China Fishery Group Ltd (CFGL) is the world’s top producers of fish and fishmeal products. Its fishing operations accounted for 76% of revenue in 9M08 and its fishmeal & fish oil operations accounted for 24%. According to the Food and Agriculture Organisation, global demand for fish is expected to grow by 50m tonnes to 183m tonnes from 2001 – 2015. We believe that CFGL is in the right industry for growth going forward.
CFGL is currently benefiting from China ’s growing demand for aquatic products. China accounts for 57% of CFGL’s revenue. According to the National Bureau of Statistics of China , aquatic products CPI rose 11.2% YoY in Nov 2008, suggesting that demand remains robust relative to supply. We believe that this trend could persist for a few more quarters.
Falling oil prices will benefit CFGL. Crude oil prices have fallen from a high of US$147/bbl in July 2008 to US$40/bbl as of Feb 2009. We are assuming FY09 average crude oil price of US$65/bbl, lower than FY08’s US$100/bbl. Consequently, we forecast FY09 bunker cost of US$61.8m, 35% less than our FY08 estimate. We forecast FY09 net profit growth of 18..7%, which we believe will excite investors.
High gearing, but strong operating cash flow. We are concerned that CFGL has a high gearing ratio of 0.93x and a sizeable US$245.8m long term loan.
However, CFGL has strong operating cash flow (US$60.2m for 9M08) which is expected to persist and help its refinancing of US$80m short term loan. Its 9M08 interest coverage was an acceptable 4.5x. In addition, we believe that lower interest rates in FY09 will be positive.
We rate CFGL a BUY with a target price of S$0.86. We have a price target of S$0.86 based on 3.9x FY09 P/E which is pegged to the FSTC FY09 P/E of 3.9x.
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