Shares in Tasmanian salmon farmer Tassal Group Limited (ASX: TGR) have been touching record highs at $5.08 this week as investors warm to its potential to deliver growing profits long into the future.
The stock is up 37% since September 2015 when the conclusions of a Senate Inquiry into the sustainability of salmon farming in Tasmania effectively halted the prospect of regulation seriously limiting Tassal's expansion plans on The Apple Isle.
Back in April 2015 I wrote about how shares sunk to a 52-week low of $3.11 after the announcement of the Senate Inquiry into the Tasmanian salmon farming industry. The Inquiry's terms of reference included the potential to seriously restrict the growth of salmon farming in Tasmania on environmental protection grounds.
This resulted in institutional investors getting cold feet and dumping the stock, but buying back in during September after the regulatory risk effectively dissipated with the Inquiry concluding that the industry was already sufficiently regulated despite protests from the powerful Tasmanian Greens party interests.
The chart below shows the lull in share price between March and September while the Australian Senate Inquiry threatened to sink the Tasmanian salmon farming industry. The rebound since September is due to institutional buyers moving back into the stock after the Inquiry concluded the industry required no further regulation beyond what already existed.
Source: Google Finance
Salmon farming is a disruptive technology in its own right, but not exactly a sexy disruptive technology like cloud accounting business XERO FPO NZ (ASX: XRO) or digital jobs marketplace Freelancer Ltd (ASX: FLN). Although on the plus side that means it does tend to generate far less investor excitement, which is a good thing for its share price relative to the valuations of the sexier tech disruptors.
In fact despite its recently rocketing share price, Tassal still trades on just 15x trailing earnings at $5.08 and it offers an estimated dividend yield around 3.1%.
Both Tassal and its rival Huon Aquaculture Group Ltd (ASX: HUO) also both benefit from growing demand for salmon due to population growth and the changing dietary habits of your average Australian.
The fact that salmon farming can only be practiced in the cold waters of Tasmania also provides something of a moat against competitors and means earnings growth should be leveraged to the twin tailwinds of organic demand growth and potential salmon price increases. Tassal's products are commonly found in the big supermarkets at Woolworths Limited (ASX: WOW), Coles and Aldi.
Tassal also bought the De Costi seafood sourcing and distribution business in 2015, which gives it more strength as a diversified and vertically integrated seafood retailer with potential to extract synergies and benefit from scale over the long term.
Foolish takeaway
An investment in Tassal Group continues to carry risks around the natural environment, regulation, and the potential for a fall in salmon or other seafood prices.
However given the valuation, tailwinds and handy (5% franked) 3.2% yield it still looks a reasonable bet to outperform the market over the long term.
