Thanks for sharing that report, I didn't look at the valuations...

Thanks for sharing that report, I didn't look at the valuations until now. *REALLY INTERESTING*. If people are interested, highly recommend Annex A: Grant Thornton's independent valuation report that benchmarks Huon to Tassal and the market, p.157-253. For those who don't want to dig that deep, well here's a summary for you.

Overall: They show that Huon at the price of $3.85 per share is within the fair range of $3.75-$4.23. And moreover that it is not expensive compared with Tassal's current price. Seems strange to me, but it is based on a lot of assumptions. They use a discounted cash flow (DCF) that is based around earnings power, and an asset based approach of Price to Net Tangible Assets (P/NTA).

It's really important to note that they assume a 40% control premium. Essentially to make it look fair, they handicap Tassal by 40% and say Huon is worth that much more because you control the whole business. Even after that though, Tassal still looks cheap-ish on the various metrics. So something to be aware of.


The DCF: For Huon, they assume 40,000tonnes per annum into the terminal value. They assume prices return to normal at around $14.70/KG, though only gradually. They assume air freight doesn't return back to normal until FY25 (ouch!). It's assumed around $30m CAPEX for Huon, which is on par with Tassal salmon's ($50m for salmon and prawn). They note Huon earns $2.70/KG pre-AASB16 or $3.40 post-AASB16 EBITDA margins (that's lower than Tassal mind you, which over past 5 years has been around $3.30/KG pre-AASB16 - see graph below). but then they assume Huon's margins increase to Tassal's over time to make their valuation look better.

Tassal has better margins than Huon:

Tassal is basically the cheapest when compared with earnings (check out FY22, and that excludes emptying the freezers for China):





Net Tangible Asset analysis: They did an analysis of the valuation based on NTA. They don't really explain this much, but basically outline what the net assets of the company is, remove the impairment from FY21 (not sure why, but again makes things look better for Huon), and then multiply it by x1.3-1.4. If we used that same metric for Tassal, you'd find that Tassal is trading at around 44% discount.

International sales show that Tassal is 10-20% undervalued on current earnings, but well undervalued if earnings were to normalise


Share price analysis: They did an analysis of Huon, and noted their lower share price since Covid-19 is not temporary. This consider their share price at $2.60 or whatever up until the bid, not the $3.85 it got to post bid. That is, the analysts reckon there has been a structural reduction in Huon's profitability and earnings capacity. This is because EBITDA have declined; they have more debt; and they have done capital raisings. The share prices are actually reflecting net assets, not earnings. Interesting, as Tassal trades at only around 10% discount to net assets at the moment and also has had more debt and capital raisings, so on that metric not looking great. They do however say that Huon has no real growth opportunities (yellowtail kingfish, to compete against Clean Seas?), and that's also why they deserve a discount, which I don't think is the same for Tassal who are more profitable and have more growth potential.


Market Risks and Opportunities: They have a summary on risks and why this weighs on the share price. Salmon price volatility, diseases, growing conditions, global warming (interesting discussion on the next century's ocean temperature impacts on salmon growth in Tassie), Covid-19, etc. On the flip side, they also discuss significant barriers to entry for aquaculture, and the improving industry conditions with more salmon/fish being consumed over the medium to longer term. They talk of environmental benefits of salmon protein versus other commodities. And essentially the age old story: more people, consuring more fish, with limited opportunities to expand aquaculture.

An afterthought - Why is Huon share price now dropping? Share price is now down to $3.45, well below the $3.85 share price offer + $0.15c special dividend on offer. Obviously the market is factoring in that there is a risk this transaction does not progress, or is lowered. If you are confident of the transaction, you could arbitrage 55c on the trade right now. Personally, I prefer holding Tassals.