Oceanus Group: Fairly valued for now

Developing at all fronts. Expansion of downstream activities is on track with positive contribution to earnings since 1Q09. Management is actively negotiating with potential clients to build up its sales of canned marine products. Oceanus Group has opened 2 new restaurants in Shanghai's CBD, which have already achieved cash flow breakeven levels. Farming capacity increased to 24,000 tanks by end 1Q09, on track to reach its year-end target of 40,000 tanks.

Financing secured but at high costs. Oceanus has secured a S$73.5m loan from private equities at an interest of 9% and issued with 490m warrants to the same creditors. The warrants are exercisable any time prior to the later of 30 Jun 2012 or its 3rd anniversary at an exercise price of S$0.15 on a 1-for-1 basis. Exercise of the warrants will be accounted as Oceanus' prepayment of the loan of equal amount, namely S$0.15 x warrants exercised. The loan secured will finance most of the Group's capex for 2009. However, the high interest costs and potential dilution to share capital are key concerns.

Good Prospects but priced-in. We revised our adj EPS forecasts downwards to reflect higher finance costs and potential dilution to the share capital. We continue to like Oceanus' business prospects. However, current valuation has priced in most of its potential value. Hence, we downgrade our call on Oceanus to Hold, with a TP of S$0.28, based on 8x blended FY09/10 adj EPS (previous: 6x), which we think justifiable in light of the Group's higher than average growth potential. Downside risk mainly lies in the execution of its expansion plans.

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