Pacific Andes Resources Development

OCBC on 24 Jan 2013

Summary: Pacific Andes Resources Development (PARD) has underperformed the market despite the recent rally in the equity market. Its share price has stayed below its pre-FY12 results level in Nov 2012 when it posted a disappointing set of 4Q and FY12 results. As a recap, it also slashed its dividend payout from 1.08 S cents (about one-third of its earnings) to 0.3 S cent (14.5% of earnings). PARD’s earnings growth trend is now limited by several key challenges ahead, including growing its fishing operations and ensuring increases in catch volumes/entitlements in all its fishing grounds for the near to medium term. We projected flat FY13 earnings of HK$638m, which is a decline from the recent high of HK$773m in FY10. As such, we are CEASING COVERAGE on the stock due to the lack of medium-term price drivers and muted earnings outlook.

Share price underperformance 
In Nov 2012, both Pacific Andes Resources Development (PARD) and China Fishery Group (CFG) posted earnings which were below market expectations. Share prices of both stocks have aptly captured this disappointment and despite recent broader market rally, both stocks failed to recover grounds. After the results, PARD traded down from 14.9 cents in Nov 2012 to as low as 12.9 cents, but has yet to recover back to the 14.9 cents level since Nov 2012. Similarly, CFG fell from 68.5 cents gains to as low as 53 cents and is currently hovering around 62 cents.

Below expectations results and cut in dividend payout
As a recap, PARD generated FY12 net earnings of HK$627.7m, below market expectations of HK$755.3m, while CFG was hurt by several factors including lower catch volumes and reported a 25% drop in FY12 earnings to US$78.1m. PARD also saw weakness in its margins. Together with the disappointing results, management also slashed its dividend payout. For PARD, the dividend payout was cut to 0.3 S cent (14.5% of earnings), down from 1.08 S cents (which traditionally accounted for about one-third of its earnings). For CFG, dividend payout was cut to 1.9 S cents versus 4.5 S cents previously. 

Ceasing coverage on PARD
PARD’s earnings growth trend is now limited by several key challenges ahead, including growing its fishing operations and ensuring increases in catch volumes/entitlements in all its fishing grounds. We projected flat FY13 earnings of HK$638m (down 17.5% from FY10 high of HK$773m). Since June 2012, the stock has been trading below 16 cents (range of 12.9 to 15.8 cents with an average price of 14.6 cents). There appears to be limited near-to medium-term share price drivers for now. Assuming an average price of 14.6 cents (which is close to our fair value estimate of 14.3 cents) and based on last year’s dividend payout of 0.3 S cent, the dividend yield is only 2%, sharply below its historical level. As such, we are CEASING COVERAGE on the stock due to the lack of medium-term price drivers and muted earnings outlook.

Pacific Andes

OCBC on 27 Nov 2012

Pacific Andes Resources Development (PARD) delivered a disappointing set of 4Q results, dragged down by lower earnings from China Fishery Group (CFG). Net earnings plunged to HK$8.9m, down from HK$146.1m in 3Q12. As a result of this, dividend per share was slashed from 1.08 S cents (which traditionally accounted for about one-third of its earnings) to 0.3 S cent (14.5% of earnings). Outlook is muted, and management is exploring new growth areas. While the Supply Chain Management (SCM) operation is still relative stable, the fishing operation appears to be under pressure. Overall, in view of the weaker outlook, we have cut our estimates for FY13 from HK$839m to HK$638m. In addition, we have also dropped our DPS projection to be the same as this year’s payout at 0.3 S cent. Using the same valuation peg, but moving to blended FY13/14 earnings, we dropped our fair value estimate from 17.8 cents to 14.3 cents. Downgrade to HOLD.

Sharp drop in 4Q earnings
Pacific Andes Resources Development (PARD) delivered a sharply below expectations set of 4Q results. Net earnings plunged to HK$8.9m, down from HK$146.1m in 3Q12. This meant full year earnings of HK$627.7m, way below market expectations of HK$755.3m. Management explained the main reason for the sharp decline in earnings was largely due to lower-than-expected earnings from China Fishery Group (CFG), which was dragged down by several factors including lower activity in the North Atlantic as well as lower catch volume in the South Pacific Ocean. In addition, overall average selling price (ASP) also fell 3%. This led to a sharp decline in margins. For PARD, operating margin fell from 10.2% in 4Q11 and 12.5% in 3Q12 to 6.4% in 4Q12. Other margins fell in tandem. 

CFG disappointed, massive cut in dividend payout 
CFG disappointed and posted net earnings of US$78.1m for FY12 versus US$103.7m in the previous year. This also translated into lower dividend payout of 1.9 S cents for CFG shareholders versus 4.5 S cents previously. Similarly, PARD shareholders will also see a cut in dividend payout from 1.08 S cents (which traditionally accounted for about one-third of its earnings) to 0.3 S cent (14.5% of earnings).

