Westcomb's report released yesterday.
WESTCOMB Financial Group yesterday (May 4) initiated coverage of Oceanus Group Ltd with a “buy” call and 0.44 sgd target price due to a whale of an outlook for the Singapore-listed firm’s expanding abalone capacity and plans to open a string of restaurants serving the delicacy in China.
The aggressive target price represents a 226% upside to Monday’s 0.135 sgd valuation, but Westcomb said its bullish stance is justified.
It said the Fujian province-based firm was buoyed by compelling catalysts, namely its unchallenged position as China’s largest land-based farmer of the shellfish backed by concerted efforts to acquire abalone farms.
“With the company’s capacity growing rapidly to 20,500 tanks as of December 2008, it has thus emerged as the world largest land-based abalone farmer.”
Westcomb is also optimistic on Oceanus’ ambitious plan to be the first to establish an abalone-centric restaurant chain, beginning in China’s most populous city, Shanghai.
“The sky’s the limit. The management has a conservative internal target of 10 restaurants in FY09, and 100 restaurants by FY11. To them, the target of first 100 food restaurants is just a milestone marking the beginning of its restaurant chain’s journey.”
Live abalones don't fetch as high as price as processed ones, which is why Oceanus is going downstream.
It said the current challenge is for Oceanus is to systemize the food chain operations, with its first restaurant in Shanghai estimated to sell about 5,000 abalones a month, and 60,000 a year.
Westcomb also said that the abalone processing side of the firm’s operations offered “compelling advantages.”
“Generally, a processed abalone commands a premium over a live one. On top of that, its selling price is relatively stable, unlike live abalone whereby its price is much more volatile.
A processed abalone is shielded from risk arising from disease or natural disaster which is faced by live abalone.”
Additionally, processed abalone have a longer storage calendar.
“We find it compelling to recommend ‘buy’ as the risk-reward ratio is in Oceanus’ favor. Notwithstanding that uncertainty remains in the downstream business, we believe the risk is low given that (1) encouraging progress has been shown so far, (2) even if the downstream business does not take off successfully, its abalone farming business is expected to remain profitable.”
It added that key risks include that its biological assets are exposed to any diseases or natural calamities that may visit upon the tanks, and that its downstream business, including the energetic restaurant chain plan, involves execution risk.
Recommendations of DBS, Kelive, Daiwa and Citigroup
Dr Ng Cher Yew (right), chairman of Oceanus, seals a deal with Ah Yat Restaurant.
Prior to Westcomb’s initiation, Daiwa Institute of Research reaffirmed its “buy” on Oceanus in mid-March but provided a more modest target price of 0.285 sgd compared with an earlier 0.535 due mainly to its downward earnings forecast revisions for FY09-11 by 27.6%, 21.0% and 17.4%, respectively.
“Oceanus management claimed that abalone market prices declined by about 10-15% in January, but stabilised in February and March. Based on our channel checks and according to Oceanus management, there still appears to be a structural shortage of the Japanese variety of abalone in the China market, but management is cautious about the 2009 pricing environment given the decelerating China economy,” Daiwa added.
It said it believes Oceanus’ 2Q FY08 and 3Q FY08 earnings benefited from having large numbers of seedlings progressing to immature abalone, and 4Q FY08 was hindered by relatively few.
In general, it expects 3Q FY08 to be a “normal” quarter. “We still forecast the company to record earnings growth between FY09 and FY11. We also assume that Oceanus shifts from a company focused on growing its stock of abalone to a steady-state business that pays 50% of its earnings as dividends in 2011.”
In early February, DBS Group Research started Oceanus with a "hold" with a 12-month target price of 0.19 sgd.
In Shanghai: Lunch crowd at the Ah Yat cafe-style restaurant selling abalone meals. Photo by El Lee
“The company is aggressively expanding its (abalone) farming capacity as well as integrating downstream businesses. We initiate ‘hold’ reflecting our concerns about its execution in terms of its aggressive expansion plans and its downstream moves at a time of economic uncertainty.”
However, DBS was bullish on management’s rich experience in aquaculture farming, and the “unique and ideal location of the farms” which guarantees stable and efficient operation while the latter lowers its expense ratio.
In mid-July of last year, as the Beijing Games were in full swing, Kelive Research issued a “buy” recommendation on Oceanus with a target of 0.455 sgd.
“Rapid decline in wild catch due to overfishing and regulatory enforcements presents opportunity for (land-based abalone farmer) Oceanus to satisfy demand and global supply shortfall.
Oceanus has mapped out the areas for land acquisition and appears confident of acquiring additional land parcels to achieve their forecast of 40,000 tanks for abalone rearing by FY09,” Kelive said at the time.
And earlier that month, Citigroup put a 0.35 sgd target on Oceanus, touting the company’s strengths including its ideal breeding location; know-how to enhance survival rates; economies of scale; favorable tax incentive support, and relation with Ah Yat -- its JV partner for the new restaurant chain.
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