China Fishery (CFG SP): Margin to rise on low oil price - BUY (unchanged)

Results in line.  Profitability of trawling operation, despite strong demand, was eroded by high fuel cost during the year. Blended operating margin dipped 2.0pcp to 26.8%, though SG&A expense reduced from 6.8% of total revenue to 6.2%. Fishmeal division, on the other hand, kept expanding capacity in Peru. Overall, the company recorded 13.1% growth in top line to US$459.4m. Net profit stepped up 6.5% to US$94.3m.

Story unchanged. The FY12/08A performance is roughly in line with our expectation. We maintain our view towards the counter:
Abnormal FY12/09F – trawling division will likely register steady sales growth with apparent margin expansion, though minimal contribution from fishmeal division.
Extra fuel from South Pacific – the company will send four trawlers to South Pacific to catch Jack Mackerel. A quota system will be introduced to this water area by the South Pacific Regional Fisheries Management Organization this year, which will grant quota to existing operators, guaranteeing their long-term fishing rights in the region.

Valuation and recommendation. The counter is trading at undemanding 2.8x one-year forward P/E, versus industry’s 8.8-43.7x. We reckon the major concern might on the high uncertainties associated with the fishing activity (e.g. quota, weather, etc) and the company’s relative high financial leverage (net gearing 98.9%). Potential catalysts might include: 1) strong earnings growth in FY12/09F with corresponding cash inflow; 2) encouraging results from operation in South Pacific. We maintain our BUY call with the target price unchanged at S$1.12, representing 5.0x FY12/09F P/E.

Margin to rise on low oil price