Oceanus

Certainly. Seems that the SGX listing of Oceanus is grossly underpriced relative to its TDR counterpart. Through the second TDR program, Oceanus had allowed investors in Singapore to convert their shares into the more expensive TDRs. As announced, the bookbuilding price of the TDRs is equivalent to S$0.477. Note that this is already priced at a discount to the current TDR market price of NT12.40 (S$0.53)! So, even after today's 13% surge to the current SGX price of S$0.35 per share, the counter continues to trade at a whopping 34% discount to the current TDR market price! Amazing!!

By Stephen Aldred and Charmian Kok

 
SINGAPORE/HONG KONG, April 29 (Reuters) - Kohlberg Kravis
 Roberts & Co <KKR.N> is in talks to buy Singapore-listed abalone farmer Oceanus Group
 Ltd < OCGL.SI > in a deal that may be worth around $500 million, three sources with direct
 knowledge of the matter told Reuters.
 Oceanus stock, which was trading down 2 percent, turned positive to trade up as much as
 14.6 percent after the Reuters report. Some 29.3 million shares changed hands, the highest
 volume since Jan. 17. The stock had its biggest one-day percentage gains since August
 2010.
 Private equity firm KKR has lined up financing of $300-400 million from a group of
 banks, according to one of the sources.
 The sources declined to be identified as the talks were confidential. KKR and Oceanus
 declined to comment.
 Two of the sources said the take-private deal could ultimately see Oceanus relist in Hong
 Kong to unlock value in the stock.
 The stock is down about 13 percent this year, hurt by poorer-than-expected results for
 2010 and concerns that it will continue to  see execution risks from the expansion of its
 restaurant business. Oceanus currently has a market value of about $484 million.
 Oceanus Group is a holding company originally listed in Singapore in 2008. Its two main
 business segments are
 aquaculture production and abalone processing and distribution, but it also operates the
 "Ah Yat Tian Xia" chain of restaurants with outlets in China, Hong Kong, Taiwan and
 Singapore.

 The company expanded from 21 restaurants in 2010 from 14 units in late 2009, but has
 since cut back to 13 outlets as expansion costs outstripped its revenue, OCBC Investment
 Research said in a March 2011 report on the company.
 Oceanus reported in March its fourth quarter net profit swung to a loss of 45.6 million yuan
 ($7 million), compared with a net profit of 59.1 million yuan a year earlier.
 Oceanus' abalones are farmed along the coasts of Fujian and Guangdong provinces in
 China. As of Dec. 31, Oceanus had 30,123 abalone breeding tanks and an  abalone
 population of 178.4 million units of abalones. Oceanus' biological assets were valued at
 1.155 billion yuan as of the end of last year.
 According to Starmine's SmartEstimate, Oceanus is trading at a 12 months forward
 price-to-earnings    ratio of 6.3 times, compared with its sector median of 11.8 times, as of
 the close of Thursday.   ($1 = 6.502 Chinese yuan) 

Got or don't have? After Reuters put out a ' very sure ' report, now Oceanus has a dampener announcement to say 'where got?'  


,,,,


The Company has received enquiries and/or has been in early stage confidential
discussions with various parties from time to time in relation to a possible transaction
involving the shares in the Company (“Possible Transaction”). Such discussions
have been preliminary in nature and at this juncture, no definitive agreements in
relation to the Possible Transaction have been entered into. No proposals have been
received by the board of directors of the Company. Accordingly, there is no certainty
that the Possible Transaction will materialise or that an offer will be made for the
Company.

Posted by d.o.g. on June 1, 2010

Larger (heavier) abalones are worth more, so assigning the same value to abalones regardless of weight is not appropriate.

Also, the market value rises faster than linearly i.e. an abalone that weighs twice as much is worth more than twice as much in market value. So computing value by total weight doesn't work either.

Usually the abalones are sold at specific stages/weights, so it's more common to value them based on the quantity in each weight band, with a different per-weight value in each band.

The fundamental problem with abalone farming and indeed any long-lived agricultural business like timber, cattle or tobacco leaf production is that at any given time, there is a huge amount of capital at risk, while only a small part of the total value can be realized at any one time.

