Wednesday, May 30, 2007

Pacific Andes Holdings Limited - FY 2007 Financial Statement Analysis and Review

Pacific Andes finally released their FY 2007 financial statements today. Revenue was up 48.9% from HK$3.55 billion to HK$5.29 billion. Gross profits increased by 67.8% and net profit attributable to shareholders increased by 49.7%, from HK$257.4 million to HK$385.4 million. However, after stripping out exceptional items (such as a gain on dilution of interest in CFG after the latter did a placement of 29 million shares to institutional investors at S$3.98 per share), net profit would have increased by 38.1% from HK$176.1 million to HK$243.2 million. This represents a significant step for PAH as it has shown consistent growth over the last 2 financial years, aided in part by their aggressive expansion into Peruvian waters and the building up of their fishing division.

Let’s do a quick numerical analysis for PAH:-

Profit Attributable to Shareholders (less exceptional gains) = HK$243.2 million (equivalent to about S$48.6 million)

Issued Share Capital = 662,215,616 shares

Earnings Per Share (cents) = 7.34 cents/share

Price-Earnings Ratio at S$1.16 closing price = 15.8 times

Thus, I would conclude PAH is reasonably valued according to FY 2007 earnings, and some may argue that it is a little high at 15.8x, but this is rather subjective as Synear Foods is trading at 20-30x PER.

Gross margins are 18.2% for FY 2007 as compared to 16.2% for FY 2006, an increase of 2 percentage points. Management has mentioned that they are in the process of negotiating the terms of the 4th VOA, and if successful, they should be able to reduce costs further. Net margins have dipped slightly for PAH, at 4.60% for FY 2007 as compared to 4.95% for FY 2006. This is probably due to higher costs incurred in acquiring new vessels, operating costs relating to these vessels as well as interest expenses on the convertible bonds and senior notes.

The company has declared a dividend of 1.08 cents per share pre-rights, and together with the interim dividend of 1.3 cents per share, makes up a total of 2.38 cents/share. The dividend yield at the closing price of $1.16 is thus 2.05%. For myself, being vested at 81 cents, the dividend yield will be 2.93%.

Balance Sheet Comments

Non-current assets had increased significantly from HK$850 million to HK$3.476 billion. The bulk of the increase can be attributed to an increase in property, plant and equipment as well as deferred charter hires for their vessels; as well as vessel permits. If I am not wrong, these vessel permits can last for a period of 50 years and so will remain in the balance sheet for quite some time. Goodwill on consolidation of CFIL also contributed to the increase.

Current assets increased by only 26.8% in total and most of the increase can be attributed to increases in receivables as well as advances to suppliers. Disappointingly, cash and bank balances only improved by about HK$8.695 million due to the large amounts of cash needed to secure the new vessels.

For current liabilities, trade and other payables saw a significant jump, which was in line with increased operational capability (there was also a corresponding jump in receivables). Finance leases also appeared on the balance sheet as I suspect the charter hire is structured as a finance lease and capitalized, rather than treated as an operating lease and expensed (this is opposed to the sale and leaseback system practiced by Ezra and Swiber which uses operating leases). Total gearing is now 116.9% which is frighteningly high, up from 82.3% a year back.

Key risks

The key risks will include massive dilution from the conversion of the CB as well as the high gearing for PAH, thus increasing interest expenses and hitting the bottom line. Also, it remains to be seen if the fishing and fishmeal division for the company can grow steadily and capture more market share.

Other risks include a worldwide ban on fishing activities due to over-fishing in certain parts of the world, which may affect revenues. Costs may also go up if appropriate equipment needs to be installed in order to remain environmentally friendly (e.g. no bottom trawling is allowed in certain areas of the ocean). Another risk is that of the demand for fish and fishmeal decreasing although this is remote considering that fish has always been a staple diet for many cultures and countries. A final risk I can think of is that of natural disasters which may damage or capsize the super-trawlers and/or purse seine vessels.

Growth Prospects

- CFG and PAH will manage to re-negotiate the terms of the 4th VOA and lower costs so as to improve gross and net margins
- The fishing and fishmeal division under PAH grows significantly as a result of more vessel acquisitions for fishmeal processing in future.
- Signing of additional VOA for CFG which will increase the allowable catch above 270,000 tons.
- Improved earnings as a result of higher margins from economies of scale in combining the operations of the expanded fleet of vessels
- Rising prices for fish and fishmeal products worldwide may give PAH a better edge in pricing their catch and reaping higher margins as a result
- PAH acquiring 63.9% means that net profits attributable to shareholders will increase significantly from FY 2008 onwards. It remains to be seen if this will translate into a higher intrinsic value. I do not expect better dividends because of the high gearing the company has got itself into. It should try to conserve cash as much as possible unless it has sufficient operating cash flows to justifying a dividend increase.

PAH have called for a SGM to be held at Grand Hyatt Hotel on June 18, 2007 (Monday) at 10:30 a.m to approve the rights issue. Assuming the rights issue is approved, the company’s share capital will double and its earnings per share will drop. Thus, unless the company significantly scales up earnings, it may not offset the benefits of an increased share float; and this will ultimately cause shareholders to weep.

Execution and cost-control are key elements for success for PAH and CFG, as the company is very aggressive in its expansion, thus exposing itself to much risk.

Note: My end-May 2007 portfolio review will be posted tomorrow as PAH’s results takes precedence over the discussion of my portfolio. Stay tuned !


Anonymous said...

Hey Musicwhiz, just wondering if it is possible for you to post your annualised gain on top of absolute gain for each counter you hold? This is with ref. to the ST report you discussed one/two weeks ago. (pls don't view this -ve.)

Meanwhile, I wish you a very very happening Honeymoon to Europe. Enjoy.. don't visit to Bourses, ha ha. Remember you are on a holiday. Perhaps along the way, help to boost Sgp's dwindling population? ;)

musicwhiz said...

Hi Anonymous,

I do post my total gain against cost as a %. By annualized gain I think you mean total gain per annum since I started investing. It's not a very convenient figure to put down as this tends to change quite drastically as my portfolio changes. But if you want a figure, currently it's about 23% to date (based on my total invested capital, including realized and unrealized gains/losses). Since I have been investing for close to 3 years, it's about an average of 8% per annum, which incidentally is the average gain for most value investors.

My mistake was in trading early on, which caused me to lose quite a bit of money. Now that I have a firm investment philosophy, I intend to stick to it.

Thanks for the honeymoon blessings ! Yes, haha I may add to Singapore's population if all goes well. Cheers !

Anonymous said...


Just wanted to thank you for your reply. It's has further convinced me that you are a responsible blogger. You take pain to respond to all questions. I had thought that it was not nice to ask for the annualized figure but decided to ask anyway to see what would your response like. Thanks!