Cut FV to 14.3 cents; downgrade to HOLD
The key challenge is the lower activity in the South Pacific, which is unlikely to pick up any time soon. In addition, there has also been a 70% cut in Total Allowable Catch (TAC) in Peru for the upcoming fishing season. While the Supply Chain Management (SCM) operation is still relative stable, the fishing operation appears to be under pressure to find new areas of growth. Overall, in view of the weaker outlook, we have cut our net earnings estimates for FY13 from HK$839m to HK$638m. In addition, we have also dropped our DPS projection to be the same as this year’s payout of 0.3 S cent. Using the same valuation peg, but moving to blended FY13/14 earnings, we dropped our fair value estimate from 17.8 cents to 14.3 cents. Downgrade to HOLD.

Pacific Andes Resources Development

OCBC on 10 Aug 2012

Pacific Andes Resources Development (PARD) posted a 43% YoY drop in 3QFY12 net earnings to HK$146.1m or 19% of our full year estimate and is in line with our expectations. Fishery & Fish Supply accounted for about 47% of revenue with the balance from the SCM business. We are keeping our FY12 estimates intact. While fish consumption is fairly defensive and unlikely to be affected by the global economic slowdown, pricing is likely to soften due to uncertain economic outlook and market conditions. We are retaining our fair value estimate of 17.8 cents and BUY rating. Yield is still healthy at more than 7%.

Slow quarter with 3Q net earnings of HK$146m
Pacific Andes Resources Development (PARD) posted a 43% YoY drop in 3QFY12 net earnings to HK$146.1m. This formed about 19% of our full year estimate or a total of 78% for the 9-month period – which is fairly in line with our expectations. Revenue dropped 15% YoY to HK$2530.1m. However, net margin fell from last year’s 8.6% to 5.8% in the quarter. Fishery & Fish Supply accounted for about 47% of revenue with the balance from the SCM business. The former saw a drop in gross margin from 38.5% last year to 26.9% this year. For the 9-month period, revenue was up 16% to HK$8302.7m, while net profit was flat at HK$618.8m.

South Pacific is still not meeting expectations
Management has acknowledged that the catch volume from the South Pacific is not up to expectations despite the potential size there. It is continuing with its strategy of better utilisation of vessels via re-deploying its assets to better yielding fishing grounds. Funds from the recent Senior Notes will be deployed in the coming months and are likely to be utilised to strengthen its business.

Retain FV, but limited near to medium term price drivers
As the 3Q results were largely in line with our estimates, we are retaining our fair value estimate of 17.8 cents. While fish consumption is fairly defensive and unlikely to be affected by the global economic slowdown, pricing, which has already eased in 3Q12, is likely to soften. Risks of this happening have increased especially in view of the still-uncertain economic outlook. As such, we do not see any near to medium term price impetus. However, yield is still healthy at more than 7% based on the last done price of 14.8 cents. Maintain BUY.

Pacific Andes Resources Developments Ltd

OCBC on 14 May 2012

Pacific Andes Resources Developments Ltd (Pacific Andes) reported a stronger-than-expected 23% YoY jump in 2Q net earnings to HK$333.0m. Going forward, there are several positives including better quota, catch volume, higher selling prices for fishmeal as well as better efficiency and contribution from Tassal. In terms of its key markets, China is stable and it is seeing demand coming back from Japan and Korea. Africa is expected to be the fastest growing market for the group. We have raised our FY12 earnings from HK$731m to HK$791m due to the stronger 2Q. Using the same 6.5x earnings peg and adjusting for the rights issue, our fair value estimate for the stock is 17.8 cents. At current price, we maintain our BUY rating.

Stronger-than-expected 2Q results
Pacific Andes Resources Developments Ltd (Pacific Andes) reported a strong set of 2Q results (for the 3-month period ended 28 March 2012). Revenue grew 35% to HK$3,320.5m. Net earnings improved 23% YoY to HK$333.0m and also higher than our estimates. This gives 1H net earnings of HK$472.6m, or 65% of our full year estimates. The group attributed the better performance to both its core businesses of frozen fish SCM (53% of revenue) as well as better high revenue from its fishery and fish supply business (47%). The key markets are China (accounting for 69% of sales), Africa (13%), East Asia (9%) and Europe (8%).

