Core business tells the real story
When reading Sinofert’s financing results, we always try to find out the real earnings from its core business – fertilizer trading/distribution – and core asset, its 8.94% equity stake in QHSL Ind. (000792.SZ). From the reported 1H11 NPAT Rmb496mn (+52% YoY), after taking out gains and losses from derivatives, provisions, and impairment, we finally find out the true earnings, as much as Rmb585mn (+329% YoY) from core business, and Rmb732mn (+162% YoY) if recurring income from QHSL Ind is added. These two figures, which reflect the true picture of Sinofert’s strong earnings recovery during 1H11, are big positive surprises to us, and remarkably above market expectation. The set of superior results give us more confidence in our existing FY11 earnings estimate, which has been an outlier at the high end of market forecast range since 2Q11.
Positive:
Profit from core businesses – fertilizer distribution, is way above our estimate.
1H nitrogen sales margin = Rmb57/tonne, +154 % YoY.
Revenue +39% YoY, while maintaining stable sales and
distribution costs.
1H potash sales margin Rmb210/tonne, +209 % YoY from Rmb68/tonne in 1H10.
Negative:
1H phosphate sales volume = 1.43mn, -21% YoY, mainly due to the new export restriction.
Valuation and recommendation
We maintain our 2011/2012 EPS forecasts of Rmb0.22/Rmb0.26.
The stock currently trades at 8x/7x 2011e/2012e P/E. Reiterate BUY.
Risks
Trading risk; uncertainty in negotiations with suppliers; domestic long-term demand weaker than expected.