China Fishery (CFG) had released their FY 2008 financials some time back, and I had the chance to do a detailed review of the Company's financials. Suffice to say that I was not entirely happy with the numbers that I saw, and a few aspects of the financials caused me a considerable degree of worry and consternation. However, my fears were assuaged due to the fact that a lot of the debt in CFG's books had collateral tied to it (i.e. their fishmeal processing plants, fishing vessels and fishmeal inventories) and assured me that CFG could re-finance its short-term debt. I will be touching more on CFG's debt in the Balance Sheet review below. Perhaps astute readers out there can point out facts which I myself had over-looked when I decided to invest in this company. However, things change and the future is never certain; thus one must always question one's original premise for investing in a particular company.
Profit and Loss Analysis
In such uncertain times and in the midst of a severe recession, most investors would find it more prudent to scrutinize a Company's Cash Flow Statement and Balance Sheet rather than its Income Statement. This is because a strong Balance Sheet and regular and stable cash inflows can help a company tide through long downturns to emerge even stronger after that. CFG had managed to grow its top-line revenue by 13% from USD 406.4 million to USD 459.4 million. The rise in revenues was mainly due to higher catch volumes and higher selling prices for its fish with regards to its trawling division, which accounted for 74.7% of total revenue. The other 25.3% was made up of fishmeal operations and this created a minor drag on revenue as fishmeal prices softened during FY 2008 compared to FY 2007. A latest check on fishmeal prices from Copeinca's 3Q 2008 financial highlights shows that fishmeal prices averaged around USD 988 per metric tonne (MT), lower than the USD 1,100 to 1,200 per MT hit in FY 2007.
Gross margins dropped from 34.8% in FY 2007 to 32.3% in FY 2008. The main culprit was higher bunker fuel costs as the price of oil shot up to as high as USD 147 per barrel around July-August 2008. The ratio of fuel to total sales increased from 14% to 17.9% as a result of this. However, with oil prices slumping to below USD 40 due to the global recession, CFG should be able to regain their high margins again for FY 2009, barring unforseen circumstances.
Finance costs also rose slightly for the Company from USD 26.8 million to USD 31.2 million, a 16.4% increase. This was due to higher bank loans taken out during FY 2008 for the acquisition of fishing vessels and fishmeal plants. As the credit crisis dragged on and credit became tighter, the Company had also ceased their acquisition of assets until more clarity emerged. This will be discussed under future prospects and directions. As a result, net margins decreased from 21.8% to 20.5% (helped by a tax credit of USD 2.4 million from the recognition of tax losses carry forward by CFG Investment S.A.C.) and net profit rose just 6.5% from USD 88.5 million to USD 94.3 million. Using an exchange rate of 1 USD = 1.52 SGD, this translates to about SGD 143.3 million net profit. EPS is about SGD 18.3 cents and using the closing price of 60 Singapore cents as at February 24, 2009, this translates to a historical FY 2008 PER of 3.28 times.
Balance Sheet Review
Well, I have to admit CFG does not have one of the cleanest Balance Sheets around; after doing a quick comparison to companies such as Boustead and Tat Hong, I was forced to conclude that CFG's Balance Sheet represents a lot of risk and notwithstanding the fact that their trawling operations generate lots of operational cash inflows, the Management must make a sustained effort to reduce their gearing and improve their cash balance. A quick glance would show that the Company had debts amounting to USD 317.3 million for FY 2008 (bank loans + senior notes) of which about USD 60 million is up for re-financing within a year. Gearing is dangerously high at 43.6% debt to total assets and about 94.5% debt to equity ! The fact that the Company had a measly cash balance of just USD 7.7 million is of great cause for concern ! I will cover this aspect during the review of the Cash Flow Statement, and though this may be a timing difference, having so little cash in the face of so much debt is not something I like to see as an investor.
Current ratio actually improved from 1.05 in FY 2007 to 1.28 in FY 2008, mainly due to the increase in trade receivables and inventories, coupled with a large drop in trade payables. However, the worrying fact is that short-term debt increased in order for them to finance their acquisitions, and only the assurance of better cash inflows in future can make me feel more worry-free. Suffice to say this is a Balance Sheet which had me beleaguered for quite some time, but seeing that CFG and PAH have a good track record and are a major industry player, and that the CEO is prudent enough to manage inventories and debt; this has caused some of the worry to ease, though some doubts still linger which I will attempt to address at the upcoming Annual General Meeting.
