Why would you short Tassals *now*?, page-749

Thanks Candle for your comments, it's always good to hear other people's opinions.

There's perhaps three things from what you say that are worthwhile distilling - and really treating quite separately. In some of your comments the cash flow and statement of asset/liabilities are used interchangeably, but we should be careful of that. The three things I've looked at - and I am really open to discussion on whether I got this right or not - is inventory, asset/labilities, and cash flow.

The example you gave from Freedom Foods was really an inventory issue. If you have increasing inventory over time, particularly if it is improperly valued, then you can get in a world of trouble. I don't see that issue with Tassal. Their biological asset and inventory has typically been relatively low, and where it has increased/decreased they have been able to deploy it at good market times. Definitely something to watch out for though, because inventory increased due to Covid. Mostly their inventory are biological assets that require feed (costs) but are growing (more revenue later) - they do have however some frozen fish that are later smoked. I suspect they will unwind a lot of their inventory as they sell down post-covid at higher prices. Let's see. Good point.

The statement of asset and liabilities in terms of 'right of use' assets is a joke - it's the new accounting standards. But, they have $214m of assets and $217m of liabilities. Are they really pumping up their asset sheet with this, seems they are netting it out? My point I have made with their environmental licenses is that it's an asset they can sell because you can't make new ones - if you want to see what that value looks like, check out the Huon takeover process.

The cash flow is where it's all at - nothing can be hidden here as all incomings and outgoing need to be reported. Whether additional air freight costs post-Covid are listed within operating EBITDA or not, they are listed as an expense on the cash flow statement. Similar with the points on leasing - all of the cash costs are included there. What you see is really quite clear. There is cash generated by operations; there are CAPEX investments; there are investing incomes; and net debt has increased. I suggest folks look at the details in the annual reports, but here is a snapshot from Morningstar from the past decade:



The challenge with capital intensive businesses is that the returns are not seen straight away. So if you look at a specific year (e.g. 2019) it looks like $139 of investing capital outflows and $50m of borrowings was needed despite the $90m of operations. The problem with that first-cut analysis is that the investing outflows is what's going to drive the future operating cash flows. Essentially, they bought land to put prawn ponds on. And essentially, that's been the case for five years - look at the media release below for example:

https://tassalgroup.com.au/wp-content/uploads/sites/2/2018/09/Media-Release-Tassal-completes-Prawn-acquisition.pdf

For those interested, here is the data PER SHARE from Morningstar for past year. You can see in there two capital raises (146m to 209m shares) that occurred to fund De Costi and prawns. The mistake there was to pay too much in dividends in my mind, and not fund it through debt. The other thing you can see is the steady improvement in sales per share, cash flow per share, assets per share, book value per share, etc.


To my mind, I think what's most illuminating is the 2012-14 situation. They invested heavily in expanding their salmon production and improving the process - and shortly after they were able to pay down $80m debt while continuing to invest in capital to drive the business. Right now we've (hopefully?) come to the end of that cycle where debt is at $200m, revenue is about to ramp up because of prawns (though air freight will be a drag on salmon), and growth CAPEX will substantially be reduced while maintenance CAPEX of $45m p/a will remain. And if that does happen, then I think a future capital raise looks very very very unlikely, and instead you will see the cash flows repairing the balance sheet.