China Fishery (DMG)

Share price beaten down; upgrade to BUY (BUY, S$1.55, TP S$1.77)

Company fundamentals still intact, recent sell-down unwarranted. Since mid May 11, China Fishery’s (CFG) share price fell some 13% to S$1.55. We contacted management, and understand that operations are still sound and up to expectations. Barring unforeseen circumstances, we continue to remain optimistic on 2HFY11 earnings due to (1) delayed fish roe sales pushed to the coming quarter, (2) fishing season in Peru which began in Apr, and (3) South Pacific/Mauritania performance expected to be in-line or better than 1HFY11’s. Currently trading at 10.5x FY11 P/E, valuations appear attractive. Given that the company’s fundamentals remain sound, we think the recent sell down is unwarranted, and upgrade our call to BUY, with TP unchanged at S$1.77 based on 12x FY11 P/E. This implies a 14% upside from current price.

Outlook for 2HFY11 still up to expectations. North Pacific (NP) trawling’s delivery of fish roe to Japan in Mar 11 was delayed due to the earthquake. We expect this to result in higher ASPs for the coming quarter. Fishing grounds in Peru were closed temporarily but has since reopened in Apr 11. Together with a 47% increase in TAC limits to 3.7m tonnes for the Apr season, the outlook for Peru’s fishmeal operations looks rosy as well. We also understand that CFG has contracted to sell its 3QFY11 fishmeal at US$1,400-1,500/tonne, higher than the current spot rates of ~US$1,360/tonne.

Valuations look attractive; upgrade to BUY. As fundamentals for the company continue to remain intact, CFG trading at 10.5x FY11 P/E looks attractive in our opinion. Our target FY11 P/E of 12x is a 60% premium to peer average. Risks to our call include poorer than expected execution for CFG’s South Pacific/Mauritania operations.