ACHL – share capital

Just fooling around with the Asian Citrus accounts for y/e 30-Jun-2011. There is talk about the desirability on the BBs of ACHL buying back shares given its low PER and high cash balances.

It should be remembered that it wasn’t too long ago that ACHL issued shares. Hence the high cash balance. it doesn’t seem very logical to issue shares one year, and buy them back the next. That just looks schizophrenic. Besides, I think ACHL has got plans for that money (otherwise why raise it?). (And before you say it … yes, I know that ACHL has been buying back shares lately, but not at the rate it’s been issuing them).

Cash generated from operations was 618m RMB. But get this, the proceeds from the issue of new shares amounted to 1284m RMB. I have two observations on this:
1. ACHL has been on a low PER for a long time, so ACHL has had to raise capital at a high price. Can it earn above the cost of capital to justify this? Personally, I doubt it. Sharelock Holmes is showing that ACHL has a ROCE of 7.8%. Last year, ACHL traded on a PER of about 6.7, so the cost was at 14.9% (the reciprocal of 6.7). That just doesn’t make sense.
2. In the cashflow from financing activities, we see this curious little item: repayment of amount due to a shareholder (note 33b): 214m RMB. This note reveals: “was an amount … payable on demand to Sunshine Hero Limited, a former shareholder of BPG Food & Beverage holding approximately 9.60% of the Company’s total issued share capital … This balance was unsecured, interest free and fully settled during the year ended 30 June 2011”.

Perhaps a forensic accountant could explain what’s going on here, if you catch my drift. I have mentioned related party transactions in a previous post.

ROE of 6.5% is very low, and existing/prospective investors should regard this is an inadequate return. Results are expected later this month.

It seems that ACHL has been pursuing EPS growth at any price, which will inevitably be value-destructive. Growth in EPS is a neat trick may entice new capital into a company in the short term, but it cannot be maintained in the long term if the returns on the capital are inadequate.

I’m going to stick my neck out here and say that the next set of results shows a reduction in ROE. Results are due later this month, so we shall see.

Be careful out there!

About mcturra2000

Computer programmer living in Scotland.
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3 Responses to ACHL – share capital

  1. mcturra2000 says:

    29.00p, for the record.

  2. mcturra2000 says:

    Also for the record, 4 brokers follow this company. All of them rate it as a strong buy.

  3. Soicowboy says:

    Hi Mcturra,

    Reading your post prompted me to dive into the ACHL RNS releases. It seems (to me) that the points you raised have pretty straightforward explanations without the need for forensics:-)

    2 placings in 2010 at PEs of about 8 and 11 for 2 major purchases, one of which fell through hence the excess cash on the balance sheet.

    Payment to Sunshine Hero to clear the debt on the other purchase.

    I haven’t done the maths on the ROE, but it will look better on an ex cash basis.

    Obviously, if they wanted they could buy the shares back for much less than they sold them.

    On the face of it this share looks really cheap so I would expect there to be something to worry about.



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