Several positives on the horizon
For its South Pacific fishing operation, the group has deployed one super-trawler to Namibia to catch Horse Mackerel. In terms of its key markets, China is stable and it is seeing demand coming back from Japan and Korea. Africa is expected to be the fastest growing market for the group. For the Peruvian Fishmeal & Fish Oil operation, catch volume was down, but sales volume went up because of accumulated inventory. Management is expecting higher quota utilization in the following months (8% of 1H quota was used up by March versus about 62% currently), better selling prices for fishmeal (from US$1200-1250 per ton to US$1400-1500 per ton) and better efficiency to be some of the key factors for the coming quarter. For the SCM division, this quarter should also see contribution coming in from Tassal as well as to work on improving the margin from the current 2% to about 2.5-3.0%.

Maintain BUY, fair value estimate of 17.8 cents
Since announcing the recent 1-for-2 rights issues in early March, Pacific Andes shares have been languishing. While this was somewhat a dampener, the overhang is now over. We have adjusted our earnings for a better than expected 2Q, raising our FY12 earnings from HK$731m to HK$791m. Using the same 6.5x earnings peg and adjusting for the rights issue, our fair value estimate for the stock is 17.8 cents. At current price, we maintain our BUY rating.

Pacific Andes Resources Development

Kim Eng on 16 Mar 2012

Background: Pacific Andes Resources Development Ltd (PARD) sources, transports and supplies frozen seafood products to the international markets, focusing on the frozen fish supply chain management business. It is also the controlling shareholder (58%) of China Fishery Group Limited (CFG SP).

Recent development: PARD announced last week that it will undertake a 1-for-2 rights issue at S$0.14 per share to raise about S$220m. The rights pricing is a 39% discount to its closing share price then of S$0.23. The share price has since declined by 13% and the stock goes ex-rights today.

Palpable frustration. The level of frustration among investors over the dilution from PARD’s rights issue was palpable at a recent company briefing. It was its third rights issue after two 1-for-1 issues in 2007 and 2009 at S$0.52 and S$0.15, respectively.

Up against a stone wall. Management was vague and non-committal on the purpose of the fund-raising, except to say that it was for potential acquisitions and working capital. It reiterated that the funds were not meant to cover debt repayments and that the company is comfortable with its net gearing level of approximately 80%.

Test of investor confidence. PARD’s profitability and macro fundamentals are still positive, as highlighted in our report in February, 2012 Small Caps: Not stopping the love. While we concede that its business is built on scale which requires large amounts of working capital, this round of rights issue out of left field will severely test investor confidence.

Pacific Andes

OCBC on 10 Feb 2012

Summary: Pacific Andes Resources Development Ltd (PARD) announced a 41% YoY increase in 1QFY12 revenue to HK$2451.3m. Net profit improved 38.6% to HK$139.6m. China remained the biggest market and accounted for 73% of group revenue. The Chinese government recently reduced duties payable on a range of commodities and food products, and this should have a favourable impact on its fishery products. The group looks poised to enjoy better operational efficiency and better earnings outlook in China. We reiterate our BUY rating and raised our fair value estimates from 26.3 cents to 31.7 cents.

Good set of 1Q results
Pacific Andes Resources Development Ltd (PARD) posted a good set of 1QFY12 results. Revenue rose 41% YoY (down 4.3% QoQ) to HK$2451.3m. Net profit improved 38.6% YoY to HK$139.6m. The increase was largely due to the frozen fish SCM division, which saw a sharp 75.6% YoY rise in revenue to HK$1,470.0m as a result of higher average selling prices and higher demand. This accounted for 60.0% of total revenue. Revenue from the fishing division increased 9.3% YoY to HK$981.3m. However, margin from this unit was affected by higher prices carried over from the previous quarter.

Several positives for 2012
Having cleared its inventory from the previous quarter in 1Q12, there are several positive developments ahead, including lower duties in China – its key market which accounted for 73% of group revenue in 1Q12. The Chinese government has recently reduced duties payable on a range of commodities and food products, and this should be positive for PARD’s fishery products. In addition, healthy consumption in China should support demand.

Operational improvements 
Average selling prices generally improved in 1Q and are expected to hold for the rest of the year. We expect increasing contribution to come in from its still-new South Pacific fishing operation in FY12. For its fishmeal operation, this will enjoy higher quota following two acquisitions in late 2011. After last year’s investment into improving its facilities in North Pacific and Peru, the group should be able to enjoy better operational efficiency.

Reiterate BUY, increasing fair value to 31.7 cents
We have adjusted our FY12 earnings from HK$706m to HK$731.m, up 4%. The stock has traded within a PER band of 5-9x in the last three years. While we have pegged its valuations at 6.5x previously, we are increasing it to 8x on better earnings prospects and cost savings. Similarly, we raised our fair value estimate from 26.3 cents to 31.7 cents. Yield is decent at 5.7%. BUY.