Oceanus Group Ltd: Still in gestation phase

Population growth cushions net profit. Oceanus Group Ltd (Oceanus) reported its 1H09 results with a 23.7% YoY decline in sales to RMB138.5m. Profit before tax and one-offs grew 16.0% YoY to RMB209.3m thanks to a larger abalone population, which boosted the fair value of its biological assets. Net profit recorded a nine-fold surge to RMB187.4m in the absence of oneoff RTO expenses.

Abalones feel the heat of recession. Weakness in the group's results came from its 2Q09 sales, which contracted by 43.8% YoY, as it came under pressure on two fronts - lower selling prices as well as leaner volumes. ASP fell by 10-15% as the global recession weighed on 'live' abalone prices, while volumes fell by 13% as the group set aside a portion of its livestock for future processing. Unusually high volumes sold a year ago due to an industry supply crunch magnified the volume squeeze. Further evidence of the recession was reflected in the group's biological assets, whose average unit fair value was marked down by 25% from a year ago.

Sowing today for future growth. Although Oceanus' 2Q09 results were uninspiring, management remains optimistic on its outlook as it believes that abalone prices have bottomed out and that demand remains firm. It expects 2H09 to be stronger and remains committed to expansion via downstream integration. As the group is in the expansion phase of its business life cycle, we expect fruits of labour sown today to be reaped over the next two years. For now, the business will have to endure a phase of high capital intensity and trial-and-error before its envisioned business model gains traction.

Downstream businesses to drive 2H09 and beyond. Riding on the success of its first Ah Yat Tian Xia restaurant, the group launched 3 new restaurants in 2Q09. Management targets to open 20 restaurants in 2009, 50 in 2010, and 100 in 2011, with eventual plans to list this chain as a separate entity. We expect Ah Yat Tian Xia to drive the group's growth as the chain gains critical mass and reaps economies of scale. Further driving Oceanus' downstream integration is its new processing plant, which is on track for completion in 3Q09. The plant will fully automate processes that are currently manual, and could lift capacity by 10-fold over the next two years. Overall, Oceanus remains on track with its long term growth plans. As such, we maintain our BUY rating and S$0.40 fair value estimate on the stock.

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