China Agri - Industries Holdings (606.HK): At the halfway point of an asset swap

2018-02-13 17:18 港股研报君 阅读 779

机构:中金公司

评级:BUY

目标价:3.84港币

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FY17 earnings guided at about HK$3bn 

In early January, the company issued a positive earnings alert, estimating that FY17 accounting profit would be around HK$3bn, or HK$2.1bn net of a HK$900mn one-off gain from a corn asset disposal conducted in 4Q17. This exceeded our expectation and – since one of its two major earnings contributors, the corn processing business, is likely to be muted in 2H17 due to lower government subsidies – we attribute this positive surprise to the better-than-expected performance of its oil seeds business. We also expect the final dividend will comprise of 20% of recurring earnings (HK$2.1bn) and a special dividend from the proceeds of its corn asset disposal. If we assume an average of guided special dividend range of HK$1bn– 1.6bn, FY17’s total dividend yield based on its current share price will be about 10%. 

Trends to watch 

1) Expect crushing/refining spread of about HK$270/t to drive up oil seeds GP margin to >5% in 2H17 and sector GP margin could be further lifted by combining CP oil business if the soft commodity price move remains positive in FY18. 2) Waiting to see the other side of the coin in an asset SWOP. And, 3) rice, wheat and barley businesses all have steady growth outlooks. 

Valuation and recommendation

We revise up our FY17 earnings forecast based on the company’s announcement (+67.6% to HK$0.59), but trim that of FY18e by 12.1% to HK$0.28 as the oil seeds consolidation has not been done yet to offset the disposal of its corn business’ earnings. Thus, we tentatively cut our end-2018 target price by 24.1% to HK$3.84 (from HK$5.06) as we wait for more information about the consolidation of its oil seeds business before we can reflect the full picture of this asset swap and reach our new target price. Our TP is based on 0.7x the company’s 2018e BPS, which is derived from global peers’ internal rate of return defined as their ROE divided by P/B on average. Since our TP still indicates 16% upside from the current share price level and it’s highly likely that the asset SWOP can be completed within this year to enhance earnings outlook, we maintain our BUY recommendation for the company.  

Risks 

Unfavorable soft commodity prices; restructuring falls even further below our expectation. 

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