TP at S$1.32
Earnings revisions bottomed out. We turn from neutral to positive, as we are now projecting a sustained earnings growth in FY12F, after a disappointing FY11, which saw results missing expectations. We believe market expectations are now at more realistic levels with downward earnings revision over, presenting outperformance opportunities. We expect earnings growth in 1Q12 to continue and project 2Q12 net profit to grow c.5-10% yoy to c.US$48-50m due to a stronger contribution from its fishmeal operations, as well as interest savings from an earlier refinancing of its senior notes.
Valuation attractive even on our below-consensus estimates; priced at -44% discount to Carlyle’s entry. The counter is now trading at 6.5x/ 6.1x on FY12F/ 13F earnings, near -1 std deviation below its average of c.9.8x. At current levels, this puts it at a hefty 44% discount to Carlyle Group’s entry price of S$1.85 (in Jun 2010). Our FY12/13F forecasts are currently 4%/14% below consensus’ mean.
Upgrade to Buy, TP at S$1.32; further upside possible as counter re-rates. We have raised our FY12F/13F net profit forecasts by
5.6%/ 8% respectively to reflect lower interest costs. We believe the share price should be supported by a healthy yield of c.5% for FY12F. Our TP is raised to S$1.32, based on 8x FY12/13F PE (-0.5 std dev), equating to a total return of c.33%. In our view, there could be further upside when the Group delivers on its operational performance, leading to a valuation re-rating to mean levels. This would equate to a price target of S$1.68 (or c.60% upside), based on FY13F forecasts.
Time to re-cast your net
While CFG’s share price has performed relatively well YTD, our forecasts suggest the risk/reward ratio is skewed on the upside with bottomline growth expected in FY12F. We turn positive, from neutral, on the counter as valuations still look attractive even our on below-consensus’ estimates, while operations from its North Pacific and Peruvian operations look stable. We upgrade our recommendation to Buy, with a revised TP of S$1.32 based on 8x FY12/13F PE, -0.5 std deviation from average. The share price is supported by a relatively attractive yield of c.5%, based on one-third payout, as per prior years.
Earnings revisions bottomed out. CFG share price suffered a de-rating in 2011 due to missed expectations which arose largely from lower harvest in South Pacific and an unexpected earlier closure of Anchovy fishing grounds in Peru. In that year, management was also partly focused on its intended dual-listing on the Hong Kong Stock Exchange, which was eventually called off due to market conditions. In addition, FY11 net profit was impacted by a US$16.3m charge arising from its early redemption of its senior notes. We believe market expectations for earnings growth in FY12F are now at a more realistic level, presenting outperformance opportunities.
Projecting earnings growth to continue from 1Q, supported by higher fishmeal volumes in Peru and stable operations in the North Pacific. CFG 1Q saw a robust set of results with net profit growth of 21% yoy to US$23.8m. We project 2Q12 net profit to register positive, albeit smaller (vs 1Q12), yoy growth of c.5-10% to c.US$48-50m on the back of a stronger contribution from its fishmeal operations, coupled with interest savings from its earlier refinancing of the US$225m senior notes.
North Pacific – 2Q a peak season. We expect to see continued stable operations from its North Pacific fleet. While the total allowable catch there has been lowered to 1.67m mt in 2012, from 1.75m mt (2011), this should be mitigated by a higher ASP. According to ‘Globefish’s’ [unit in UN’s FAO (Food & Agriculture Organisation) Fisheries Department, responsible for information on international fish trade] report in Mar 2012, the “prices for Pollock fillet blocks and surimi are firming” due to shortages in the market.
Peru fishmeal to benefit from higher volumes, stable prices in FY12. The Group’s total allowable catch (TAC) for Peruvian anchovy currently stands at 6.21% and 11.72% in North and South Peru respectively. We expect this to put them in a good position as the TAC has recovered to 6m mt in 2011, and this should be sustained throughout 2012.
While fishmeal prices have softened since reaching a high of about US$2,000/mt in 2010, the higher quantities should offset any price declines. Furthermore, according to Globefish’s report on fishmeal/oil in Mar 2012, fishmeal prices should remain firm on the back of demand from terrestial and aquatic animal production.
