Asian Citrus Holdings Limited (ACHL)


Stock to Watch: Asian Citrus Holdings

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Finding growth shares becomes ever more elusive while the UK economy reamins in the mire, although dual listings can offer better growth abroad.

An interesting one currently is Asian Citrus Holdings (ACHL), China's largest orange plantation owner and operator which is listed on AIM and the Hong Kong Stock Exchange. Despite inflationary risks in China, this company is firming up its growth record in a relatively straightforward industry and could have plenty of long-term mileage.

Two macro factors are worth bearing in mind.

First, demand for fresh fruit may continue to enjoy support from China's emerging middle class which has a taste for various Western lifestyle products. There appears to be a social trend towards drinking fresh orange juice and Asian Citrus has taken initiative by way of last October's £165 million acquisition of Beihai BPG Food & Beverage, a producer of fruit juice concentrate. Management said the overall benefits to the group put it in a strong position for this "booming, though largely unexploited fruit juice market".

Second, beware the double-edged sword of rising food prices.

The company's recent strong profit growth has been aided by a 9% increase in the average selling price; yet oranges may risk pricing themselves out of reach from an element of the population. Statistics suggest Chinese food inflation is running at about 10%, a key reason why the authorities are trying to trim China's economic growth rate.

Besides soaring property prices, food is now a social issue. And as you can tell from supermarkets here, the price of oranges is increasing as a result of harsh winter weather in the US limiting supply. Perhaps the Chinese domestic market can evade this winter influence but inflation is still a potential limiting factor for oranges. This is relevant to a growth company needing to keep achieving new business in a competitive market. Most likely, modest weakness recently in the shares - from over 80p to a low 70p area - relates to such concerns.

With that caveat clear, the 25 February interim results (for the second half of 2010) were very strong: pre-tax profit up 112% to £52 million equivalent and earnings per share up 84.4% to 5.8p. While these results benefited from an £18 million assets revaluation and a one-month contribution from an acquisition, profit still grew by 50% as sales to supermarkets rose by 22%. Try finding organic growth anywhere near that in Europe.

The company owns and operates two large plantations, growing both winter and summer oranges - about three million trees altogether. Stock has been developed such that it should be able to increase production volume as the trees fully mature. Land has also been acquired in a third province with scope for a further 1.8 million trees. So the necessary initiatives are being taken for long-term growth on the agricultural side.

Asian Citrus proclaims itself "one of the largest orange producers", although take note; its market share was just 2-3% in 2009 according to Guangxi Citrus Research Institute. This market is competitive; Asian Citrus won't have freedom to price.

The Beihai BPG acquisition looks sensible with scope to boost this juice producer's throughput: a new facility this year will mean 40,000 tonnes of extra annual production capacity relative to the 60,000 tonnes' capacity recently. This company produces a variety of fruit juices and its long-term relationships with various major food and drink customers offer scope to benefit the enlarged group. Management says it is increasing its presence in the Chinese retail market and so higher capacity looks timely.

In a 10 January update, management said its total winter orange crop yield had risen about 25.5% year-on-year; and in the financial year to end-June 2010 the revenue split between winter and summer orange sales was similar. This ought to balance out seasonal factors towards consistent supply; likewise the Beihai BPG acquisition is said to reduce the group's seasonality of revenues and cash flows.

Asian Citrus is cash rich which could enable continued expansion. The end-December 2010 balance sheet had £277.5 million cash (at current exchange rates) in context of £662 million net assets, low on goodwill/intangibles and with only modest liabilities. There is no debt and the current ratio (of current assets to current liabilities) was an ample 3.3 times at end-year. So this is a strong balance sheet with net asset value at 54.5p a share.

Seymour Pierce, the company's nominated adviser and broker, projects pre-tax profit of £48.8 million on sales of £130 million for the current financial year to end-June, equating to earnings per share of 4.6p - hence a prospective P/E multiple in the mid teens. Such a rating accords with a "growth at fair price" stock-picking approach, also respecting the asset backing.

While on the face of it Asian Citrus is high-risk as an AIM share exposed to an emerging market, you can see from the essentials I have picked out, it has an attractive profile: big enough to be a strong player yet small enough to deliver exciting growth with a giant new consumer opportunity.

In terms of corporate governance, the founder of the group (in 2000) remains executive chairman and chief executive, something that might raise eyebrows nowadays in the West. But he is clearly a high achiever and as you can see from the website, well connected politically. His son is also the sales and marketing director. There are only two British, non-executive directors, and three disclosed holdings amount to almost 53% of the share capital - possibly for reasons of control. So be aware of all this.

On 28 February, options over 20 million new ordinary shares were granted to certain individuals in the company, this potential dilution in context of 1.2 billion in issue - so hardly significant. An exercise price of nine Hong Kong dollars equates to about 71.3p, a touch below the current price of 73.5p on AIM. No performance criteria were stated although none of the beneficiaries is a director or substantial shareholder; this just looks an initiative for employee share ownership.