Pacific Andes Resources Development - Moderated FY12 expectations (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.21

Fair Value: S$0.344

Posted 3Q net earnings of HK$255m. Pacific Andes Resources Development (PARD) posted 3QFY11 net earnings of HK$254.8m, up 17% YoY but down 5.9% QoQ. 3Q net earnings amounted to 32.4% of consensus full year's estimate of HK$786m (based on Bloomberg poll). Revenue grew 32.5% YoY and 20.9% QoQ to HK$2965.4m. Revenue growth came from both core divisions; Frozen Fish SCM unit (up 49% YoY) and Fishing division (+19%). It attributed the better performance to higher sales in China (which accounted for 73% of group revenue now) as well as better contribution from its Peruvian fishmeal operation. Although gross profit rose 19% YoY to HK$698m, gross profit margin fell from 26.2% to 23.5% due to higher fuel costs and repair and maintenance costs for its vessels.

Focus on operational efficiency. PARD aims to focus its capex on improving operational efficiency. For its fishing operation, it is planning to better deploy its vessels to ensure higher utilisation rate. In the South Pacific, it is enjoying average selling prices (ASP) of about US$1300 per ton, which is similar to the North Pacific prices for Alaskan pollocks. There appears to be an emphasis on the South Pacific, largely to develop the grounds for future quota allocations. For its Frozen Fish SCM business, it has also outlined its plan to reduce its reliance on third party chartered vessels to lower its transportation costs.

Higher debts - is it a concern? Total borrowings moved up from HK$5.9b in Sep 2010 to HK$8.6b by Jun 2011. This led to an increase in debt-to-equity ratio from 61% to 74%. The bulk is in short-term debts (55% of total borrowings), and CFG (China Fishery Group) accounted for 45% of total debts. Looking at the breakdown, the bulk of the debts under PARD is for short-term working capital usage and as such we are not overly concerned at this juncture.

Cut fair value estimate to 34.4 cents. In view of global uncertainties, we have moderated our forecasts taking into account muted outlook for demand as well as ASPs, which have trended down since earlier this year. Overall, we have cut our FY12 earnings by about 10% to HK$855.1m. As a result of this, our fair value estimate, which is based on blended earnings, was also affected, down from 38.5 cents to 34.4 cents. However, with the recent selling, its share price has taken a hit and at current level and with the potential upside, we are maintaining our BUY rating.