Monday, March 24, 2008

Pacific Andes - 3Q FY 2008 Results Analysis and Review (Part 1)

I know this review is long overdue, but I really haven't had time to get down to it till today. Anyhow, as my investments are long-term by nature, the fortunate thing is that it does not really matter if I analyzed it today, yesterday or even last month. The nature of Pacific Andes' business is not going to change overnight, or for the next 5 years for that matter ! As it is, they will probably be even more diversified (I hope !) in the next few years after announcing their intentions to expand their fishing activities to South American seas.

Anyhow, below is my quick and brief review for PAH's 3Q FY 2008 financials. Note that I will place more emphasis on the FY 2008 results once they are out by late May 2008.

Income Statement Analysis

For 3Q 2008, revenues were HK$1.11 billion, a 52% increase over the same period last year. However, economies of scale meant that COGS only increased by 40.3% over the same period, resulting in an increase in gross profit of 101%. GP Margins for 3Q 2008 stood at 24.6%, compared to inly 18.3% for 3Q 2007. For 9M 2008, gross margins were 20.7% against 9M 2007 gross margin of 17.1%. This clearly shows that economies of scale in PAH's fishing operations are beginning to bear fruit, as they are able to reap cost benefits from their enlarged fleet of purse seine vessels.

As a result of the issue of bonds to fund the increase in stake in CFG from 28.8% to 64.1%, interest expenses ballooned from just HK$57.7 million in 3Q 2007 to HK$111.3 million in 3Q 2008, an increase of 93%. For 9M 2008, the increase was 146.2% due to a low base for finance costs incurred in early FY 2007. As a result of this, profit before tax rose only 93.8%, less than the increase in gross profit but nevertheless still impressive. The fishing division (now bolstered) accounted for 55% of 3Q 2008 revenues, up from just 37.4% previously. China still made up the main bulk of sales (77.5% for 3Q 2008) and it remains to be seen if there will be pricing pressures for the Group due to the Government's announcements to combat inflation. Fish being a staple food item on Chinese menus may not make this effect too pervasive, but their next results update should mention something about their ASP (average selling prices) to hopefully be able to maintain their margins.

As explained in Note 8 (Page 10) of the result announcement, finance costs had risen due to interest attributable to US$93 million 4% convertible bonds, US$225 million 9.25% senior notes as well as increased short-term borrowings. The Group seems to have taken on a lot of debt in order to increase the contribution provided by the fishing division, and the effects of this additional debt are going to follow the company for some time into the future. I view this as part of PAH (and CFG's) expansion plan to increase their reach into the South American seas, and CY 2008 should be the year in which they manage to extend their footprint to these regions and also to add a new revenue stream to their business. As it is, it will be prudent to watch for their gearing, cash flows and financing costs in subsequent quarters.

Balance Sheet Review

The most notable increase within the Balance Sheet under "Non-Current Assets" belongs to PPE, and this increase is 77.4% from HK$863 million to HK$1,533 million. This reflects the Group's purchase of their additional stake in CFG and shows up CFG's related assets. Goodwill has also increased due to their acquisition of CFG.

Inventories have dipped slightly as this is the "low" season for PAH (4Q 2008 will be the peak season). Bills receivable has increased to HK$177 million in line with the increase in scale of operations and revenues. Current and Quick ratios are 1.56 and 1.27 respectively for 3Q 2008, and are 1.90 and 1.51 for 3Q 2007. The dip is due to the higher bank advances drawn on bills and also higher current portion of interest-bearing borrowings. As the ratios are still above 1, the company is not in any immediate danger of insolvency.

For non-current liabilities, it is worth noting that there is an amount of HK$615 million now appearing for convertible bonds. There is also an amount of HK$416.5 million worth of deferred consideration payable which I believe is a one-off amount. Net assets had increased to HK$4.25 billion from HK$2.78 billion from March 31, 2007, representing an increase of 52.9%.

Stay tuned for Part 2 of this analysis, which I will try my best to keep short and succinct !

No comments: