Halcyon Agri

Halcyon Agri 2Q15 results sorely missed consensus even though net profit skyrocketed to US$3.2m (+420.4% y/y), albeit from a low base of US$0.6m.

Revenue of US$298.3m (+701.9%) was boosted by a jump in total sales volume to 192.8 tons (+897%) with recently acquired Anton Company (70,947 tons), New Continent Enterprises (51,398 tons) and Centrotrade (34,010 tons) contributing to the jump. The gains were however pared by lower average selling prices of US$1,547/ton (-19.6%).

Gross margins slipped 2.2 ppt to 7% stemming from a change in its sales mix. During the quarter, it sold 84,407 tons of third party products, which carried lower gross margin of 4.3% versus 8.3% commanded by its own products.

This was in part mitigated by the strengthening USD against IDR, SGD and MYR, which resulted in a FX gain of US$2m versus a small loss in 2Q14.

Earnings were however weighed by a 217% spike in selling and admin expenses to US$7.3m on consolidation of recent acquisitions as well as 14-fold surge in finance costs to $6.5m due to higher debt for acquisition and working capital needs of the enlarged group.

Post acquisition debt grew 15.9% q/q to $389m, giving an elevated net gearing of 2.3x. However, sequential cash flows improved from negative US$26m to a positive US$2.5m.

Following the completion of its Centrotrade acquisition in Jun, management expects performance for the remainder of 2015 to be driven by the integration of its entire supply chain, and margins to improve from economies of scale and cost efficiency. Notable risks would include the the price environment for natural rubber, which remains extremely volatile and challenging.

Halcyon is currently trading at 8.3x forward P/E, and 1.2x P/B. There are 2 Buy calls on the stock with an average TP of $0.68.