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Agreed.
I understand short attacks preying on fear, and driving share prices of the whole sector down.
What I don't understand is why the short sellers don't just take their profits, at some point. They can't drive real companies to zero, so doesn't the risk reward ratio get out of whack for them with p/e ratios of 2?
At some point, bigger players will come in on the long side.
This would be hastened by companies proving their credibility with a series of commitments; e.g., dividends, share buy backs, insider purchases, pledges not to raise capital under book value, upgraded accounting and auditor firms, reconciliation to Chinese tax accounting, taking private at 50% premiums, dual listing, etc.
To clarify spinning out subsidiaries; the key to unlocking value in a serious way:
(anyone more familiar with spin outs, please verify or educate -- tia)
Let's for the moment assume that the fish business meets 2011 guidance of at least $32M. Let's also assume that the number of APMFFs built in 2012 doubles 2011, as previously targeted. Since fish sales in 2012 will derive from 5 farms over most or all of 2012 vs from half a year from one farm in 2011, revenues will more than double. Let's say, $75M in 2012, with further growth built into the model for 2013 and beyond. $75M generates $48M in gross profit and net earnings of say $40M, since there are no taxes.
SIAF spins out the FISHCO with say 20,000,000 total shares, retaining 15,000,000, and using 5,000,000 for the IPO on an Asian exchange. What happens?
The parent company, in which we own shares, by then will be traded either BB, major NASDAQ, or dual listed. It will own an asset worth 3/4 of the market cap of FISHCO, to be determined by the open public market in Asia, presumably Hong Kong. As shareholders, we will each get our pro rata shares in the new FISHCO times the 25% that is spun out. More importantly, SIAF will be worth MUCH MUCH more. Why?
Basically because the US listed Chicoms get a horrible valuation, at least for now. That won't happen in Hong Kong, where rational financial metrics will surely apply, even if discounted or conservative.
So, the numbers:
Let's apply a conservative p/e of 8 on the $40M of a company growing at 100% per year. FISHCO is worth $320M, or $16 per share using 20M shares. So, for each share of SIAF a current investor has, he will get .25 shares of FISHCO times 20/70 (ratio of percent interest), or about .071 shares, or $1.14!!
As if this weren't good enough, the parent company will now have more cash by virtue of its interest in FISHCO, and much more importantly it will now own 3/4 of an asset valued at $320M, or $240M, equal to $3.43 per share !!
Imagine what happens if revenues are $100M+, even $150M because the spin out takes place in mid 2013, and HONG Kong values a company growing at 100% with a p/e of 20!
This is the kind of upside SIAF has in two years.
I hope that during the Q1 conference call, Solomon can pledge no equity raises at the parent company level in 2012? Or, if a pledge is too strong or too "forward looking," at least proclaim that current 2012 capital development plans, though ambitious, appear easily funded through 2011 and 2012 cash flow, plus continued grants and low interest loans.
This seems very doable to me, particularly in light of very intelligent plans to raise capital at the parent level in 2013, spinning out subs. If those 2013 plans can be voiced, why not 2012?
Would also like to hear more on the requirements for low interest loans.
My guess is that the equity raise this year -- still not less than $1.50 -- is needed because the government requires land use rights and improvements both reach certain threshold levels, and be funded with company cash in order to become eligible for grants and low interest loans, collateralized by free and clear, improved land.
We've seen $ value thresholds for improvements with past matching grants for the cattle business.
Radically improved net tangible assets at the parent company may also be a criteria, not dissimilar from U.S. bank loan qualification.
Yet they have drilled 295 successful wells. They have acquired and expanded a drilling outfit, operating at 35% net profit margins.
You can question their competence in investor relations, communications, and timely reporting -- all of which appear to be improving since the forensic audit, but their operational performance has always been competent, if not stellar.
Expect very good Q1 results next month.
Of course, the real story will unfold as Durimu is developed. If the signposts indicate they'll succeed in "aggressively drilling" 30 barrel/day wells, the shares will double, and more if skepticism of the space abates.
Have to disagree about the new field being worth PTR's efforts. They are orders of magnitude larger, exploring new fields internationally with vastly more proven reserves. The new field would not move the dial for PTR, nor do they care to direct development efforts at 30 barrel a day wells.
However, imo,
it would make a lot of sense for NEP to sell its Jilin fields or an interest in it to someone else, perhaps a driller who's already there, if they have the cash. I wouldn't advocate this until the new fields are more proven and aggressive drilling begins.
Valued at "just" $250,000 per well -- one guess as to value is $70M. The "oil properties net" on NEP's books is $41M. Valuing at 3x EBITDA after 40% royalty, China oil tax, and using $90/barrel oil, yields about $100M.
$50M would accelerate Durimu drilling pretty darn quickly, generally speaking yielding 100% return on investment per year.
NEP's whole business model was to drill very small wells in Jilin, on PTR land, for PTR BECAUSE the fields were too small for PTR to bother with.
Nothing's changed about that.
I wouldn't hold out hope for any buy out, especially from PTR.
However, NEP will report good earnings within a month -- $.35 +/- ? And they will show progress on the new fields the remainder of 2011, leading to and incremental $1.00 of earnings, starting to ramp in 2012, and possibly an additional $1.00 to $2.00 in 2013.
If the exploratory wells are successful, these are reasonable expectations, and this is what investors should look for, imo. That, and ...
Signs that the Chicom space and NEP is clearing itself from short attacks and absurdly low valuations due to the corporate misddeds and miscalculations of other companies.
Of course, no one knows when this will turn around.
" The Company intends to charge Shengyuan for such drilling services at market rates. This initial stage is expected to last approximately 12-18 months, and during such period, any oil produced will be sold to qualified buyers which will generate revenue and cash flow to support the Durimu oilfield exploration program."
These are the most important parts of the release, imo. Basically, NEP will book 100% TIAN drilling capacity in revenues and profits on the income statement. This will be offset in cash flow by capital expense.
Secondly, revenue will be produced during the initial testing and exploration phase. it appears that they can develop these fields with no net loss of cash.
Roughly speaking, should wells produce 30 barrels per day, @ $90 oil, each well drilled will add $.01 to eps every year, less depletion.
A run rate of 100 wells per year -- what does "aggressive drilling" mean -- will commence in 2012, adding incremental eps of $1.00 per share.
Strindberg,
Good luck in the marathon.
Hope you'll continue to post JF's commentaries, and that they have a little more to say. Also, your own comments, after your race.
Let me chime in a bit about how SIAF is misunderstood. It has both income statement and balance sheet advantages, considering the incentives it's been granted from the government. They pay no taxes. This was initially instituted for a period of five years, and is expected to be extended another five. And in some businesses, the government provides subsidies or grants to underwrite land use and improvement costs.
We've already seen SIAF's nascent cattle business receive $2M in development grants. During the conference call, if I remember correctly:
cattle cooperative farms will grow from 6 to 26
revenues will grow about 10 fold
government to match certain development costs
there will be a brand new "aromatic" beef initiative
It's reasonable to extrapolate that grants for this expansion will total at least $6M - $10M Not sure if this is the area in which "substantial" grants are expected.
These grants fall right to net tangible assets. Likewise, the $8.4M profit from the sale of the dairy business is an immediate balance sheet boost of $.12 per share. Had they not elected to pursue aggressive capital development plans, this would have fallen directly to cash.
Think about that. The profit on sale equals about 15% of the company's total market cap. And, we can expect another 20% - 40% added to the balance sheet in the form of development grants.
EPS is not the only way to value a company. Of course, the trailing multiple is under 4; and forward about 2.
Drexion,
Further to my last post.
The first quarter comparison next month is $4M revenues. Expect 100% YoY beat there, which would be a good start to their seasonally much stronger second half.
