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.