Asian Citrus is the largest orange grower in China. It runs two large plantations in the south east of the country, with a third coming on stream in 2011. To optimise cultivation, all of these are located at similar latitudes to the world’s two largest citrus regions, Florida and California. The firm has certainly done its homework and incorporated leading irrigation systems, imported US seeds and recently obtained accreditation for its organic food.
Asian Citrus (Aim: ACHL)
Last year, despite being hit by severe winter storms and rising costs of raw materials such as fertiliser, Asian Citrus generated solid results, producing revenues of Rmb533m (£50m) from 130,000 tons of oranges. This is set to accelerate over the next few years as the plantations reach maturity.
The average productive life of an orange tree commences in year four, reaches its peak in year ten and continues for more than 30 years. Asian Citrus is also ramping up its sales to supermarkets (36% of sales), where gross profit margins tend to be 15% higher than to wholesalers. A 50:50 split is expected by 2010. What’s more, the board plans to launch its own brand of premium orange juice shortly to compete with more pricey imported versions, such as Tropicana. And as with most things Chinese, the cost of production is phenomenally cheap compared to the West.
For the year ending June 2009, Evolution Securities expect turnover to rise to Rmb663m (£62m) and generate underlying EPS of Rmb4 (or 37p), putting the shares on a meagre forward earnings multiple of 4.1. This looks good value; net assets are worth £3 a share, while cash balances of Rmb310m (or £29m) should provide sufficient funds to implement all the planned developments that could drive production to more than 500,000 tons a year in ten years’ time.
So what are the risks? As with any agricultural company, Asian Citrus is subject to the whims of an ever-changing environment. Should a natural disaster befall the plantations, the cost could be substantial. To its credit, the group has done all in its power to manage this exposure by planting wind-breaking trees to help mitigate the impact of typhoons, for example. Also, the fact that it is based in China means the group carries the usual risks of an emerging nation (geopolitics, currency exchange, tax rates).
But I’m not put off. Asian Citrus is an old-economy stock operating in a growth market, whose shares trade at an attractive price for investors with a higher risk threshold. With local demand rising, added to the longer-term prospects of exporting abroad, these are exciting times. China has already become the world’s manufacturing centre, so why not for oranges as well?
Recommendation: speculative BUY at 162.5p (market cap £126.5m)
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.