If the downside is not making guidance, the upside is what making 2011 guidance implies for 2012, because slowing growth from 400% to 75% gets 2012 revenues of $105M.
You have to understand how scalable these businesses are. If -- and admittedly they have to execute -- they build 8 fish farms in 2012, s they previously targeted, you'll see phenomenal earnings, because fish sales from 5 farms will kick in for a whole year, vs, sales from 1 farm for half a year, with a smaller equity stake.
Drexion,
I guess it comes down to whether you believe the CEO or not. I've been invested in this one long enough to believe him. He's come through almost every time, though not always exactly on time. That's why he took a VERY conservative approach with the HU flower guidance.
I am also very familiar with the business models for fish and dairy, and how highly scalable they are. And I do not think guidance comes from wishful thinking. It comes from knowing what contracts are in the final stages of negotiation.
I will admit that on the face of it, and before the cc explanation, the dairy sale looked troubling. But they did get what he justified quite well as a pretty decent price, which in turn substantiated his claim on the reduced business prospects.
If the revenues weren't being made up by return on the new capital invested in the first year, I'd be worried. But it is being projected, which eases any concern I might have that they paid too much for the land, especially with a substantial grant coming.
We'll see in several weeks how much better Q1/2011 is over Q1/2010.
Strindberg,
I think that Solomon has a wise path for listings. There are more difficult listing requirements, in terms of historic revenues, market cap, etc., for more major listings.
So, he is proceeding on course to unlock value -- a whole lot of value -- by matching listing timing and exchanges with subsidiary and parent company financial metrics.
In the meantime, operations appear on track.
The marketplace seems to have choked on the dairy divestiture and share issuance.
But both result in the capital already expected to achieve 50%+ growth in the first year, and 100% increase in NTA. And share issuance is contracted at not less than $1.50.
Why the price is down to a $1 is a mystery to me.
Just curious about the following.
SIAF sold a business accounting for 75% of its revenues, and is investing the proceeds, along with new cash and grants, to forecast first year revenue growth of about 50% total.
Math tells us that the remaining businesses are forecast to grow 400%. Anyone know of any other company forecasting 400% growth?
It was quite well explained on the call how the existing business models, coupled with large investment infusion, will propel the fish, cattle, and fertilizer businesses.
On top of this, NTA almost doubles.
On top of this, as Solomon stated on the call, 2012 NTA is expected to grow even more. Further, whereas 2012 eps are looked upon as too forward to quantify, the franchising model, mission specific in 2012, is designed to promote exponential growth.
These are the major takeaways from the call, imo.
Interested in contrary impressions; that is, that those are not the major or valid takeaways.
I'm not a farmer. But I've been told that in parts of upstate New York, one acre of grazing land supports 11 head of cattle. But in much of Wyoming, it takes 16 acres to support one pair.
Again, I too would like to get more details on the proposed land use, for 2011 and beyond.
But, more pertinently, I am interested on ROI, which is basically in the guidance.
Somehow, I don't think they'll earn $.43 in 2011, while setting up a much larger corporate infrastructure and asset base, without using the land for that return. Of course, if the purchase was just folly, they'll still earn $.43.
They are guiding for phenomenal growth in three businesses, and adequate to excellent immediate return on assets, so it's hard to see that the land cost, net of grants, etc., was out of line.
Also, do we know the payment terms?
snow
In post 5718 you estimated 2011 net profits at 50% of gross profits. This is misleading.
Can't understand why you'd object to a company buying more land than needed for just one year. How can they expand? If it were enough for build out in ten years, I'd understand.
That having been said, I would like to learn more about proposed land use as well.
We do know now that there are large capital budgets for every business, and that the projects will be carried out on this land. The cattle business revenues are guided 900% higher, so need 10x the land, I guess.
Snow's point that there is no money to develop the land is not valid, period.
