Having watched this thread from afar, it appears there is some confusion about the reason Tassal is a highly shorted stock – hint: it has nothing to do with salmon prices or China. I thought I would outline the bear case so holders may better understand the other side of this trade.
Tassal has materially inflated its earnings using aggressive accounting. The most obvious sign of this is that since 2013, Tassal has reported $340m of “operating profits” while generating negative $180m of free cash flow (including lease costs), with the gap widening in recent years. This is despite paying $130m less cash tax than accrual tax (an accounting red flag).
Here are some of the accounting techniques Tassal uses to inflate its earnings (there are more but they are less meaningful):
1. Aggressive cost capitalisation – Tassal runs an excessive amount of costs through its cash flow statement, capitalising them rather than recording them as operating expenses. This is done under the guise of “investing for the future”, however, Tassal’s operating cash flow has not grown with EBITDA or its asset base, suggesting the costs are being accounted for aggressively. This was one of the major problems at Freedom Foods.
2. Under-depreciating its assets – Tassal states underlying capex for its asset base is ~$50m per year. This compares to a depreciation charge of $30m. We know Tassal’s assumptions are aggressive by looking at Huon, which records a similar depreciation charge, despite an asset base half the size of Tassal’s.
3. Aggressive accounting for leases – changes to accounting standards have allowed Tassal to record lease expenses as financing cash outflows rather than operating expenses. In 1H21, cash lease costs were $26m vs. lease depreciation charge of $15m. This is because Tassal depreciates leases over 10 years while paying them down on a cash basis over 4 years. We know this because the lease asset balance is $215m, but cash lease cost is $55m. Analysts do not include this $55m expense when they calculate free cash flow, but this is wrong – these costs are ongoing and essential to run the business.
The difference in cash and P&L earnings explains why, despite reporting record profits every year, Tassal’s net debt continues to increase. Tassal’s use of operating leases is also an issue (leases have increased from $85m in FY17 to $215m in 1H21). This is debt, but Tassal tells the market it isn’t. This has the effect of making the balance sheet look better than it really is.
One way these issues could manifest is through a capital raising. Given Tassal raised equity for prawn growth in FY19 (over-raising by ~$80m, a red flag), it will need to come clean about the real reason for this next raise, i.e. balance sheet repair, which will mean it will likely be done at material discount to market prices.
This post is not an attempt to convince anyone to sell their shares and there certainly are reasons why Tassal’s stock price may rise in the future – many have been outlined in this forum. It is just to provide some clarity about why Tassal is a popular target for short-sellers.
Finally, before people look to refute this post, none of this is opinion (aside from the expectation of a capital raise), these are all facts, taken from public financial statements.
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