Asian Citrus Finance Blog – Half Year Results 2014

Asian citrus has now released their half year results for the year ending 2014.

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Overall revenues were down by £14.4M due almost entirely to a £13.1M reduction in the revenue from the sales of oranges, with the rest due to a smaller fall in the sales of processed fruit.  The cost of the agricultural products sold increased by £4.4M which meant that Gross profit was down by £19.1M.  There were also small falls in selling and general expenses but the big hit was the non-cash £56M of reductions in the value of biological assets.  This drove the profit for the year down by £76.2M, resulting in a £54.4M loss.  If it wasn’t for the loss on the value of assets, there would have been a very small profit, but it is still a poor result.

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Total assets at the half year point were £57.7M lower than at the end point of last year.  This fall was driven by the aforementioned £65.2M reduction in the value of biological assets.  The other large falls were a £24.1M reduction in the value of assets under construction and an £8.2M fall in the value of deposits.  These were only slightly mitigated by a £35.7M increase in the value of property, plant and equipment (£8.4m of which was moved from non-current deposits), and a £6.2M rise in the value of receivables.  The group has very little liabilities with the only real one being £9M worth of payables, which reduced by £1.4M compared to the end point of last year.

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Before working capital movements operating cash flow collapsed from £30.7M last year to £11.8M in the first half of this year.  After working capital was taken into consideration, the cash generated from operations was £16.5M, £25.2M worse than in the same period of last year.   The majority of the cash was spent on additions to construction in progress (although this was £8.2M less than last year), with the remainder used on additions to biological assets.  The group then paid out £3.9M in dividends which meant that the group had a cash outflow of £3.3M compared to a £569K income last time.

Much of the poor performance this year has been blamed on bad weather.  The persistent heavy rainfall has caused nutrients to leach from the soil, resulting in the higher usage of fertilizer and pesticide in an attempt to maintain output volume.  In addition there was also negative media coverage relating to dyed oranges being sold in Gannan.  Despite Asian Citrus not being implicated in the scandal, this still had the effect of reducing the average selling price for oranges as customers looked abroad due to the lack of confidence in the domestic market.   Another source of rising costs is the general wage inflation that is taking place in China.

During the first six months of the year, the production yield at the Hepu plantation decreased by 25%, mainly due to the replanting programme replacing some of the existing winter orange trees with banana trees.  The first banana harvest from the plantation is likely to be ready by September 2014.  The selling price of oranges from the plantation also fell slightly, down by 4%.  The production yield at the Xinfeng plantation decreased by 4% with the profit margin collapsing due to the poor weather, higher usage of chemicals and the dyed oranges scandal – combined with the fall in volumes, the selling price of the oranges fell by 17%.

As well as the Xinfeng Plantation, fully planted with orange trees and the Hepu Plantation, with oranges and bananas, the group also has the Hunan Plantation, which so far has not produced any fruit.  There are currently over 1M orange trees and 500K grapefruit trees and a further 250K grapefruit trees are expected to be completed by 2014.

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As briefly mentioned, not only are production volumes down but average selling prices are down too.  As well as all the other problems, the group are experiencing higher competition because of the increase in the average maturity of trees belonging to competitors.  This is not something that was mentioned before and it seems strange that these competitors suddenly have high yielding trees given the problems with the weather that Asian Citrus has been experiencing.  Another reason for the fall in selling prices is the fact that the bad weather affected the quality of the oranges which meant that the proportion taken by supermarkets, as opposed to wholesale or corporate, reduced.

During the period the processed fruits segment made a £4.8M profit but the agricultural produce segment made a £57.6M loss, mainly due to the loss of value of the biological assets.  The group will be increasing capacity at the fruit processing business in 2014 after the new plant completed trial production.  Apparently it takes up to five years for new factories to be up to full capacity so the contribution from the new one will be modest to start with.  Like for like sales of processed fruit was slightly ahead of the same period of last year as sales of processed Pineapple juice collapsed during the period from £7.3M to £5M due in part to the effect on prices due to destocking activities by Thai and Phillipine producers was counteracted by increases in some other juices such as lychee.

