Maxim's Group reiterates Buy and Price Target of $18:
What’s new? This morning, CHBT announced an addition of 14 new customers to its bulk probiotics operation. In addition, the company recently retired $25MM senior convertible promissory notes issued to Pope Investments II LLC with a total redemption payment of $29.7MM. The strike price for the convert was $12 with the addition of some unpaid interests; the actual strike price would have been $14.16.
Expansion of bulk probiotics operation is the key driver for CHBT shareholders. With the addition of 14 new customers, the total bulk probiotics customers increased to 51. All new customers are of small to medium size; and among them, one from an animal feed manufacturer, eight from the dairy industry; and five from functional food, nutritional product or pharmaceutical producers. Given that one of our major investment themes is execution regarding bulk probiotics sales expansion going forward, today’s development is a very encouraging step in that direction.
F2011 total revenue projection remains attainable. After the company recently closed the majority of its retail stores and outlets, we believe that distributor retail sales has accounted for 95+% of the total retail probiotic revenue. With seasonally heavy retail probiotics sales in 4Q and 1Q of the year due to holiday and Chinese New Year gift giving, we remain confident in our projected total F2011 sales of approx. $115MM (bulk plus retail).
Retirement of the convertible notes is a positive for CHBT shareholders. The retirement of the convertible notes is overall, positive, in our opinion, for current CHBT shareholders as they no longer face potential share dilution. Despite that the $30MM cash being valuable for the corporate development; we believe the company would still have $130+MM (pro forma) – more than sufficient for its planned development efforts, including the second 150-ton facility expansion and the new probiotics-based animal feed facility in Yangling, in our opinion. Given that the actual strike price would be $14.16, it is not surprising that Pope Investments would choose redemption instead of conversion of the notes.
Adjustments of financial model. Based on recent developments, we are maintaining projected revenue (approx. $115MM and $164MM) and increasing EPS to $1.77 and $2.45, from $1.74 and $2.37, for F2011 and F2012, respectively.
Valuation remains favorable for CHBT. CHBT is a premium Chinese probiotics company at the path of a major expansion in the bulk probiotics market, in our opinion, and we expect CHBT shares to appreciate going forward. As such, we reiterate our Buy rating and 12-month target price of $18 for high-risk-tolerant, long-term-oriented investors.
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