Why would you short Tassals *now*?, page-288

I was thinking this morning, what would it take in the earnings for the market to think 'neutral' on the results. Presumably with the Covid and global salmon price headwinds, a neutral result would be no change from 1H20. Maybe no growth would be seen negatively, but I think it's not a bad benchmark to look at.

Focusing on EBITDA (pre-AASB16), the benchmark for FY20 is $127.3m or 1H20 was $66m - essentially pretty even from 1H (52%) to 2H (48%), and with increasing prawns I suspect it may tilt a bit more to 1H.

To get that $66m EBITDA, let's assume seafood remains flat at $2.2m (it's negligible really, can only go up probably). For prawns, in FY20 it was worth a total of $12.3m but is expecting to grow to $20m. I have assumed the ramp up continues at the normal pace, and so expecting 1H21 of $9m. That leaves $52.6m for salmon, which is the equivalent to a 7% decline (you could break that down to around +1 volume and -8% price action). Note I didn't look at cash flow on this recognising that prawn CAPEX will impact on it. But overall if these were the results, then the 5.4% yield is essentially safe and I can't see the market pushing the price down further.

Flip it around, and putting the 'Shorters' hat on. If they were projecting earnings to decline to a point where the current price is "expensive", how far would earnings need to drop? Well, let's say 'expensive' is 4% yield (that compares with others in the market like Inghams) - then earnings would need to drop to $46.2m, and if you assume that prawns are just flat (no growth), then that would require a 29% decline in salmon EBITDA . Or if you were to say expensive is PE ratio of 15 (currently 9.8, and 15 seems to be a high water mark), and again no changes in prawns, then that would require $41.6m of EBITDA and a 38% decline in salmon EBITDA. The shorters really are banking on things going pear shaped.

Clearly I'm bullish on TGR. And at these prices, would look at averaging down. But I don't like betting on price movement pre earnings results. If the earnings are -30% despite the prawn growth, and the price tanks, then like the Director's I'll continue to nibble away..