Why would you short Tassals *now*?, page-797

Happy weekend holders,

Some really good points above. Not sure if there are many folks out there that explicitly are looking for aquaculture exposure that will now be drawn to Tassal, but you never know. Most fundies are actively avoiding the agriculture sector imho. I do however believe this could lead to a re-thinking and re-rating of the asset valuation - and kind of puts to bed that the ESG concerns of aquaculture / Tasmanian salmon would lead to stranded assets. On the contrary, they're in demand. So let's breakdown how some folks may look at the valuations.

I have updated the overall market caps and enterprise values based on most recent data. Note this includes all performance rights share issues; includes Huon takeover share price plus pending 12.5c interim payment; includes long and short term debt; but excludes accounting trickery like accumulated depreciations and intangibles.


Next, I have looked at the traditional operating metrics. This includes revenue, operating cash flows, operating EBITDA, and forecast EBITDA for FY21. I have excluded all non-salmon (i.e. seafood and prawns) from the Tassal calculations. So this is the valuation of Tassal for salmon only, excluding prawns and seafood. What you can clearly see here is that Tassal trades at a significant discount when looking at the operating metrics - essentially, Tassal has a significantly greater return on equity that's not reflected in the current share price.


The reality is that JBS will be presuming they can increase the operating EBITDA. If you were to look back at c.FY19 or even earlier, prior to Huon doing their ocean pens, the discrepancy would be a lot less. But even on revenues you can see there is a 20% discount. So I reckon looking at asset valuations may more useful. To be clear, I don't think Tassal is worth $15.37 based on JBS' valuation of Huon! I do however think that Tassal's salmon business alone at ~$3.60 may not be far off the mark.

It's likely that JBS are buying assets, so it's worthwhile to look at asset based valuations. Again, I have removed around $150m of Tassal's net assets (predominantly PPE) from the calculations which relate to the prawn farms.



You see that the net assets for Huon are stacked towards PPE, whereas Tassal has a lot more biological assets (worth less in M&A). Moreover, both have similar 'right of use assets' which in my mind is the most valuable: the licenses to operate salmon farms which globally are in short supply as not easy to expand salmon farms these days. So on this basis, you can see that Huon trades at a discount when you look purely at those tangible assets ex biological assets.

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So I don't know how the market reacts Monday, next week, or whatever. I do know that JBS have paid a lot for assets that currently aren't very financially productive, but they have the potential to be under better management and with more CAPEX. Considering the above calculations don't include prawns that have a substantially better growth trajectory, it's clear to me that Tassal is still trading at some sort of a discount and this may provide a bit of a floor in the market.

GLTAH.