Congratulations to long term Huon owners. I think it's great that Twiggy and this strategic review is unlocking some of the true value of the company.
I'm long Tasmanian salmon, though have put my emphasis on Tassal. The market is fundamentally super strong despite the Covid headwinds - it's really important I reckon to look through those earnings bumps, and focus on the underlying earnings and capital allocation of a business. Huon has put much more emphasis on leverage, export markets, and cyclical prices - this totally blew up in their face during Covid, but that was a black swan event. But in the medium to longer term, we're going to face growing demand globally particularly in Asia, less competition from Chile, and a relatively moderate supply growth which should buoy prices for the long term. Twiggy is an amazing investor when it comes to picking the bottom of long term cycles, and surely this is it for salmon / aquaculture.
My reckoning is that Twiggy is looking to buy the asset base - particularly the licenses. Put simply, you cannot get new licenses for estuary-based salmon farming pretty much anywhere in the world. So any salmon growth needs to come from ocean pens (expensive), land-based reticulated aquaculture systems (significant time delays, unproven technology on scale), or improved operating efficiency from estuary based aquaculture. It is definitely the latter that has been the focus (larger smolts being used, etc). So being able to pick up those licenses from Huon / Benders at a discount, wow what a great opportunity to pick up 1% of the world's salmon aquaculture licenses on the cheap.
@jdliveuk you note that the market cap is worth more than the fish in the pens - not sure, but you should really focus on enterprise value because Huon is carrying so much debt even after the recent write downs, and this debt is not simply an accounting trick but rather money that needs to be paid back.
But still, taking enterprise value into account and looking at the operating earnings potential of Huon - there's a way in which you can argue it's a cheap investment for Twiggy. And good for long term holders too. If Twiggy can wrestle some of the control from the Benders, improve the capital allocation, improve some of the operational decisions.. why couldn't they return to FY18 and FY19 operating profits of $40-50m? And then you're looking at around 8% operating earnings even at today's $3 price (~$600m EV). Though I reckon that's the level of turnaround that's required for Huon's shareholders.
Again, good luck to all long term holders. And really great to see the market taking some interest in Australian aquaculture.
HUO Price at posting:
$3.02 Sentiment: None Disclosure: Not Held
