A Good Fishing Spot

Ord Minnett has taken a fancy to Tasmanian salmon, viewing the industry as offering attractive growth prospects from rising Australian consumption, with annual salmon consumption of 2.5kg per head of population having more than doubled in the last 10 years.


We believe further upside remains, however, supported by trends such as consumers seeking healthier lifestyles, changing dietary preferences and population growth.


Our estimates are for salmon consumption to rise by mid-single digit percentage rates over the medium term. Even though salmon has gained popularity, current consumption levels represent less than 15% of Australia’s per capita total seafood consumption, suggesting room to grow.


Overall, the UN Fisheries and Aquaculture Organisation (FAO) estimates that by 2025, Australia’s per capita consumption of fish will rise to 33kg, representing a 1.9% compound annual growth rate on top of population growth. Within this, we believe salmon consumption growth will be higher, hence our assumption of a 3–4% compound annual growth rate in per capita consumption.


Our preferred fish in this sea is Tassal Group (TGR), on which we have a Buy recommendation. Tassal has annual production of around 25,000 tonnes and a 48% domestic market share, and is the largest vertically integrated salmon producer in Tasmania.


The company owns hatcheries, marine farms, harvesting and processing facilities. The principal revenue stream is from the sale of fresh HOG (head-on-gutted) salmon, but the company also supplies processed products such as fillets and smoked salmon. The largest sales channel is retail and the company supplies Coles and Woolworths, with Tassal products marketed nationally under various brands.


We have also recently initiated coverage on Huon Aquaculture Group (HUO) with a Hold recommendation. The company, with annual production of around 18,000 tonnes and 35% domestic market share, is another vertically integrated salmon producer operating in Tasmania.


As with Tassal, the main Huon Aquaculture product is fresh HOG salmon, and it also supplies processed salmon products, along with a small amount of trout. The largest sales channel is Australia's wholesale markets, with a lesser amount being exported, mostly to Asia.


The local market is consolidated, with Tassal being around 1/3 larger than Huon Aquaculture, and together the two companies represent more 80% of the Australian market (which is around 2% of the global market). This market structure should encourage pricing discipline, supporting industry margins.


Globally, Tassal and Huon Aquaculture each represent less than 1% of total salmon production. Norway’s Marine Harvest is the largest producer, with a 19% global market share and annual production of around 421,000 tonnes.


At time of writing, our base-case valuations for Tassal and Huon Aquaculture suggest 20% and 4% upside, respectively. We forecast Huon Aquaculture to grow profit faster from a lower base, but we prefer Tassal, given its market position, stability of returns, and the fact that outer-year valuation multiples for Huon Aquaculture are similar to those for Tassal, suggesting a superior risk-reward profile for Tassal.

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