Without grants, etc. in 2011 SIAF took in or will take in at least $72.5M:
$31.0M from dairy sale, including $8.4M profit
$16.5M from stock issuance (or more)
$25.0M from net profits (or more)
From the statement that NTA will increase by $80M - $90M, I infer that the dairy was carried on the books at a much lower valuation, and the remaining difference will come from grants, rebates, subsidies, etc.
I also would appreciate more details on this, and land use; also, payment terms for the land.
Regardless, the numbers above show that -- even if they pay 50% cash for the land now and the remaining 50% during 2011 -- SIAF will still have $20.5M for capital development to improve the land and businesses BEFORE using it as collateral to borrow any more.
Snow,
Again, ...
Many obvious possibilities pertain making your point about having no money for capital development useless:
1) SIAF used $31M in cash from the dairy sale to buy $52M in land, leaving $21M equity, to borrow against for capital development.
2) There ARE rebates, grants, and subsidies
3) the value of the land use and businesses increase as cash flow producing improvements are made
4) likewise, grants increase as improvements are made. We've already seen this in the cattle business, after certain dollar value threshold of quality improvements were made
5) the Chinese government is offering numerous incentives for agriculture
6) the stock issuance at not less than $1.50 brings in up to $16.5M in cash, that can be used to improve the land, thereby enhancing its eligibility for increased low interest loans, if desired.
Snow,
Why do you look for negatives without acknowledging positives? More importantly, some of your assertions are just wrong. SIAF pays no taxes, and their fixed expenses are very low, so to say that fixed expenses in 2011 will be reduce gross profit by $15M is not only wrong, but particularly odd, when you seem to have gotten some figures from the 2010 financial report, which shows fixed expenses.
Also, I think you are mistaken about profits to yourself. SIAF makes a capital investment in a joint venture. Capital is not an expense on an income statement. In return, SIAF's interest in the JV gets 50% of the profits, which are derived solely from fish sales.
The JV is paying SIAF -- not itself !! -- for construction, etc. Afterall, the JV partner isn't doing the construction -- neither is the JV -- SIAF, the parent holding company is.
Snow,
1) They are accelerating growth of the remaining three businesses. They will grow in the triple digit percentages.
2) They are earning more money in 2011 vs, 2010, 50% more revenues and the same earnings increase as guided in 2009 in absolute dollars.
3) There are four strategically linked major initiatives:
a) selling dairy for $31M, $8.4M profit
b) buying new land now (before continued inflation)
c) issuing new shares at $1.50 or higher, offset by retiring shares
d) large capital development projects in every business, most of which comes from from the dairy sale and new shares
e) using some gearing for these projects, and creating the means for further leverage through low interest loans and grants on vastly improved land
4) Result of those 4 initiatives is a 100% increase in net tangible assets and 50% conservatively forecast revenue growth
I do not know the specific uses for the land, and it would be great to find out. I do know that they projected 900% growth in the cattle business. That will take some land. I suspect they will use their own land for some fish farms. They mentioned having 500 acres for future HU flower planting. Keep in mind this represents potentially tripling that business. And they mentioned 160 acres for asparagus.
Obviously makes sense to purchase more land than needed for just one year. More likely, they're set for 3-5 years with land that is appreciating; will appreciate more as improved; and provides the absolutely necessary infrastructure for further later growth.
Snow,
As an addendum to my last post, 2012 earnings could be WAY WAY higher than my last post, which made the "conservative" case.
In an earlier post I pegged easily achievable 2011 fish revenues of $60m, plausibly $100M.
As Strindberg pointed out, he thought $60M was way too low. If previous guidance of 8 new farms in 2012 vs. 4 in 2011 hold, then construction, consulting, module fees figure to increase 100%, maybe more depending on the size of the farms, and economies of scale. )I used 75% total business growth in the last post). We now know that the farms are expandable, so less sales/new partners are required to garner new revenues.
Also, quite significantly, part of SIAF's 2011 capital plan calls for accelerated equity participation in the fish sales. VERY important for two reasons:
1) makes getting new fish farm partners much easier, as less capital is required of them; also, as the demo farm(s) show success (sales starting in July), selling partners also faciitated
2) they will derive accelerated revenues/earnings from fish sales as they kick in.
