Pacific Andes Holdings: Post rights, still a BUY

Rights issue to raise S$209m. Pacific Andes Holdings' (PAH) Rights issue is progressing smoothly with the current trading of the "nil-paid" rights. Upon the completion of the rights and warrant exercise, the group would have raised about S$208.68m (or a net proceed of S$204m). Funds from the Rights cum warrant issue will be largely deployed as part of its working capital and for general corporate expenses. With this exercise, the overhang on capital raising is removed and the group is in a better financial position. Gearing is also expected to come down from 0.9x to about 0.6x.

Is current high oil price a concern? Recent rebound in crude oil prices could once again sparked concerns over its costs of bunkers. However, bunker cost as a percentage of PAH's cost of sales is fairly manageable at about 10% in FY08 and 11% in FY09 (even when oil prices shot to record high levels of more than US$140 per barrel). As such, at current crude oil price of US$70 per barrel, we are not overly concerned about the impact on its margins.

Maintain BUY, adjusting fair value post-Rights. Recently, PAH's posted a credible double-digit earnings growth of 38% in FY09 earnings to HK$664m. For the current year, we are expecting earnings of HK$720m before rising to HK$822m in FY11. The improvement will come largely from organic growth, stemming from the deployment of five vessels to the South Pacific (which will mean increased catch volume) as well as better synergies from its integrated Peru operation.

While global economic signals remain mixed, we believe that fish consumption will at most be mildly affected as consumption patterns are unlikely to change too drastically and fish is an affordable source of protein. Risks to our earnings include the escalation of the current H1N1 outbreak, slower fish demand from China, and any regulatory issues with the Russian fishing quotas (which still formed the bulk of its operation). Maintaining the same peg of 6x blended earnings, our post-rights adjusted fair value estimate is 31 cents. The stock has done very well this year, outperforming the STI with a gain of 68% versus 32% for the STI. With the current softness in the market and with a potential upside of 48% to our fair value, we are reiterating our BUY rating.

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