ASIAPHOS: Key Catalysts Remain Intact

Excerpts from analyst's report

NRA Capital analyst: Liu Jinshu

Singaporean-controlled AsiaPhos mines phosphates in China and produces phosphate products which are used in a wide range of goods such as fire retardants and food products.Key Catalysts Remain Intact  ♦ 1Q16 results not reflective of full year performance. AsiaPhos Limited reported lower revenue for its 1Q16 results announced on 29 April, as the mining season only resumed in late March this year and the company had rolled over less inventory from 2015. As a result, net loss attributable to shareholders widened from S$0.12m a year ago to S$0.915m in 1Q16. We are unfazed by the 1Q16 results, which were distorted by inventory movements and timing differences in the resumption of mining. More importantly, key catalysts to raise production and improve margins remain on track based on reported developments.

 ♦ In fact, mining rate reflects upside risk to our forecasts. Average daily output in April reached 2,300 tonnes per day (tpd), compared to the average of 1,400 tpd in 2015. This implies that there were about 196 mining days in 2015. Based on the same number of mining days (assuming a late finish to the mining season), the 2,300tpd of April 2016 if sustained throughout 2016 works out to a potential full year output of 450,800 tonnes, or 17.5% higher than our forecast of 383,740 tonnes (already +40% from 2015)!

♦ Next step now lies with approved mining scale. AsiaPhos is in the midst of raising its overall mining limit from about 250,000 to 600,000 tonnes per annum.

Meanwhile, AsiaPhos has started preparation work to sell the higher output, having entered into a non-binding memorandum of understanding (MOU) with a major fertilizer producer in Sichuan who intends to purchase at least 60% of total mine output in 2016. We currently do not foresee any difficulty with AsiaPhos raising the production limit.

♦ Attractive share price

"On balance, we maintain an Overweight rating for AsiaPhos and retain our forecasts and valuation, but reclassify AsiaPhos from a high return/low risk investment to high return/moderate risk. "We still see AsiaPhos as a lower than average risk investment due to the availability of assets to secure loans, higher than expected production in April (to impact 2Q revenue and profitability), anticipated margin improvements, and the attractive share price of AsiaPhos." -- Liu Jinshu (photo)

♦ P4 margins on track to widen further. Changes in the electricity tariff structure is also expected to reduce P4 production costs for AsiaPhos. We estimate that a RMB0.05 per kWh reduction in electricity costs will add about 7% points to gross margin. In addition, AsiaPhos also undertook certain design changes at one of its two furnaces to reduce electricity consumption and raise production efficiency. These developments reassure us that the company is likely to meet or even exceed our forecast gross margin of 15.0% for P4 in 2016, compared to 10.2% in the last nine months of 2015.

♦ Available assets mitigate funding risk. The key risk now is that the company’s cash flows have tightened. Net gearing has remained low at just 8% of common equity. However, cash has dwindled to S$2.0m versus S$4.3m at the beginning of the year due to expenses and working capital requirements in 1Q16 that led to net operating cash out flow of S$1.8m.

The company has assets such as PPE at its factory that can be pledged for bank loans, thus mitigating this risk. Nonetheless, we are mindful of the negative working capital of S$3.3m, and classify AsiaPhos as high return/moderate risk (from low risk previously).

Full report here.