Thread by @DownunderValue

Tassal $TGR.AX $TGR half year results out and they didn’t disappoint 🤯
✅Revenue +43%
✅EBITDA +25%
✅NPAT +31%
✅FCF +137%

Let’s take a look 👇

1. But first, you can find my previous updates and the original deep dive all linked through here.

If you don’t want to look at the entire thread, the original is in my index of deep dives on my pinned tweet.

https://twitter.com/DownunderValue/status/1486223005475049477

2. The three components of my investment thesis
✅Cyclical (salmon) – peaking now but expecting to stay elevated
✅FCF conversion (prawns) – on track as CAPEX reduces
✅Valuation – remains cheap relative to peers

3. An update on the technical thanks to @ElephantCapita2

You can see we’re still closer to the bottom than the top, and fundamentals are driving this breakout.

4. But what I’m really looking for is this 2012-14 3x over an 18month period as salmon farming hit scale, CAPEX declined and FCF ramped up.

Can’t tell you about the technicals, why stock didn't pop today, but fundamentals are on target for both salmon and prawns.

5. First thesis is on the cyclical nature particularly for salmon. This has bottomed, and 1H22 was a clear turning point.

Wholesale prices up post lockdowns. Export prices and volumes way up. Expecting margins up in 2H22.

6. Cyclical prices have reached all time highs this week. I expect that due to lack of global inventory, this will remain elevated (perhaps not 90NOK) for 2H22 and maybe into 1H23.

https://twitter.com/DownunderValue/status/1492371848193277955

7. @berthon_jones and @lachlanbjensen have been all over inflation impacting this earnings season.

And Tassal has been no exception with higher costs, tighter margins, forecast to continue in to 2H22 countered to some degree by higher prices / sales mix.

8. The cycle is really getting going when we have Michael @Fritz844 and FinTwit jumping on board! But my point is this is the early stage of the cycle, not the peak - yet.

https://twitter.com/Fritz844/status/1493391951659352070

9. Inventory has declined by 4000t pushing up cash flow. We can expect another 1000t to be drawn down in 2H22 before we hit around 2,000t working capital requirements. However combined with higher prices, export EBITDA may actually increase in 2H.

10.The second part of the investment thesis is FCF improving as CAPEX pulls back.

The EBIDTA to op.CF bridge shows this *starting* to kick in, but expect more in FY23+ as air freight reduces, prawn production increases, and salmon pricing flows through.

11. You can see it more clearly here the CAPEX declining, with maintenance CAPEX stabilizing around $70m for both salmon and prawn .

12. Think of salmon/prawns as an infrastructure play. CAPEX upfront, then revenues increasing.
As biomass increases particularly for longer duration salmon, efficiency improves. Salmon is nearing optimization, but prawns are still early (4000t with target of 20000t by 2030).

13. Prawns are a big part of my thesis.

The land (CAPEX) has been paid, production is only at the early stage of ramping up, working capital is lower (6months grow vs 4yr for salmon), ROIC is higher (12% salmon vs 30% for prawns), etc.

14. Big growth numbers coming out of prawns.

And as they get more efficient, better marketing (all year round availability, fresh never frozen, etc) the EBITDA margins of $5-6 should be achievable.

15. For the first time we got a glimpse as to what the third pillar of the product life cycle would be.

16. Seaweed will reduce carbon, reduce runoff and produce consumables. This will be one of the first large-scale integrated multi-trophic aquaculture based on decades of research.

17. And here’s a deep dive on why I personally think seaweed is a great opportunity for Australian businesses.

https://twitter.com/DownunderValue/status/1443058731214770179

18. Last comments on valuation. Tassal are still trading at heavy discounts to international peers and the Huon takeover value.

https://twitter.com/DownunderValue/status/1424531783232589826

19. Huon transacted at 20x pre-Covid EBITDA. With an EV of $1.3bn, Tassal’s pre-Covid EBITDA was $140m (9x), and I estimate a non-cyclical normalised EBIDTA for Tassal of $170m (7.4x) in FY23. 40% discount is consistent with European M&A too.
seafoodsource.com/news/business-…

20. Overall, happy with these results.

The investment thesis is unfolding as planned albeit 6 months later than I originally anticipated. Target: 2x revenue, 3x EBITDA, 4x FCF by 2030 still in play.

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A deep dive per fortnight is my commitment to FinTwit.

Questions and feedback always welcome. DYOR.

Disclaimer, I'm long TGR.