This was also a period of upheaval for the board as directors Peregrine Moncreiffe and MrMa Chiu Cheung both resigned, to be relaced by Mr. Chung Koon Yan and Mr. Ho Wai Leung.  More importantly, however, the founder, current ceo and chairman, Tony Tong is also standing down.  He has been in charge for 14 years and speaks volumes.

Due to the performance this half the board have not recommended an interim dividend.  Going by just the final dividend last year, the shares trade on a yield of 3.7% but given this performance, I doubt there is much chance of this being maintained at the end of the year.  Going forward, the board expect the second half of the year to continue to incur higher costs as they try to replace the nutrients washed away in the heavy rain and typhoons.

There is no doubt this has been a terrible half year for Asian Citrus.  The bad weather has reduced the yield and quality of oranges as well as increasing costs as the nutrients that are washed away need to be replaced.  There was no mention of the canker outbreak so it is hard to see if that is still a major issue and the group are also facing greater competition from other plantations with maturing trees.  In addition, the mass resignation of most of the board is certainly not a sign of confidence.  Having said that, the share price has taken a battering, the group are diversifying away from oranges, there is a whole new plantation due to come on stream soon and another juicing plant is also starting up.  These shares are very risky, but I am quite tempted to pick some up at these prices.

On the 24th March the group announced that they had signed supplier agreements to supply a total of 57,000 tonnes of summer oranges in the first half of 2014.  This is close to the tonnage recorded in the same period of 2013 and the production from the Hepu plantation has not yet returned to that of before the canker infection last year.  The selling prices of the oranges are broadly flat when compared to last year, falling by about 1%.

On the 20th June the group announced the summer orange crop yield from the Hepu plantation came in at 49,540 tonnes.  This is considerably below the 57,000 achieved last year and that the group signed supplier agreements for (above).  The plantation is still being affected by the Canker outbreak and this year was also impacted by frosts earlier in the year.  The annual production volume came in at about 197,467 tonnes, nearly 10% lower than last year.  The processed fruits business had volumes in line with last year but continued margin pressure.  Turnover and net profit are expected to be in line with market expectations, but lower than last year.  Asian Citrus can’t seem to get back on track, the Canker is still a concern, the lower margins at the processing plant is a worry and now we have frost to contend with.  The shares took a dive after this update but they seem to be trading at a rate that probably undervalues the company so I have taken a small risky punt on them.

On the 22nd July the group released a statement with regards Typhoon Rammasun in Guangxi where the Hepu plantation is located.  This was the strongest storm that the region has suffered in years and has caused widespread damage.  The impact to the plantation is significant and it will take some time for the group to determine the physical and financial losses.  ACHL just can’t catch a break at the moment.  This updated is worded very strongly and I have decided to exit with a small loss, turns out my timing was a bit off but I will still cover the company with a view to entering again if sentiment changes.

On the 11th August the group released an update on the damage caused by Typhoon Rammasun.  The storm destroyed 221,769 Banana trees planted in 2013, as a result of which there will be no banana harvest this year.  It damaged farmland infrastructure and machinery such as windbreaks, greenhouses and electricity wires at both the Hepu plantation and the Beihai Juicing plant.  It caused the juicing plant to temporarily suspend activity as a result of loss of electricity which in turn, ruined some of the raw materials.  Therefore, management estimate that impairment losses and provisions related to the damage of about £3.6M will be required within the statements this year.  Although the board expect turnover to be broadly in line with market expectations, core net profit will now be lower.  Additionally the typhoon caused premature fruit drop from some of the existing orange trees which will result in decreased production yield in the upcoming winter and summer crops and the impact of the typhoon will prolong the susceptibility of the trees to canker and increase the leaching of the soil.  Sadly the group’s insurance policy does not cover damage from natural disasters.

Separately the board expects that a material impairment loss in respect of goodwill equivalent to £197M will be charged to the profit and loss statement this year.  This is a huge impairment but as I do not really take much account of Goodwill for this very reason, it will not really affect my judgement.  It sounds as though the effect of the typhoon will carry on into next year and as such I will continue to watch from the sidelines.

I am not sure on the significance but Sunshine Hero Ltd has sold its 9.13% of the company’s issued share capital to Genuine Enterprises Ltd, owned by Mr. Huang Xin.

 

 


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