Let's look at fish sales. In 2011 they will have a percentage equity (25%, I think, but not sure) for half a year for one farm. In 2012, they will have closer to 50% equity interest in sales for 3/4 year for 5 farms !! That's an increase of 15 times !!
Now. let's think about spinning off the fish business -- issuing say 25% of total new shares -- to the Hong Kong exchange for a business with $100M+ revenue 60% gross margins that's demonstrated 500% +/- growth over each of two years, and projected to grow another, say 50% - 75% in 2013.
Any reason that business couldn't well be valued in the $500M range?
Snow,
See no reason that $.80 is not still very doable in 2012. That question was asked, and Solomon said that it was getting into a touchy area with respect to forward looking statements/Form-10. But he did allow that 2012 calls for further franchising. This is the model that leads to hugely scalable growth. So, earnings could be even higher.
Consider:
I have been talking about fish revenues growing 600% 2011 over 2010. Well, beef revenues are guided up 900% 2011 over 2010. (Flower revenues are guided 50% higher, even though the yield capacity is closer to 200% higher). Granted. such gaudy increases are due to the businesses starting up in 2010, but they will still be very young franchises eoy 2011.
What if growth slows from 600% or 900% to even 75%? With economies of scale, earnings will at least double.
btw, sure a lot of the land is being used for the cattle business growth, and all the capital development budgets detailed in the call. Sure that many more projects are planned for 2012.
Thanks for your explanation. Now I see you meant that the Swedes thinking of 2011 being lost meant in relation to their previous pps expectations, considering currency risk.
In no way is it lost on the company's progress.
The company's pps clearly suffers from the extreme stain on the space in the US, much of it brought on by some bad apples, more than there should be. This is much more responsible for low valuation than any earn ings projection or stock issuance. I would argue VERY confidently that the company made several large changes, sacrificing little or no short term momentum, while gaining a great deal of high margin, highly scalable 2012+ growth.
Obviously a share price of 3-4 looks less likely from 1 than 2, but still can happen:
1) the company is easily distinguished from unreputable ones, for two major reasons:
a) going through the rigorous SEC scrutiny now that many avoided in the past
b) dividend
c) forthright with plans to dual or separately list
2) the company continues to execute
a) 2011 earnings guidance affirms earlier guidance in absolute dollars, and is still 60% eps growth
b) If the flower business yields to capacity -- about 80m - 90m plants, earnings will approximate previous eps guidance of $,50 per basic share, even with new shares and jettisoning the dairy
c) the company will enter 2012 as a much faster growing company than it would have had it not greatly expanded its capital base underlying its fastest growing businesses, increasing NTA 100%
Strindberg,
I hope you'll convey the reasons that 2011 is most assuredly not a lost year to whoever thinks it might be. Also, the effect of extinguishment of debt is a non-cash item and should not be looked upon negatively; rather, it should be factored out.
2011 will see 50% growth in revenue and almost 100% growth in net tangible assets. Most companies would kill for that; so hardly a lost year.
Consider also, that the remaining three businesses will show phenomenal growth rates; especially the fish business, where revenues are guided to 600% growth. Think about that. They do not make these projections without knowledge. $30M in fish revenues absolutely confirms the hugely scalable business model, virtually guaranteeing $60M in 2012 revenues, maybe even $100M. Recall earlier targets of 4 new farms in 2011 and 8 in 2012.
On top of this, the flower business guidance was very conservative, basically assuming the same bad weather that cut 2010 yield in half.
Why is net income of $.39 FD that hard to understand?
It does NOT include the one time capital gain from the dairy business. It is also ABSOLUTELY REMARKABLE GROWTH, considering they've jettisoned the dairy business, a strategically well considered move.
Here are the 2010 results:
Revenues
$40,551,066 Gross Profit $22,453,425
Gross Profit Margin 55% Income from Operations $18,901,864
Please note the difference between gross profit and net profit was only $3.5M, primarily because SIAF is exempt from income taxes. This number shouldn't change too much in 2011.
