FY12 results - overall in line, but masked by one-offs and others
Sinofert reported FY12 NPAT of RMB878m (+30% YoY) vs. our RMB889m and consensus of RMB910m. The FY12 NPAT included an RMB92m non-cash gain from Pingyuan's deconsolidation and a lower than expected 9.7% tax rate vs. our 16.5% est. and a FY11 rate of 16.6%. FY12 op income of RMB944m (+14% YoY) was soft against our RMB1.1bn due to depressed phosphate/compound margins. Days receivable and inventory continue to improve dramatically; days payable are steady - someone is managing the business (Figure 6) - long last. A RMB 0.0187/share div was proposed vs. our 0.19/ share estimate. BUY
Margins down on poor phosphate & compounds
FY12 revenues were up 12% YoY to RMB41.2bn and in line. However, the FY12 RMB2.40bn reported gross profit (+15% YoY) was below our RMB2.56bn on lower than anticipated phosphate and compound margins; while the RMB944m (+14% YoY) FY12 EBIT was significantly below our RMB1.1bn on higher SGA costs. We believe part of the increase was from the Sinochem Yunlong acquisition. Inventory losses were up by RMB31m (+56% YoY) in 2012, but still significantly below our RMB160m estimate.
Investment thesis – Buy on better margin outlook
Despite acknowledging ongoing macro-head winds in the fertilizer industry, we continue to be firm advocates in Sinofert’s turn-around story. Compared to 2007-2009, Sinofert, under Chairman Feng, is now a better managed company, with significant improvements in cash mgmt and divestments of non-performing assets such as Pingyuan. We believe Sinofert’s ongoing enhancements to its distribution channels as well as M&A success (Yunlong) will put it in a good position to meet with future increase in fertilizer demand.
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 9.3x 2013 P/E and 0.8x 2013 P/B with an ROE of 8.2% versus domestic peers of 15.3x P/E, P/B / ROE of 1.9x / 13.8% Key risks include economic deterioration and further removal of government subsidies