So my thoughts here on why the shorters have been circling etc after reviewing recent announcements by tgr, Huo and global market pricing are:
1) Tgr and Huo are both expanding their salmon production by around 20%+ in fy21 vs 20. So domestic supply is increasing significantly.
2) global export prices are down at 5-yr lows according to freely available charts
3) around 15-20% of tgr usually sells into domestic but due to high international freight costs, logistic supply chain and border issues and low export spot prices, both Huo and tgr are looking to sell more salmon domestically, thus further expanding domestic supply and putting downward pressure on prices
4) the 3rd supply side problem is that the wholesale channel (ie restaurants, pubs, conference venues/ catering for events, cafes etc) was heavily affected especially in VIC but to a lesser extent elsewhere in Aus in H1 fy21. The 20% usually sold into this channel had to again be diverted to retail (supermarkets) thus worsening the supply glut, or could be kept in the water for another 6-12mo but this reduces margins once fish are >3yo and >5kg hog size (as per Tassal agm).
5) on the bright side for pricing, retail supermarket salmon consumption was clearly up in 2020 but not quite enough to offset the above factors entirely, hence the need for some stock to be held back and some discounting. The wholesale channels are of course picking up nicely now, but not back to baseline levels (think zero conferences, less tourists, less population growth, less international students, and nervous people who still prefer to avoid eating out, combined with venues having to abide by the 4sqm rule thus reducing dining capacity.)
6) prawns look like another bright spot in terms of superior returns and shorter cycle vs salmon plus less price competition, but they may be somewhat affected too by the export and wholesale slumps.
7) I suspect the shorters were also hoping for the catalyst of a China ban on all seafood or on salmon at least, given the lobster dramas earlier in 2020. This risk looks to have faded given the de-escalation in tone by both China and aus on the trade front, at least for now.
8) I can’t see much biological risk (disease outbreak), regulatory risk (permit withdrawal etc for say storm bay) or debt/ financial risk (plenty of headroom), and tgr is on a low p/e with a solid 5% dividend, so any short term price weakness to $3 is likely to attract buyers quickly.
I note that the salmon price weakness has led to 10-20% price target downgrades by ubs, Goldman and credit suisse over the past month or two.
in conclusion, despite the fact that tgr will try to dress up their results well with their usual positive tone, and revenue will be up plus cashflow will improve vs fy2020 (due to harvesting biomass that previously absorbed working capital), I suspect there will be some negativity in terms of lower prices and thus lower margins, and some commentary around ongoing challenges in export markets. I doubt tgr will admit openly domestic retail oversupply issues in their carefully crafted statements but both investors and analysts should be able to read between the line when seeing their numbers on margins, ebitda and vague statements around challenges in supply, challenges in export/ wholesale channels, holding harvesting back for higher hogs in h2 fy21 and h1 fy22 etc etc.
I’ll ponder all this for or a day or two, but don’t think I’ll buy any more and may even lighten my holdings a little into the feb result as a risk hedge, then add back more once feb result has passed, especially if there is an opportunity to pick some up in the low 3s before the shorters start closing their positions
I think medium term there will still be eps growth so I can only assume the shorters will look to exit as soon as the global salmon price improves and export/ wholesale channels improve, which should allow the sp to grind back to 4.00+ by the end of 2021.
unfortunately this stock has been a pretty poor underperformed for the past 4-5yrs in terms of diluted eps growth due to multiple capital raisings and failure to grow diluted eps, but I still have faith that they can grow eps substantially with minimal further dilution over the next 3-5 years so with a 3-5 year view I’m optimistic that tgr can deliver above market returns in a market where it’s hard to find value and growth and yield.
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