They sold the major contributing division to 2010 revenues and profits to strategically transition the company, and still forecast:
46% jump in revenues, and
37% jump in gross profits
Think about what the growth rates for the three remaining businesses are.
Spinning out the subsidiaries to Hong Kong is a great idea, imo.
Basically, it would be like doing an IPO for each business. In that sense, current owners now have pre-ipo stock. The main idea is that the sum of its parts would be worth much more than the total. This could easily be true in normal circumstances. But the real bang for the buck will come from a massively higher p/e valuation.
SIAF will still own a large portion of each newly traded subsidiary company, making it more truly a holding company. The holding company could be dual listed in US and Sweden.
This is largely a matter of semantics.
The guidance would have been $.50, if the new shares weren't included, but it also would have been $.50 or more, if the new shares were included and the dairy business not sold.
My main point is that investors have a knee jerk reaction to issuing new shares. It dilutes % of ownership, but it makes each share worth more, and is accretive to eps, as long as the proceeds get as high or higher rate of return than the company as a whole.
Fact is, in this case, the new shares will get at least $1.50 per share. If there weren't what Solomon thinks are great opportunities, that $1.50 would increase sash balances by more than the current price. But it gets better:
For one, the new higher share count will be somewhat offset by retiring shares.
More importantly, the new shares, and cash brought in are linked to the cash brought in by the dairy sale, and to grants, subsidies, and the ability to collateralize the new loans, such that NTA will show dramatic increase, and the return on new funds does appear will generate superior returns, mostly from the fish business.
cleeze
This was a great post.
Been a lot of big trees lately; nice view of the forest.
Dilution is a misleading term, though I agree it's toxic in this space right now, as is almost anything.
Every start up silicon valley company issues new shares, so they "dilute" each owners percentage ownership in the company. This is how compnies get the capital to execute their business and to grow.
And the owners are HAPPY because it is done at a higher valuation per share!
SIAF's issuance is exactly the same. Not only is the issuance being done at a higher valuation, but as near as I can tell, it will be accretive to earnings per share immediately!
2011 income guidance is 60% higher than 2010 income, and equal in dollars to previous guidance. True, it is lower than previous guidance per share not because there are more shares (from which return on the capital raised contributes to earnings), but because of selling the dairy farm.
And even these revenues are made up dollar for dollar in 2011.
And as all these new moves are linked and result in $85M increase in NTA, 2012+ will see the real accretion in eps.
I think that those two surprises -- selling dairy and new share issuance -- were looked at in a vacuum, without scrutiny or even analysis, and therefore were the reason the share price dropped.
The company made sweeping, transformational changes, all of which were linked. They are embarking on major development projects, concentrating on faster growing franchise model businesses, some of which require new land, a valuable, appreciating asset in China.
They are becoming a much bigger company than we knew about prior to these revelations, somewhat ironically because of -- rather than despite -- the sale of vast revenue producing dairy.
The dairy sale and share issuance are necessary cash drivers to procure leverage in the form of grants, subsidies, and eventual low interest, government sponsored loans. Altogether, these projects will produce $80m to $90M increase in net tangible assets in 2011. This is a phenomenal figure. It would not happen without the share issuance and dairy sale. And these changes set the infrastructure to move the businesses to the next step in 2012.
So the whole picture is bright. The market delinked the pieces of news yesterday, and chose to value only the parts it didn't like.
Yet, even disregarding conservative guidance of 60% earnings growth, NTA improvement of 80%, largest potential business guided to 6-9 times growth, 2011 US uplisting, 2013 subsidiary Asian uplisting, the bald worst case view of the dairy sale and stock issuance are fully overcome by:
1) Lost dairy revenues are 100% replaced by 2011 fish revenues, with better margins; dairy sale produces $8.4M profit. That alone equals 13% of the entire market cap.
