There will be an impact to TGR's cashflows, and will likely have to reduce or even perhaps suspend the next dividend.
There are 3 main components to the equation.
1. Demand in the salmon consumption market is facing a temporary negative shock, with hospitality all around the world temporarily shutting down or facing extreme drops in patronage. This will likely create a neutral to negative bias on the supply/demand side in general. TGR is more susceptible to this than normal due to weighting their harvest towards the 2H. A continuing observance of the hog price is required to truly keep an eye on the seasonal supply/demand situation. To countenance this, TGR have the ability to leave fish in water longer than expected and only harvest what they may operationally require to delay the receipt of cashflows.
2. A large component of their domestic earnings is directly tied to the hospitality industry, therefore the closure of these businesses will only hurt distribution sales. This is obviously tied to point 1, however what is not known is the inventory within the existing supply chain that has a rapidly diminishing market.
3. Although relatively affordable, in the current economic situation with household budgets and income uncertainty at the forefront of peoples minds, I expect a material reduction in the short term of more 'relative' expensive seafood in general. You are generally not going to be buying prawns and salmon if your one of the 1.5-2 million people expected to access the jobseeker/newstart payment scheme.
Having been in the position of raising substantial capital recently, they are extremely well capitalised and funded. I expect a delay or slowdown on prawn expansion capex in the short to medium term, to provide additional liquidity and protection from an uncertain economic impact. They have a reasonable operating margin and efficient cost structure to be able to adequately survive a substantial and prolonged slowdown. Suspension/reduction of future of dividends would also provide immediate wiggle room on operating cashflow.
I believe at current prices, they are being substantially mispriced (on a 5 year time horizon), but that is the power of doubt and uncertainty within the current environment.
Do I think it will get worse before it gets better?
Yes, however Tassal as an entity will continue to exist, and with the correct mindset and timeframe, I think it is likely investors will look back on any prices below $3 as being a good risk adjusted opportunity to purchase shares. If in doubt, consider managements actions, they have added and will likely add again in the future to come at these reduced prices.
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