Tassal Group TGR.ASX

Tassal Group TGR.ASX makes for quite an interesting play at the moment. There are two big stories on this stock at the moment.

1. The recently announced Federal Senate enquiry into the practices of the Aquaculture industry in Tasmania.  Our (uninformed) view is environmentally conservative Tasmanian Government would have been making noises about this long before the federal government got involved if there was a significant environmental matter to be aired in public.  Our experience with most farmers is that they understand they depend on their environment for a living so why, f* it up. Someone with the bio of TGR’s CEO should understand this. However we certainly wouldn’t be surprised to be wrong.

2. The potential purchase of Di Costi Seafoods as referenced by several media outlets here.  This looks to be a sizeable potential acquisition for TGR and with a new aversion to debt, given it’s history, we expect that this purchase would likely be make on equity account.

There are a couple of ways forward here. TGR currently trades at less than 9.8x P/E and a 4% yield, prima facie – cheap.  On the flip side cash generation is weak and these businesses can consume a lot of capital, In the event there was some change in business configuration required due to the Senate that either (1) reduced intensity or (2) required capital investment it could be a big negative.

Dragging the negatives out a bit further – 1. using more expensive equity to pay for the Di Costi deal, in theory at least, reduces the chances that the parties can find mutually acceptable terms.  The addition of Di Costi does add a new level of diversity to this business which starts to de-risk it somewhat which should add to the value.

Our view. Buy the dip in April – a bit of negative media attention could give the opportunity to buy a fashionable sector at a good price.  Any return to normal valuation from a ‘nothing to see here’ response may well make April 2015’s price for this stock look like ‘the one that got away’.

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