2) Stock issuance will be valued at no less than $1.50 per share
Not sure if there's a replay call in, or the cc is on the web -- Chad?? -- but I'd encourage people to look into it, listen, or wait and read a transcript.
Basically, there was PLENTY of good news on the call.
The only things I can see were possibly conceived of unfavorably were actually positive, in my view, when realized in context. Even viewing in the worst light, these two elements were both nicely countered:
1) the dairy sale for too little: known for three trading days anyway, plus provides $31M for well reasoned investment in faster growing businesses, and will show an $8.4M profit
2) share issuance: up to 11M shares some time in 2011, only a minor part of 2011 capex; offset by retiring shares; contractually limited to price at or above $1.50; use helps to satisfy grant and low interest loan prerequisites
Everything else was assuredly positive; principally:
1) Fish farm revenues and gross profit to grow 6-9 times in 2011, 100% replacing dairy business revenues and profits
2) Net tangible assets to increase $80m to $90M to $3,00 per share!
Obviously, he couldn't talk about prospects. But he doesn't set targets in a vacuum.
Someone asked about the Form-10. As I recall, he basically said it's out of his control.
They are on track because:
1) They've repeatedly targeted four
2) The current farm can be expanded
3) They signed a contract for one expandable farm in the first quarter; that's a run rate of four for 2011
4) They now have a demo up and running. Remember, fish sales will start in July. Gotta believe that some prospects are lined up, waiting to see the quality, size, growth characteristics of the fish, all of which are competitively vastly superior, according to the 10-K, and presumably already demonstrated in Australia, where Mr. Lee is from.
5) They specifically guided $32.2M in revenues, despite being conservative in other areas.
6) All above indicates to me that they are already close to new contracts.
I really don't think people are seeing the whole picture. A major part is that the fish business replaces ALL of the dairy business's 2010 revenues. But it does so in a franchised model designed for geometric growth, not arithmetic, like the dairy business.
There have been a lot of posters and shareholders in this company because they believed the growth potential of the fish business. Now, we are seeing that growth, exactly as scheduled.
Admittedly, we need to see continued execution to plan. But the upside is enormous. The revenue and profit growth for each farm is built into the business model. Most companies hope for earnings visibility, so that they can sustain earnings. This model virtually guarantees not only earnings sustainability, but exponential earnings growth.
Understand your reasoning but they specifically guided 2011 revenues of $32.2M for 2011, for the fish business alone!
That's 9 times 2010 revenues. It's totally believable, because 2010 had no fish sales; the current demo farm is now up and running and can be expanded; a new expandable farm has been contracted; and they are on track for 4 new ones in 2011.
They are understandable reluctant to project past 2011, but have previously guided 8 new fish farms in 2012. If on target, fish business revenues would more than double again in 2012 to more than $70M+, because fish sales would increase 5 fold, deriving form the 5 already built vs. 1.
And the intention is to list subsidiaries on an Asian -- presumably Hong Kong -- exchange, where the p/e ain't going to be 2. The market cap from this one business could be well over $250M based on targeted growth and the stated move to another exchange. And even that is based on a PEG ratio of something like .25.
So, there's huge upside.
And I just don't see why the emphasized minimum new issuance price and almost double in tangible net assets doesn't provide downside protection.
If they meet half of their projections -- and remember the HU flower guidance was very conservative -- well, just can't see anything but blue skies.
Love to hear what anyone on the call thinks I'm missing, other than market is fickle.
Snow,
Further to your question, Solomon specifically targeted $32.2M in revenues -- > 3/4 of total 2010 revenues -- and gross profits of $19.5M in 2011.
That should remove any doubts about diminished share of construction, consulting, module fees.
So, the fish business -- always the potential star -- is guided to grow 6 - 9 times!!!
What if it does half that growth again in 2012, when the farms constructed in 2011 start producing fish sales? Think about that.
