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Sunday, 02/17/2008 11:03:11 PM

Sunday, February 17, 2008 11:03:11 PM

Post# of 10237
AgFeed Industries (FEED)

Feed is a Chinese pig food retailer, and it is getting into pig farming. The kicker is that as the Chinese like pork over beef and as they get wealthier they will consume more pork. The have a Board od Directors that has many Americans on it. And they recently hired Ed Mcmillan as an adviser. Ed is a retired CEO of Purina Mills and sits on the NTRZ and other related BOD's.

A poster at FEED Yahoo put up a response to a question about the 60 PE to another that I can't march in explaining more, so here it is.
Re: PE 60 7-Feb-08 09:21 am
The TTM p/e of 60 is based on year ending 9/07 since we do not yet have 4th qtr 07 results yet. The quarterly yoy increase in earnings for the 3rd quarter was 184%, while revenues increased 487%. At that time the company had 3 manufacturing facilities for animal feed (mostly pig) and about 250 franchised retail stores selling Agfeed product exclusively. They also market through wholesalers and directly to the larger farm operators. In the 4th qtr they added a 4th manufacturing facility and another 250 or so franchise stores. They also acquired a large hog breeder farm and announced their intention of entering the hog raising business. They followed through by purchasing majority stakes in 5 hog raising farms and are currently on track to sell 120,00 hogs this year. Plans are to make more acquisitions and their stated goal is to sell 400,000 hogs in 2008. There is currently a shortage of pork in China due to increased demand as the population becomes more affluent and can afford more meat (pork represents 65% of meat consumption in China), and due also to declining hog populations due to disease and weather. The current market price for hogs averages $220 and Agfeed contends they will net 37% of that. After paying minority holders in the hog farms the company should net about $60 per hog. If they meet their goal of 400,000 hogs that comes to $24 million net on sales of $88 million. TTM revenues (derived from feed sales alone)were $28 million. The company has announced surging sales in their primary feed product (piglet premix) and I am looking for revenues from feed to approximate $60 million. That is just a guess as company has offered little guidance in that area. With total revenues of near $150 million dollars vs the revenues of $28 million that the p/e of 60 is based on, and the improved margins (better margins on hogs than on feed) it's not hard to understand why this company would trade at a high multiple. If that's not enough, consider that while most Chinese companies pay a flat 25% income tax on earnings, Agfeed and others in the hog business have been granted an exemption from taxes. They will pay no income tax on this windfall. Chinese government is desperate to increase the supply of pork and it's a great time to be in the business. The government sees value in allowing Agfeed to prosper (my opinion). The hog raising business there is highly fragmented with 70% of slaughtered hogs coming from back-yards and small farms. Typically it takes a chinese farmer 12-18 months to raise a hog and achieve market weight. With their special piglet pre-mix Agfeed has been able to get their pigs to market in 5 months (which is the standard in the USA). Also these small farmers frequently fail to vaccinate against disease and protect their stock from weather extremes like the cold/snow/ice currently plagueing southern China. Agfeed (and others I'm sure) are poised to consoldate this industry and increase hog production to meet the demand of the Chinese people. The government is anxious for this to happpen. Agfeed has some of the top animal nutritionists and geneticists on board, as well as seasoned financial experts to advise on their rapid expansion.