Migao's two main products are Potassium Nitrate (NOP: current capacity of 80,000 t) and Potassium Sulphate (SOP: current capacity 180,000 t). For more details, please see their website at http://www.migaocorp.com/.
In recognition of the quality of its fertilizers, the company has secured a five-year contract with Yunnan Tobacco (a large Chinese Tobacco producer) for the NOP. What is interesting is that Yunnan is increasing its tobacco acreage to deal with the growth in China and to increase its exports. This should be positive for Migao's growth plans. Also, Migao has recently signed a joint venture with Chili-based SQM, the world's largest producer of NOP. The Companies are developing a 40,000 tonne plant (NOP) in China in the form of a 50/50 joint venture.
In terms of growth, in addition to its joint venture with SQM, Migao is working on two 40,000 tonne SOP plants (Shanghai and Zunyi), on a 120,000 tonne Sulfuric Acid plant (sulfuric acid is an input necessary to make its fertilizers) and a new blending facility.
The new blending facility is the most interesting development in my view. The tobacco industry asked Migao to build it. Basically, the blending facility takes the specialty fertilizer from Migao and blends it with more generic fertilizers to meet the needs of specific tobacco growers. Each facility costs about $4.5 million to build and the company stated that it can recover that cost from the first year profit of the facility (payback of less than a year). Also, Migao said that they could end up building 4 to 6 of these facilities, all for the tobacco industry. To put this in perspective, for the last 12 months, the company EBITDA was around $33 million, so these new blending facilities could create significant growth for the company. On the other hand, we have no seen any financial results from the blending facilities so there is risk in these forecasts.
The company has had solid revenue and earnings growth, however, part of that growth came from Migao's policy of targeting 20%-24% gross margin range. When input prices increase, such as in the last few years, the company sees increased absolute revenues and gross profits. If, for example, potassium (KCL) prices were to decrease, Migao would likely see more muted growth for a while.
Last quarter, Migao had about $17 million in cash, $14 million in debt and $78 million in raw inventory on its balance sheet. The company stated that it can achieve its growth plans by using its cash flow from operations and cash on hand: it does not need more financing. I like that the founder still owns about 18 million shares (40% of the company). Of note, Migao's revenues, costs and profits are in Chinese Renminbi that are translated in Canadian dollars for reporting purposes. So, if you feel that the value of the Renminbi will change dramatically versus the Canadian dollar, you must consider this in your due diligence.
For the fiscal year ending September 2009, the consensus EPS estimate is around $1.10 (last year, its earnings were $0.63, with the last quarter of the year at $0.31). With the shares trading at $5.49, you have a 5x price to earnings ratio. Under a similar valuation approach, Agrium trades at 5.9x and Potash trades at 7.4x.
Migao seems to have quality products and solid growth prospects while trading at a low multiples. Even if potassium prices were to decreased substantially, thus affecting the company's absolute earnings, the company would still be profitable and growing with a solid balance sheet. I think it is worth considering.
NOTE: This post is not a recommendation, do your own due diligence. I may or may not own this stock so please keep this in mind.
3 comments:
Thanks for the insight. I purchased shares just before the plunge. Its been nice to see it slowly climb back into the black for me (up 5% now. I also hold HF - any thoughts on them?
I like both MGO and HF. I think that the 2 companies will benefit from an increased use of higher quality fertilizer in China. Land is limited while population keeps growing so you need to make your land work harder, hence increase use of more advanced fertilizers.
Thanks for stopping by,
CSC
I am holding both HF and MGO as well. I expect its business will grow 30% each year for next 2-3 years.
Post a Comment