I thought I was maxed out at ~20% of my portfolio in Tassal, but...

I thought I was maxed out at ~20% of my portfolio in Tassal, but maaybe, worth another look.

So as part of that decision making, just really trying to consider the downside risk from here. Shorts have dropped from ~12% to ~5.5% in the past 6 months, and a net reduction of ~20% in the past month alone (biggest drop in the top 20 shorts on ASX). So while that's positive I suppose, it's still ranked 19th most shorted stock on ASX and there is still negative momentum.

A chunk of my investment thesis is that I think cash flow and earnings per share are at an inflection point. Essentially, CAPEX reduces and earnings increase. This is a bit messy, but the chart below is looking at the earnings per share, PE (trailing LTM and forward NTM), and share price since it's listing.



First honing in on 2012-5. You see that after a period of stagnant / declining earnings, the share price rockets following the earning per share. During this period EBITDA did nothing special - slowly increased as it has the whole time - but cash flow per share increased from 21c to 46c in less than 3years. Or put another way, pre-2012 the CAPEX had been around $50m and operating cash flow was around $30m; by 2013 the CAPEX had reduced to $20m and the operating cash flow increased to $50m. That to me is the power of reducing CAPEX and having it flow through to the bottom line.


The long flat period went for over 4 years.. and even when the share price did start responding to the changing cash flow statement, it took two full years for the turning point to occur, and another two years for the ramp. Trying to time this is nigh on impossible, even if Tassal are presenting that the difference between EBITDA and cash flow are narrowing.

The other thing to hone in on is the valuation metrics. Over the last three years, the share price has been in a steady decline which has followed the earnings decline. You can see a big gap in 2021 between trailing and forward PE because of Covid. But even if one cherry picks the forward normalised PE, it has declined from around 15x to 12x currently. The long term historical PE has a mean of 11.96x, and right now it is 11.94x - bang on "fair value" arguably. During the 2012-15 run of 3x the share price, the PE multiple expanded 2x from around 7 to 15. We won't see that again this time, or at least not to the same extent, assuming the earnings do ramp up.



I suppose for me, I just don't know when this inflection point may start being reflected in the share price. I am confident in the potential ~17% CAGR for both earnings and FCF until 2030 form hereonin, which I think is fantastic. But downside risk may also exist. At 20% of my portfolio, I guess I want 'stupid cheap' before I start adding more as I'm not really able to average down at this price. If my average price was >$3.50 and my weighting was <5%, I'd definitely be looking to add here.