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.Higher operating margin beats seasonality. AsiaPhos Limited’s 2Q16 EBITDA grew by 51.6% year-on-year to S$2.0m in spite of revenue falling by 20% year-on-year to S$9.6m due to the early onset of inclement weather. EBITDA margin nearly doubled from 11.0% a year ago to 20.8%. As a result, AsiaPhos’ EBIT actually grew by 64.6% year-on-year to S$0.5m in 2Q16, turning around from a negative EBIT of S$1.0m in 1Q16. We expect AsiaPhos to report improved performance in 3Q before reporting a substantially stronger 4Q after the end of the rainy season in late August. |
♦ Rock inventory adequate to drive revenue in 3Q. Inclement weather started in late May/early June this year and likely reduced the number of work days at the mine. Hence, the number of rocks sold fell by 31,500 tonnes or 35% year-on-year to 57,600 tonnes. However, we estimate that the company has stockpiled about 165,000 tonnes of rock-equivalent inventory as of 30 June 2016 (stocks of S$7.7m divided by cost of sales per tonne of rock in 2Q). Last year, AsiaPhos sold 23,900 tonnes of rock and 2,840 tonnes of P4 in 3Q.
This year, P4 production appears to be already in full swing with 2,300 tonnes produced in 2Q. We expect the company to produce more than 4,000 tonnes of P4 in 3Q, which will help to generate about S$10m of revenue and about S$2m of gross profit in 3Q.
| AsiaPhos | |
| Share price: 8.7 c |
Fair value: 19.5 c |
♦ Effective reduction in tax to further boost margin. The company has also disclosed that the provincial government will abolish RMB14 per tonne of taxes and amend the resource tax from RMB15 per tonne of rock to 8% of selling price per tonne of rock with effect from 1 July.
We estimate that these changes will reduce cost by S$1 per tonne of rock, leading us to project rock gross margin of 25% in 2016 and 29% in 2017.
| ♦ Increase in production is key catalyst |
 "AsiaPhos’ share price has remained stable at between 8 to 9 cents. The CEO Dr. Ong Hian Eng increased his stake in AsiaPhos to 24.77% via the purchase of 906,300 shares on 22 June. The company’s independent director acquired 100,000 shares on across 30 June and 4 July. "We continue to see AsiaPhos as undervalued with potential catalyst from the upgrading of its mining limit to 600,000 tonnes per annum in late 2016 or 2017. (Overweight – high return/moderate risk)." -- Liu Jinshu (photo) |
♦ Expect 2016 to be profitable. Based on a mining rate of 1,800 tpd over 196 mining days a year, we can expect AsiaPhos to produce 352,800 tonnes of phosphate rock in 2016.
However, we moderated our forecasts for 2016 from 383,740 tonnes previously to 328,920 tonnes, by changing production growth estimate from 40% to 20%. This is to factor in potential downtime from the weather. Ultimately, we still expect the company to make PATMI of about S$0.87m in 2016.
Full report here.
