Profits at Asian Citrus are growing at a fair lick but investors still need to tread carefully.
In Britain's imperial heyday, investors made -- and lost -- fortunes by buying into foreign plantations. Coffee plantations, tea plantations, rubber plantations: you name it, and companies were set up to grow, import, and process it. Banana and fruit importer Fyffes (LSE: FFY), for example, traces its roots back to banana plantations set up in the Canary Islands in the 1880s.
Today, Asian Citrus Holdings (LSE: ACHL) reported its final results for the year ending 30 June 2009. Headquartered in Hong Kong, the company is the largest orange plantation owner and operator in China, selling solely to the domestic Chinese market. Two plantations totalling 68 square kilometres and containing 2.8 million orange trees are already in production, with a third 35 square kilometre plantation containing 2.4 million trees under development. And interestingly, the company's shares are listed on AIM.
As I've often remarked, I'm not a fan of AIM's wilder shores. As I explained last week, for instance, when it comes to AIM, I prefer businesses such as confectionary and snack food company Zetar (LSE: ZTR), cake and baked goods manufacturer Finsbury Food Group (LSE: FIF), and optical component manufacturer Gooch & Housego (LSE: GHH).
Asian Citrus is clearly a different animal altogether. But like the companies above, the business model is easy to understand, and the risks and potential downsides relatively easy to identify. In short, I thought I'd take a look.
A juicy business
Usefully, the accounts are provided in pounds sterling as well as Chinese renminbi (RMB) -- although the renminbi figures are the definitive ones, with the sterling equivalents based on rates obtaining at year end.
And while I'm no expert when it comes to evaluating foreign plantation-based businesses, I liked what I saw.
Revenues from the sale of oranges were up 20%, with two new contracts signed with Chinese supermarket groups. Revenues from other sources -- retail units and trees -- brought the total increase in sales to 25%. Profits before tax were up 20%, and the company proposes a final dividend of RMB 0.8, equivalent to 29.6% of earnings. Equivalent to 7 pence a share, and with shares priced at 307 pence at the time of writing, that's a 2.2% dividend yield -- not especially generous, but jam today is always preferable to jam deferred until tomorrow.
The scale of the business -- not to mention the scale of the opportunity -- can be inferred by putting a little flesh on those numbers. In pound sterling terms, revenues came in at £58.8 million. Profits before tax, though, equated to an eye-watering £38.9 million, with net profits only marginally less at £38.7 million.
As far as I can infer from the company's accounts and website, the strategy is to make a virtue of operating to international standards, and increase the proportion of the crop sold to higher-margin supermarkets. Tonnage sold to these customers during the year increased from 35,000 tonnes to 42,000 tonnes.
What's more, the growing acreage and maturing trees serve to provide one of the more unusual lines in a set of accounts: "Net change in value of biological assets." Be warned, though: fixed assets are rarely so firmly anchored!
It's also clear that the prospects for future increases in sales are good, with plenty of acreage yet to come into production. As China's consumers become richer, demand should increase -- and so should profits.
What's not to like?
Asian Citrus is an interesting opportunity to profit from the remarkable pace of China's growing economic resurgence, and well worth a look. That said, final results like these are only a snapshot at a moment in time, and I'd recommend a more detailed crawl through the accounts for anyone seriously thinking of investing. I didn't spot anything that I didn't like, but that isn't to say that you won't.
Indeed, the questions that I'd want answering before investing can't really be answered by poring over the accounts. For example:
- Why is the company registered in Bermuda, and listed in London? Only now, it seems, is a Hong Kong listing being pursued.
- Are there any major UK institutional shareholders? And if so, which ones?
- How dependent is the business on the goodwill of local Chinese officials? Are there any links with China's military?
- What is the directors' track record in delivering long-term value to shareholders?
- Can any changes be expected in the company's seemingly favourable taxation treatment?
The 'wrong' answer to any single one of these questions would be unlikely to be a deal-breaker. For two or more though, it probably would. AIM shares are risky, and while risk can't be eliminated altogether, the sensible investor tries to minimise the downside.
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