassal Group in our client research back then and its worth having a quick look to see if the shares have further to go (if you are not getting our research and therefore missed out, you can sign up to a free trial here).
Tassal Group’s principal activity is the farming, processing and marketing of Atlantic salmon. The Company supplies domestic supermarkets, fish markets and independent distributors, as well as export markets. It also has a presence in the broader seafood market following the acquisition of De Costi Seafoods in July 2015. For the 12 months to 30 June 2017 (FY17), salmon accounted for over 80% of sales into the domestic wholesale and retail markets, with De Costi Seafoods comprising the remainder.
Tassal Group and International Salmon Prices
The key reason for the decline in the share price from $4.36 in early November to around $3.55 in mid-December has been the marked drop in international salmon prices since May 2017. The significance of international salmon prices for Tassal Group is two-fold:
1. Firstly, international salmon prices are a key driver of sales volume into the export channel. For Tassal Group, exports currently account for 20% of volumes and is a strategically important market. This is because the Company’s strategy is to increase fish size and the fact that larger fish attract a premium price in export markets.
2. Secondly, the Company has invested heavily in order to deliver additional annual volumes of harvested salmon to FY21. Most of the volume uplift is reflected in larger-sized fish. As such, if there is a less larger salmon that Tassal Group can sell into the export market, then future margin growth is more difficult to achieve. This is because Tassal Group needs to attract premium prices in order to offset factors such as higher waste management and electricity costs. The Company may have to sell a portion of its larger salmon into the domestic wholesale market at a discount if it cannot sell into the export market.
Since mid-December, there has not been a significant improvement in international salmon prices, nor has there been a change in the outlook for international salmon prices (to decline in 2018).
One explanation could be that demand for domestic salmon in the current summer period has been higher than expected. The Company is set to report its half-year results on 23 February, which is expected to provide greater clarity on whether this is helping Tassal Group to navigate the challenges in the export market.
Tassal Group Chart
In our research report on 12 December, we noted that Tassal Group was sitting on support and there was a possibility for it to bounce. The 10 per cent bounce that has since occurred looks good and volume is coming in. However, there is a risk in chasing it here. A stock that runs up into their results can be left exposed if they do not deliver. As long as that $3.50 area holds, a positive report on 23 February could be the catalyst to purchase the stock. We would then have an upside target at the top of the range near $4.70.
Michael Gable is managing director of Fairmont Equities.
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