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!