Shares in Tassal Group Limited (ASX: TGR) fell around 3 per cent today after the salmon farmer posted operating earnings of $41.3 million on revenues of $226.8 million for the six months ending December 31 2015.
The operating earnings (adjusted for one off costs) and revenue are 11.2% and 50.2% up on the prior corresponding period (pcp).
The result was something of a mixed bag though as unadjusted earnings were down 7.8%, which dragged earnings per share down to 17.2 cents from more than 20 cents in the pcp.
The statutory net profit was also down on the pcp due to movements on the balance sheet as accounting standards mean the group has to adjust the future value of biological assets according to the net market value of salmon stock levels.
Accounting adjustments aside, the growth in operational earnings and 7.1% lift in the interim dividend to 7.5 cents per share are two positives given the six-month period endured soft salmon prices and an operational focus on the De Costi Seafood acquisition.
Outlook
For investors the real consideration remains the outlook for the business, which still appears underpinned by strong underlying demand for farmed salmon and the opportunity to leverage the De Costi Seafoods acquisition.
During the half-year Tassal agreed to pay $50 million upfront to acquire De Costi with earn outs up to an additional $30 over the next three years. Investing cash outflows for the period of $48.9 million reflect this and the stock's outlook is leveraged to management's ability to deliver on its ambition to grow margins by extracting synergies and cost savings from the De Costi business.
Tassal aims to lift margins by eliminating inefficiencies in a seafood supply chain that traditionally has many vertical layers of incremental supply chain price increases via the procurement, processing and distribution elements prior to goods reaching supermarkets like Woolworths Limited (ASX: WOW) or wholesale customers.
If Tassal can build a world class vertically integrated salmon and seafood distribution business then there would appear to be a large addressable market and plenty of opportunity to lift margins.
Should you buy?
Overall the shares look reasonable value on around 12x estimated forward earnings of 34 cents per share for the full financial year, with an estimated yield in the region of 3.6%.
However, investors will need to have faith in management's competence and remember that the business has considerable regulatory and environmental risks to navigate. Another salmon farmer due to report soon is Huon Aquaculture Group Ltd (ASX: HUO), although there may be better opportunities available on the ASX elsewhere at the moment.
