Yes, they really do need to pay down their debt - particularly now that the CAPEX from prawns have largely been expended, they can focus on the depreciation/maintenance CAPEX and the rest of the free cash flow going to debt and shareholders. They have a policy of 50% of operating NPAT going to dividends - they won't change that. So the only way to repay the debt will be to reduce non-operational expenses (growth CAPEX), and increasing operating NPAT (emptying their freezers).
If you take a bit of a step back from the debt issue, it's actually been relatively smart. My feeling has been they should have borrowed as much as they could on the equity markets, and dilute shareholders through capital raises as little as possible, to fund the prawn CAPEX. The reason my preference was for debt is that interest rates are so low - and long term returns are essentially the return on assets less the weighted average cost of capital. The challenge they faced with their approach was the high debt levels (thanks to De Costi poor acquisition) going into the prawn strategy; and the poor market conditions during Covid that reduced their cash flow at a crucial point.
To the point on Tassal, Tasmanian government policy, offshore aquaculture, etc. Tassal will not be an innovator in that space, and I am fine with that. They take proven technologies to scale - that's their thing. If offshore aquaculture turns out to be economically viable and a good strategy, no doubt they will do it. Being a first mover is not necessarily an advantage. Huon had their face ripped off for being early on offshore aquaculture, and don't get me started on RAS (check out the headline below. Besides if they wait to do it with Government bipartisan support they may also get the government subsidies / policy environment to make it more conducive. By the way I am not a laggard, for example I am a shareholder of Delorean / bioenergy, I just think the executive team at Tassals are not innovative like Hamish Jolly at DEL and that's OK for me.
TGR Price at posting:
$3.47 Sentiment: Buy Disclosure: Held