Soymeal prices have picked up substantially vs fishmeal. Soymeal prices have appreciated by c.40% yoy on the back of higher soybean prices. The ratio between fishmeal and soymeal prices now stands at around 3.5x, below the historical average of about 4.4x recorded since 2005. We believe this should support fishmeal prices, since we understand that there is a degree of substitution for aquaculture feed between the two.
South Pacific a wild card; opportunity for outperformance lies here. The harvests of CFG’s South Pacific fleet, unlike its two other business segments, remains unpredictable, in our view. In FY11, this fleet recorded sales revenue of US$93m, partly helped by sales from the Faroe Islands. In FY12F, we have assumed a conservative sales contribution of US$90m, expected to be from South Pacific, Namibia (10k mt harvest), Mauritania (10-15k mt) and Senegal fishing grounds. In our view, this area of operations should have the most upside if harvest quantity is larger than our expectations.
Valuation
Raising forecasts by 5.6%/ 8%. We have raised our FY12F/13F net profit forecasts by 5.6%/ 8% to reflect lower interest costs, particularly after the redemption of its senior notes last year. We also see stable and improving operations from its North Pacific and its Peruvian fishmeal operations, which account for c.80% of its total revenue.
Lifting TP to S$1.32, time to cast your nets for the big haul. Coupled with our increase in net profit forecasts, we have rolled over our valuations to 8x average of FY12F/13F (from 6x FY12F), based on –0.5 std deviation to its average PE multiple. While this counter has performed well and has appreciated by c.13% YTD, we believe the upside risks outweigh the downside, barring any meltdown in the global economy. As such, we are upgrading our recommendation to Buy, from Hold, with a potential total return of c.33%.
Downside protected by dividend yield of c.5% (FY12F). Historically, the Group has declared and paid out about onethird of its net profits in dividends. We expect this trend to continue, at least as far as our current forecasts extend. Having factored this in, CFG’s dividend yield should equate to a relatively attractive c.5% at current prices, a level which we believe should bolster the share price, barring any unforeseen circumstances.
A 44% discount to Carlyle’s entry price. Carlyle Group holds an 11% stake in CFG through a private placement of new shares in Jun 2010 at a price of S$1.85 (1% above the closing price) raising S$210m in cash. At the current price of S$1.11, this is a hefty 44% below Carlyle’s entry price.
More conservative management stance gives us comfort, but also provides more scope for outperformance. The company has traditionally been rather optimistic of its prospects in the past with its expansion plans, which have then tended to fall short of expectations. In our view, this probably explains the reason why the market lost confidence in CFG, thus leading to a de-rating in the shares. Management now seems to be taking a perceptibly more conservative approach by focusing more on delivering operational efficiencies. We believe this in turn presents opportunities for outperformance and hence a re-rating in the counter.
Valuations are near –1 std deviation; PE level looks attractive. Based on the historical trading levels, the counter is now trading at 6.5x/ 6.1x on FY12F/ 13F earnings. This is near to – 1 std dev (or -0.9 std deviation, to be exact) from its average trading level of c.9.8x. We believe there is more upside versus downside on this counter based on the current valuation, coupled with the earnings momentum expected over the ensuing quarters.
60% return upside to S$1.69 possible as valuation reverts to mean, on continuation of earnings growth momentum. We also see opportunity for the counter to re-rate to mean levels if it continues to deliver and exceed our below-consensus earnings forecasts, particularly for FY13F. Based on an average PE of c.10x on our FY13F earnings, this equates to a price target of S$1.69.
Key Risks
We have identified the following key risks to our earnings assumptions:
• Performance of its South Pacific fleet. The harvest from its South Pacific fleet is rather less predictable than its North Pacific and Peruvian fishmeal operations. In FY11, the total harvest from this fleet was around 93k mt, and we are expecting a similar harvest in FY12F from the various fishing grounds. Our forecasts could be adversely impacted should this not materialize.
• Bunker costs. With the WTI hovering above US$100/bbl, bunker fuel is also hovering at US$730 per mt (180- centistoke), up from around US$650/mt in 2011. Bunker fuel accounts for c.13.8% of the Group’s revenue in FY11. Whilst we have factored in higher bunker costs, any spike in oil prices could erode profits, as the Group currently does not hedge these costs.
• Renewal of VOAs. The operation of its North Pacific quota is backed by Vessel Operating Agreements (VOAs) entered into with Russian companies. Non-renewals would impact on the operations and hence profitability.
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