FY12 and 2H12 preview
Sinofert is due to report FY12/2H results on 28 March. We expect the company to report 2H NPAT of RMB343m (+89.1%) from higher sales volumes. We lowered our FY12 NPAT by 3.6% to RMB889m on higher inventory losses as 2H12 prices fell faster than initially expected. Our FY12 op income forecast of RMB1.17bn (old: RMB1.18bn) remained relatively unchanged. We expect a 19fen /share div to be declared. BUY on gradually improving margins/ROEs.
Sinochem Pingyuan
In Oct 2012, Sinofert reduced its stake in its 1.41mtpa coal-based nitrogen subsidiary - Sinochem Pingyuan to 36.75% from 75% through capital injection from Yangmei Chemical, a coal-chemical service company. Post transaction, Yangmei will gain control (51% ownership) of Pingyuan and provide the latter with access to coal resources that Sinofert lacks. We believe Pingyuan is cannibalizing capital with its high gearing (est. 76% net debt/equity) and negative returns (RMB316m/ RMB108m FY10/11 losses). The excess cash can be used pay down debt or fund working capital in future years. For FY12, mgmt expects a RMB30-80m non-cash gain from Pingyuan’s deconsolidation.
Investment thesis
Despite the good share price performance (+c.40% vs. HSI 8.4% ) over the last six months, we remain Buyers of Sinofert for its restructuring story. With a relatively new mgmt under Feng in place, Sinofert is shifting its focus from scale expansion to profitability through upstream resource acquisitions and enhancements in the quality of its distribution channels. Sinofert’s developed network will also continue to put it in a good position to meet with China’s rising demand for fertilizers and to increase its product offerings.
Valuation and risks
We use Price-to-earnings growth (PEG) to value Sinofert due to a higher correlation between P/E to earnings growth of Chinese fertilizer stocks. Our target PEG ratio of 0.6x refers to the average PEG of domestic peers. We show Sinofert trading at 9.5x 2013 P/E and 0.8x 2013 P/B with an ROE of 8.2% versus domestic peers of 15.5x P/E, P/B / ROE of 2.0x / 14.8% Key risks include economic deterioration and further removal of government subsidies