Share price: SGD0.715
Target price: SGD1.16 (unchanged)
First Dividend Payout Since IPO?
Results better than expected. Minzhong announced its FY6/12 results on 27 Aug, which is better than expected. Full year revenue came in at RMB2.6b, up 33.2% yoy while net profit grew by 19.9% yoy to RMB679.6m. We maintain our positive view on the company and BUY recommendation with target price of SGD1.16.
Domestic cultivation business drove the growth. Minzhong’s FY12 results reaffirmed our view that Minzhong would gradually achieve a more balanced business model as its domestic cultivation business grew faster than its export business. For FY12, domestic cultivation revenue increased by 64.5% vs 19.1% growth in export business. Gross profit of domestic business also registered higher growth of 50.7% yoy vs only 2.5% for export business.
Account receivables should not be a big issue. A sharp increase in account receivables was a concern before the results. However, the situation is better than expected. Although account receivables remained high at RMB967m in FY12, Minzhong actually has managed to collect around RMB220m since end FY12 and we do not think there is any material default risk associated with the remaining receivables.
Expecting higher yield even without adding more farmland. Yield per mu increased significantly in FY12, mainly because the farmland that Minzhong acquired two years ago is approaching optimum yield. Thus, we expect higher production volume going forward even without adding more farmland.
Positive free cash flow and dividends this year? We expect higher operating cash flow and less Capex in FY13, thus the first positive free cash flow in three years. We cannot rule out the possibility that Minzhong will pay dividends or buy back shares in FY13. Although we have not put in any dividends payments or share buyback forecast as our base case, we believe such actions will boost the valuation if they eventuate. We maintain our BUY call with unchanged target price of SGD1.16 pegged to 4.35x FY13 PE.
Account receivables should not be a big issue so far. Sharp increase in account receivables was a concern before the results. However the situation is better than expected. The increase in account receivables is mainly due to the late start of the operating peak season. The company recorded a significant jump in its 4Q sales. As a result of the late sales recognition, the bulk of account receivables have yet to be collected in FY12 results.
In fact although account receivables remain high at RMB967m as at the end of June, Minzhong actually has managed to collect around RMB220m after results date (from 1 July till now) and around 80% of the new-collected receivables belong to the “over-due” category as shown in figure 2. According to management, 97% of receivables belong to long-term customers who have never defaulted before. Thus we do not think there is any material default risk related with the remaining receivables. Minzhong wrote off RMB17m receivables in 4QFY6/12. But since almost all of Minzhong’s customers are currently making regular payments and it seems that Minzhong does not have much difficulty collecting its overdue receivables, we believe the receivables write-down in FY13 will be limited if any.
Targeted cities for new industrialised farming. In our last report we mentioned that Minzhong is looking for new target cities for its industrialised farming to replicate the Tianjin model. Management indicated during the briefing that the new factory was very likely located in Jiangsu province. Daily capacity is expected to set at 4 ton/day (similar to its Shanghai factory) in Phase 1 and can be expanded to 20 ton/day of capacity in Phase 2 if the demand is high.
RMB600m undrawn bank facilities can meet funding requirement. Minzhong currently has around RMB600m undrawn bank facilities. Given Minzhong’s low leverage (net gearing of 15%) and undemanding valuation of its share price, we think it makes more sense for Minzhong to use bank loans to meet its funding needs.
Expecting better yield even without adding more farmland. Minzhong currently manages around 59,507mu of farmland, which is the same as at the end of last financial year. However we saw yield per mu increased significantly. This is mainly because the farmland that Minzhong acquired two years ago is approaching optimum yield. Generally it takes three years to fine-tune cultivation parameters to achieve optimum yield. New productive farmland in 1st year can achieve around 60-70% of optimum yield and gradually increase to 80-90% of optimum yield in the 2nd and 3rd year. In FY12, 37% of land bank only started contributions in 3Q and 4Q. For FY13, these new productive farmland will be contributing for the full 12 months. Thus we expect higher production volume even without adding more farmland.
Expecting positive free cash flow this year. We expect RMB400 Capex for FY13 in line with management’s guideline as we believe the investments in the past two years will be enough to support revenue growth. We also expect higher operating cash flow of RMB793m for FY13 on back of the normalisation of receivables level. Thus we should be able to see the first positive free cash flow since FY11.
Dividends payment this year? Although it is not our base case, we also can not rule out the probability that Minzhong will make its first dividends payment or share buyback activity this year. If it eventuates, we believe there will be big upside potential in valuation. We maintain our BUY call with target price of SGD1.16.
Source/Extract/Excerpts/来源/转贴/摘录: Maybank Kim Eng Research
Publish date: 28/08/12