Cash Flow Statement Analysis
Read more...China Fishery (CFG) had released their FY 2008 financials some time back, and I had the chance to do a detailed review of the Company's financials. Suffice to say that I was not entirely happy with the numbers that I saw, and a few aspects of the financials caused me a considerable degree of worry and consternation. However, my fears were assuaged due to the fact that a lot of the debt in CFG's books had collateral tied to it (i.e. their fishmeal processing plants, fishing vessels and fishmeal inventories) and assured me that CFG could re-finance its short-term debt. I will be touching more on CFG's debt in the Balance Sheet review below. Perhaps astute readers out there can point out facts which I myself had over-looked when I decided to invest in this company. However, things change and the future is never certain; thus one must always question one's original premise for investing in a particular company.
Profit and Loss Analysis
In such uncertain times and in the midst of a severe recession, most investors would find it more prudent to scrutinize a Company's Cash Flow Statement and Balance Sheet rather than its Income Statement. This is because a strong Balance Sheet and regular and stable cash inflows can help a company tide through long downturns to emerge even stronger after that. CFG had managed to grow its top-line revenue by 13% from USD 406.4 million to USD 459.4 million. The rise in revenues was mainly due to higher catch volumes and higher selling prices for its fish with regards to its trawling division, which accounted for 74.7% of total revenue. The other 25.3% was made up of fishmeal operations and this created a minor drag on revenue as fishmeal prices softened during FY 2008 compared to FY 2007. A latest check on fishmeal prices from Copeinca's 3Q 2008 financial highlights shows that fishmeal prices averaged around USD 988 per metric tonne (MT), lower than the USD 1,100 to 1,200 per MT hit in FY 2007.
Gross margins dropped from 34.8% in FY 2007 to 32.3% in FY 2008. The main culprit was higher bunker fuel costs as the price of oil shot up to as high as USD 147 per barrel around July-August 2008. The ratio of fuel to total sales increased from 14% to 17.9% as a result of this. However, with oil prices slumping to below USD 40 due to the global recession, CFG should be able to regain their high margins again for FY 2009, barring unforseen circumstances.
Finance costs also rose slightly for the Company from USD 26.8 million to USD 31.2 million, a 16.4% increase. This was due to higher bank loans taken out during FY 2008 for the acquisition of fishing vessels and fishmeal plants. As the credit crisis dragged on and credit became tighter, the Company had also ceased their acquisition of assets until more clarity emerged. This will be discussed under future prospects and directions. As a result, net margins decreased from 21.8% to 20.5% (helped by a tax credit of USD 2.4 million from the recognition of tax losses carry forward by CFG Investment S.A.C.) and net profit rose just 6.5% from USD 88.5 million to USD 94.3 million. Using an exchange rate of 1 USD = 1.52 SGD, this translates to about SGD 143.3 million net profit. EPS is about SGD 18.3 cents and using the closing price of 60 Singapore cents as at February 24, 2009, this translates to a historical FY 2008 PER of 3.28 times.
Balance Sheet Review
Well, I have to admit CFG does not have one of the cleanest Balance Sheets around; after doing a quick comparison to companies such as Boustead and Tat Hong, I was forced to conclude that CFG's Balance Sheet represents a lot of risk and notwithstanding the fact that their trawling operations generate lots of operational cash inflows, the Management must make a sustained effort to reduce their gearing and improve their cash balance. A quick glance would show that the Company had debts amounting to USD 317.3 million for FY 2008 (bank loans + senior notes) of which about USD 60 million is up for re-financing within a year. Gearing is dangerously high at 43.6% debt to total assets and about 94.5% debt to equity ! The fact that the Company had a measly cash balance of just USD 7.7 million is of great cause for concern ! I will cover this aspect during the review of the Cash Flow Statement, and though this may be a timing difference, having so little cash in the face of so much debt is not something I like to see as an investor.
Current ratio actually improved from 1.05 in FY 2007 to 1.28 in FY 2008, mainly due to the increase in trade receivables and inventories, coupled with a large drop in trade payables. However, the worrying fact is that short-term debt increased in order for them to finance their acquisitions, and only the assurance of better cash inflows in future can make me feel more worry-free. Suffice to say this is a Balance Sheet which had me beleaguered for quite some time, but seeing that CFG and PAH have a good track record and are a major industry player, and that the CEO is prudent enough to manage inventories and debt; this has caused some of the worry to ease, though some doubts still linger which I will attempt to address at the upcoming Annual General Meeting.
Cash Flow Statement Analysis
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