Healthy eating has been a strong trend in recent years and "superfoods" such as salmon have become more popular with consumers. This trend is likely to continue as people are more health conscious with the desire to live a fuller, more active life.
Tassal Group Limited (ASX: TGR) have successfully ridden off this wave in recent years. With the entrant of fellow salmon farmer Huon Aquaculture Group Limited (ASX: HUO) late last year to the ASX, I thought it'll be interesting to compare the two.
Operating environment
Both Tassal and Huon operate in Tasmania and are vertically integrated across marine farming, processing as well as sales and marketing. In recent years, both have focused on the domestic market given volatile prices in the export market.
Tassal generates the majority of its revenues from the retail channel, selling value added products to major supermarkets and smaller specialty stores. Given the fierce competition within the supermarket industry as well as their push on white-label products, there is likely to be significant pressure on pricing and margins.
Huon, on the other hand, generates the majority of its revenues from the wholesale channel, selling fresh fish (head on gutted, or HOG) to restaurants and fishmongers. Due to strict quarantine requirements there is limited competition from international competitors in this space, which is not the case for value added products.
Financials
Per the below table, it can be seen that Tassal's Return on Assets, defined as EBIT/Total Assets, has been quite stable over the past four years. Although Huon's metrics were initially quite poor, it has improved significantly to become more profitable than Tassal. Huon's results have been driven by a reduction in mortalities at its farms and more successful increase in domestic sales.
Both companies have a conservative gearing ratio (~20%), meaning they would be able to ratchet up returns by increasing debt.
Growth Strategy
Huon is in the midst of their three year Controlled Growth investment program to increase production and efficiency at its facilities. One key milestone is the roll out of their proprietary Fortress Pens by 2016. These pens are larger which provides more space for the fish (leads to better yield) and has reduced mortalities as they're more efficient in keeping away predators.
Tassal is focused on building brand strength and increasing per capita consumption of Salmon through its sales and marketing initiatives. Through this and its cost reduction programs, the company is aiming to achieve a Return on Asset of 15%.
What to do?
Aquaculture stocks are riskier in nature because they're exposed to more factors outside of management's control (i.e. weather conditions, disease outbreaks). A successful company in this arena is one that is more adept at meeting these challenges, and I think Huon edges Tassal.
A good example is the FY2014 production level. Tassal's production fell 12% because its stock was negatively impacted by the unseasonably hot summer of 2012/13. However, Huon were able to increase its production by 12%.
I believe this is attributable to initiative Huon put in place to reduce mortalities and improve fish wellbeing, which gives me confidence that their current investment program can also be very successful.
Huon currently trades on a forward P/E of 13x, which is slightly higher than Tassel's 12.5x. However based on the above points I would argue that Huon looks cheap and could make a great addition to your portfolio today.
Those of you who are more risk averse might like to consider other prospects and luckily for you, our analysts have just drawn up their top dividends, perfect for the current low-interest rate environment. Make sure you check it out.
