Wednesday, March 26, 2008

Pacific Andes - 3Q FY 2008 Results Analysis and Review (Part 2)

To continue my review, I will be touching on Cash Flow Statement and prospects and plans for PAH in this post.

Cash Flow Statement Review

Please note that for my cash flow review, I will be referring to numbers for 9 months ended Dec 31, 2007 (not the 3-month figures as these are more short-term by nature).

Cash generated from operating activities continues to remain healthy, as cash inflows before changes in working capital came up to HK$958 million for Dec 31, 2007 compared to just HK$542 million a year ago. Their cash generation ability from operations is not the worrying section, but I am keeping an eye on their interest paid and income taxes paid, which saw a significant rise from a year ago due to higher financing costs and expansion of their operations.

Most of the cash outflows were from investing activities, as PAH had already announced their intention to raise their stake in CFG. HK$558 million was spent on acquiring property, plant and equipment, while a whopping HK$2.37 billion was spent on raising their effective interest in CFG from 28.8% to 64.1% ! This culminated in a total cash outflow of HK$3.43 billion, a 203.5% rise over the cash outflow of HK$1.13 billion a year ago.

For financing, PAH raised cash through the issue of convertible bonds and rights shares (at $0.52 per share cum-rights). This amounted to a total of HK$ 2.49 billion, and was used to pay for the acquisition of CFG. More monies were also raised through finance leases and bank borrowings too. The result was a net cash inflow of HK$2.57 billion for 9M 2008.

These cash flows are not reflective of the usual business operating conditions for PAH as they involve a very large acquisition of CFG which is funded by pure debt, equity and convertible debt. Thus, I believe it will be more indicative to review PAH's cash flow for FY 2009 after the acquisition has gone through, in order to assess its effects on cash.

Prospects and Plans

According to PAH and CFG, the global demand for fish is on an uptrend and will rise steadily due to consumers' increasing awareness of healthy alternatives to red meat, as well as steadily rising income levels for consumers in China which means that they have the spending ability to purchase healthier products which are fish-related. This trend should see PAH and CFG improving their revenues for the forseeable future as the demand for fish is a constant and growing one which is unlikely to die down anytime soon.

PAH increased their transportation fleet from 2 to 4 reefer vessels to enhance competitiveness and efficiency. I believe the Management will be looking out for other attractive acquisition opportunities to build up their fleet in order to further enhance capacity and hence improve margins through economies of scale. Their plans to commence fishing operations in the South Pacific Ocean in FY 2009 should see new revenue flowing in, and they will deploy 3 upgraded super-trawlers there. The re-structuring of the 4th VOA is also in progress to ensure it is on a prepaid charter hire basis and not daily basis. If all this sounds uncannily familiar, it's because I had mentioned it on CFG's FY 2007 review as well ! The two companies are very closely tied and thus information may tend to get repeated.

For their fishmeal operations, Management plans to acquire more vessels and fishmeal plants in order to increase their capacity for catch and also enhance their efficiency in having more locations for unloading their fish catch. However, of late, the sub-prime crisis in USA has made financing more difficult, which may be the reason for the slowing down of their acquisition pipeline. Still, I am confident of Management's ability to negotiate for quality assets at an acceptable price to enhance value for shareholders.

Finally, shareholders should also be waiting for more news and information on PAH's proposed scrip dividend scheme. I believe this should accompany the FY 2008 financial results announcement as Management had mentioned paying dividend just once, instead of an interim and a final one.


snapper said...

Hi MW,
Thanks for the in depth financial and business analysis for Pac Andes.I've a restaurant business in Suzhou and I can tell you that the demand for marine fish is tremendous.Consumers are more than willing to pay for quality as opposed to the farmed fresh water species which are readily available, I've been observing this trend with each visit to China.I've been holding this stock since 2003 and it is an undervalued star with predictable growth in a huge market!Great patience is needed if the stock price is anything to go by.Your contribution is greatly appreciated.


musicwhiz said...

Hi Snapper,

Nice insights that you brought to the table ! Thanks for that....nothing like an actual business owner giving his view on the industry !

Yes, patience is needed for the true value of a good company to shine. As PAH had just recently issued rights and a large amount of debt, I think this will put a dampener on its growth in the short term as it has just raised its stake in CFG to 64.1%. But the effects of this are meant for long-term, and shareholders should be patient to see the growth of the company pan out in years to come.