My interpretation of the fish farm capital is that it's a move to accelerate their being built, and more being built. The capital may help underwrite construction, or it may simply be for increased share of fish sales. Just not sure. Even if they provide some of the capital, I'd think their fees would still be booked as profits, all the same. Maybe an accountant can help here?
Solomon said 11M shares over 2011. Coupled with grants, profits on the dairy farm, etc., net tangible assets to increase $80M -$90M. Quite a trade I'd say.
This plus the minimum share price for the issuance were the two major new pieces of information that should put a bottom in the pps higher than where it's trading, a lot higher, imo. Can't really see why this sell off, other than knee jerk reaction, which seems to have abated already.
The CEO specifically said that existing contracts peg issuance of new shares at $1.50 or higher. He reiterated on Q & A.
Anyone else on the call want to confirm?
That, plus an increase in net tangible assets -- that means not counting any good will -- to increase $80M - $90M.
Pretty obvious they thought they were not immune to dairy business problems.
They took decisive action, and targeted, executed on redeployment in higher growth areas.
I'm a little surprised -- and capitalized -- on the share decline now, after what I can only see as a resoundingly positive explanation, when the market knew about the sale with no explanation for three days.
Only possible reason is expected new share issuance -- but it's at $1.50 or higher. What U.S. company does not trade higher than a secondary issuance price??
They sold the dairy business and have or are reinvesting proceeds plus a bunch more, including grants into all remaining businesses, including:
$18M 50% 50% split with joint partners for new fish farms -- so will have a larger equity stake in fish sales
$18M 72% SIAF new asparagus acreage and planting adjacent to HU flowers
24M 80% SIAF 20 new cattle houses; 2nd facility on newly purchased land
additional capital for a new demo cattle/fertilizer model
notes not complete, but that's what I have
Must note that net tangible assets increase so much that grants will be a large additional part of capital. Also, down the line the facilities and land can be used for low interest loans; not sure if this is included at all; don't think so, but the cappability is being built
Great, got some cheap, cheap, cheap shares.
Sold for 2x earnings, which are low balled (probably smart, in the long run).
I just don't see downside from the call.
Besides earnings growth, there' two downside protections:
1) share issuance does not occur now, and is contractually priced at $1.50 or higher. What U.S companies fund growth above share price?
2) they are buying assets with $.50 dollars, after grants, rebates, etc. Net tangible assets will be $3.00 per share in 2011!!
What more does anyone want?
snow,
Earnings will increase for several reasons:
1) they low balled the HU flower revenues by a tremendous amount; this actually provides I'd say $.05 upside to 2011 earnings let alone 2012 -- they guides as if there will be severe storms again, even tho they are taking precautions
2) they are going to use a minor amout of new share capital -- at $1.50 per share MINIMUM -- or $16.5M -- to fund what sounded like well over $50M in capital development
3) This capital development isn't being done for no reason
4) The fish business was always the potential star, ans you can see that in the huge 2011 growth, something like +200%
5) 2012 will see growth in franchising -- this is the highly, highly scalable part of the business
6) If previous target of 8 nw farms in 2012 is met -- no mention on call -- can expect another +200%
7) looks like they are taking a bigger equity stake in the fish farms from the get go: fish sales from farms built in 2011 will kick in in 2012
Huge buying opportunity, imo, because,
They will earn in 2011 approximately what they guided previously in absolute dollars, even without the dairy business.
They only possible negative news -- issuance of new shares -- is actually positive:
1) contractually, the shares won't be issued at less than $1.50 !! This is a huge, shareholder friendly provision,
2) newly issued shares to be offset to some degree by retiring shares, so the total shares will not increase by the amount of the shares taken in at $1.50+
3) they are undertaking a huge amount of capital development which will reap some rewards in 2011, but massively more in 2012, as the capital base, and net tangible assets will increase by almost 100%! Therefore tho return on assets in 2012 could actually go down while the per share earnings go up dramatically -- 100% if net profit margin remains the same.
4) they even promised to avoid the GAAP accounting problem of extinguishment of debt