China Fishery: High inventory of fishmeal in 4Q08 was sold in 1Q09

Management have updated us that they were able to sell off about 80% of their outstanding US$33m in inventory of fishmeal which was not sold at the end of 4Q08. This is a positive in our view as 1Q09 is usually low season for fishing. We believe that 1Q09 net profit will be relatively similar to 1Q08 of US$40.4m due to the sale of its outstanding inventory.

Since the beginning of 2009, crude oil prices have remained below US$60/barrel which is a benefit for China Fishery (as of 5 May 2009 oil price was US$54/barrel). Majority of the company’s cost incurred comes from transporting its fish caught and fishmeal to China. Therefore with oil prices remaining low in 1Q09 we expect to see better margins.

Management has also informed us that their 1,500/tonne freezing capacity vessel will be deployed at the end of May and is scheduled for operations between July to Aug 2009. With its South Pacific operations coming into full gear in 2H09, we believe that that this will help to boost revenue contributions. However, this will also mean that the company’s gearing may go up. The company expects their debt level to increase by 12% to US$33.6m. Though this will increase its gearing ratio, we are not too concerned as these loans are long term due within three years.

Share price has recently exceeded our target price of S$0.86. We will be revising our price target after next week’s 1Q09 results release.

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