Tuesday, May 22, 2007

China Fishery - Acquisition of 3 Purse Seine Vessels in Peru

China Fishery (CFG) is closely related to Pacific Andes (PAH) as it is a 28% owned entity, which will soon become a 63.9% owned entity of PAH once PAH completes its rights issue (see details in PAH's announcements). Thus, any news affecting CFG would directly impact PAH's prospects, and thus its valuations as well. In future, I will blog not just about news affecting PAH, but also give updates on CFG as well.

In this latest announcement, CFG acquires another 3 purse seine vessels for US$10.5 million. This expands its fish hold capacity (storage capacity for fish caught) by 692 square metres and the permits also allow CFG to fish in Peruvian waters. This increases CFG's fleet size to 26 vessels, after acquiring the previous 4 in a March 2007 announcement. These vessels are primarily used to catch Peruvian anchovy which is a key raw material used in fishmeal processing. As pointed out by a forum user on CNA forum, the prices of fishmeal are increasing as fishmeal becomes more scarce and valuable. Also, an article in TODAY online states that the incidences of fine-dining have also increased, thus increasing the demand for fresh fish. These 2 events portend well for CFG as they are able to generate better economies of scale by increasing their fleet size. Considering the vessels are valued at US$11.2 million by an independent valuer, this means that CFG got a US$0.7 million discount on the market value. The proceeds to fund the acquisition will come from the issue of the senior notes due 2013 by CFG, as well as internal funds.

This piece of news is positive as it will be earnings-accretive for CFG, and the earnings will also flow down to PAH once the acquisition of 63.9% of CFG is completed. In terms of valuation, I will do a more detailed valuation once the FY 2007 results are released for PAH. I am expecting an announcement from PAH tomorrow on its results as last year's results were released on May 23, 2006.

CSC Holdings - A Quick Analysis

CSC Holdings had announced a S$240 million contract win for the IR resort. Please get details from the company's website or SGXNet. Forums were abuzz with this new development as it seemed to affirm people's belief that the construction sector (which had been in the doldrums for the past few years) had finally woken up. Disclaimer: Construction is not within my circle of competence, but I am doing a simple valuation based on margins, PER and basic common sense.

CSC's profit for HY 2007 was about S$2.05 million out of a revenue of S$53.7 million, giving rise to a margin of 3.83% (after removing an exceptional gain on disposal of fixed assets amounting to S$3.092 million). Previously, for HY 2006, margins were even thinner at 2.64%. For simplicity sake, I will use a margin of about 3.83% for my future projection.

Assuming FY 2007's total revenue hit S$120 million, and that the contract adds S$240 million to its order book, this will bring its total revenues to about S$360 million. Applying the net margin % gives a net profit of about S$13.8 million. Thus, earnings per share is about 1.24 cents based on 1,112,392,000 shares. At today's closing price of 37.5 cents, this represents a forward PER of about 30 times. While I am not certain of the industry itself, all I can say is that 30 times forward PER is very demanding. If a PER of 15 was assigned, then the company should trade at about 19-20 cents at most. Investors who believe in the future potential of the company to secure more IR contracts may see a lowering of its prospective PER. Also, assuming it can raise margins past 5% (the sand ban may make this difficult), the forward PER may also be reduced.

Other qualitative factors are:

1) Does the company have any distinct advantage over other construction companies when it comes to bidding for projects ? What is its competitive advantage ? If it's cost leadership, then I must say it is hard to maintain when competition is so stiff for new projects.

2) The project clinched is for the IR which will be built by FY 2008. What happens next for the company ? I don't see much future earnings visibility to justify buying a part of this business, because most of the construction work in Singapore hinges upon the IRs. Once that is over, it is highly possible that the construction industry may slip back into the doldrums.

3) Management - are they clear and concise on their strategy for growing top and bottom line ? Shareholders should query management on how they intend to follow up on this contract. If there are no concrete plans, that would mean Management has no far-reaching goal for bringing the company to greater heights.

In view of the above factors, I will not be taking a stake in the business, no matter what price Mr. Market chooses to offer to me.

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