For abalone, it typically takes 5-7 years to reach full maturity and optimum market value. If the abalone are sold earlier, not only is the weight lower, the per-weight value received is also lower, so the IRR is lower. This has to be balanced against the negative cashflow throughout the growing period. As a result, the business owner must choose between cash flow and ultimate value.

The financial statements use fair value accounting which books estimated changes in market value as revenue. While this may comply with accounting rules, it is total nonsense from a cash flow perspective because none of the so-called fair value profits can actually be converted into cash. Only when the actual goods are sold and cash received will the company know what their real profits are.

The problem of negative cash flow is exacerbated when a company is growing, because more and more capital is tied up in the business. Thus, initial success can turn into eventual failure if the company is not able to obtain sufficient amounts of money at a reasonable cost to meet its working capital needs. More problematic is the poor market visibility: because each company only sees current market output, it believes the market is undersupplied, so it expands at a furious pace. Eventually all the new production hits the market at the same time, and prices crash.

There is a huge amount of pricing risk in abalone. Traditionally, demand has outstripped supply, resulting in very high per-weight prices. These prices have enticed many players to go into abalone aquaculture, to the extent that the market price of abalone has already begun to fall. Those who purchased abalone in Singapore during Chinese New Year should have noticed that prices were meaningfully lower this year versus last year.

Furthermore, market prices are spot prices reflecting current supply - they don't reflect the much larger future supply that is coming up. Oceanus is far from being the only abalone producer out there.

IMHO it would not be surprising if within the next 5-10 years, abalone becomes a commonly available food, available year-round at affordable prices. Good for consumers, not so good for producers.

For further reading, here's the 2008/2009 annual report of the Tasmanian Abalone Council:

www.tasabalone.com.au/documents/2...Report.pdf

In particular page 21 (Quota Holder Sub-Council Report) quotes Peter Cook, a keynote speaker at the 2009 International Abalone Symposium, as saying:

"Higher market prices of the past 10-15 years have been the engine powering farm expansions; however a “perfect storm” is currently driving market prices down 30% or more. A devastating combination of (1) a 400% increase in farm production in the past 9 years (much occurring in the last 3 years) and (2) the world economic downturn and (3) continual lack of development of “home markets” resulting in over 98% of the world’s farmed abalone marketed to Asia Pacific countries. Premium species are driving the Chinese market, with production and demand in China being a dominant factor but, unfortunately, not necessarily impacting overall world demand as many people expected”.

In other words:

1. Past abalone prices were very high;
2. Farms ramped up production; and
3. There is now oversupply.

This oversupply situation probably explains Oceanus' attempts to set up abalone restaurants and create a captive offtake channel. Unfortunately restaurants have their own issues as Oceanus is finding out.

And of course we have the other problem of biological assets - since abalones are living things, they can die from disease, stress, pollution etc. Insurance is often costly or simply unavailable. Even when insurance is available at a reasonable cost, and is actually claimed and paid, the company is reimbursed for its inventory losses, but not for market share losses. By the time it rebuilds production capacity years later, its old customers would have already turned to other suppliers.

Investors in Oceanus should think very hard about:
a. access to working capital;
b. abalone pricing; and
c. a "black swan" type event killing the abalone inventory.

That should inform their view as to its true value as a business, and its merits as an investment.

I am reading d.o.g's analysis (below) and thinking that this is a good analysis. However, no one has a monopoly on wisdom and in business, it's a question of price and potential. This must be so because, if you accept that Reuters didn't get it too wrong, Kohlberg Kravis Roberts & Co is in talks to buy over Oceanus.

There is no fire without smoke and my buddies are inclined to believe there is some good possibility of Oceanus being bought out now that it has done the hard work of expanding the abalone farms, raise the creatures and expanded the abalone population to a significant number. The economics of the business have not proven to be sexy, in particular the cashflow has been pathetic. That's not to say that things won't change and this is where KKR is coming in. Just my 2 abalones' worth. LOL

Reuters spoke to 2 sources for the takeover story. These 2 must be daredevils, willing to stick their necks out like that.  They could also hv vested interest to see the stock fly.