Zagro Asia

[SLC81]

We fear of an impending a global food crisis, fear not, you still can hedge with little know small cap Zagro agriculture solution.

Been around since 1953.
"Zagro is the leading manufacturer and distributor of crop care, animal health and public health products in Asia Pacific.

Besides the headquarters in Singapore, Zagro has registered offices in Malaysia, Philippines, Thailand, Indonesia, Taiwan, Sri Lanka, Germany and South Africa. Zagro also has local staff presence in Latin America and Middle East."

We will dig into their financial another time

http://www.zagro.com/sg/index.jsp

Visit them at VIV Asia 2011 March 9 - 11th, Zagro booth Hall 3, booth A014. See you th

[Blackjack]

An unusual volume of transactions is taking place in this counter today, leading to an impressive 10.7% gains. I wonder what could be the reason for this, if any.

[RBM]

Zagro is a small cap counter on which there were a couple of VB postings one year back – I realise it is not one of the more talked-about companies on this forum but I hope you will tolerate a longer-than-normal posting. Zagro's focus is the manufacture and sale of crop care and animal health care products, aiming at the Asia Pacific region - in some of these markets it clearly has successfully worked a niche for itself – I have seen this on my pre-retirement travels in the region. Although I have been vested for some time, I would hope that the following comes across as balanced………

FY 2011 Results

Zagro is one of those companies that quietly goes about its business without fanfare, yet always seems to rise to the challenges it faces in a robust and focused manner. It reported out on its FY 2011 results earlier this evening......

+ve: Despite flood-related losses in Thailand, FY profit after tax is basically flat (up ~ 1% compared to FY 2010). Insurance proceeds – which are being actively pursued - arising from the floods will be booked in 2012. EPS: S$ cents 3.76.

+/-ve(?): For the ninth consecutive year, Zagro will pay a dividend of S$ 1.0 cent per share. At today's closing share price of S$ 0.24, this represents a yield of ~ 4.2%. The management consistently speaks to this dividend “consistency” and “conservatism” as a virtue - and they appear averse to even minor year-on-year growth in the dividend level – which I personally believe could be accommodated.

+ve: Despite concerns being expressed at the half year point, "markets remained stabilized and gross margin improved slightly". I have never had a nasty surprise from Zagro.

-ve: Total expenses increased by 11%, mainly due to increase in staff number and salaries, higher marketing expenses and product registrations cost, professional certifications and legal consultancy fee; the strong S$ also impacted profitability.

Zagro's stated NAV at end 2011 stood at ~ 28 S$cents, about 17% above the current share price. The share price suffered during the August-September market downturn but has recovered a tad since, although still some way off the heady S$ 0.30++ highs it had seen in Q1 2011. But all signs point to a solid 2012 – margins on the (slight) rise in well established markets with Insurance Proceeds from the Thai floods to come.

A bit of background and historical context ……………..

Zagro is a 59 year old company which has been listed on the SGX for 16 years now, and by all accounts had an inglorious IPO placement (judging by its early share price performance). Chairman & CEO Poh Beng Swee has been in the position for 18 years and as far as I can see has never sold a share (he and his better half own a total of 44% of Zagro’s equity) – Chairman Poh has steadily increased his holding thru Zagro’s share plan. In the better performing companies, I would submit that this is not the only time we see the leadership doesn’t sell a single share over a very long tenure. Zagro’s Top 20 shareholders also seem to stick with them (because of the boring dividend?).

Recent EPS in S$cents has shown a good trend, only “blipping” in 2009…………

-2006 -2007 -2008 -2009 -2010 -2011
+1.68 +2.26 +3.00 +2.36 +3.72 +3.76

Turnover shows a similar trend. Decent year-on-year growth.

Sorry about the epistle. Thought it was worth hitting the ivories on this one. Hope I don’t come across as unbalanced.

Vested,

[Musicwhiz]

Hi RBM,

My curiosity got piqued upon reading your epistle hehe, so I decided to check Zagro out. It was one of the companies which I routinely glanced through the results announcement every half-yearly. It is, as you say, a "boring" company - no announcements of any sort and just quietly going about its business.

Some observations:-

1) Even though the Company has experienced stable product sales and gross margins, revenues remaining stable is going to be a problem as staff costs and other related expenses will almost surely rise due to inflation. How will the Company begin to control this unless it somehow raises prices (i.e. increase margins) or lowers COGS?

2) Realized that the inventory levels increased quite a bit - was this due to the Thailand flooding where they needed to re-stock significantly, thereby creating a timing difference at year-end?

3) Bank loans also jumped quite a bit from $7 million to $17.5 million - also as a result of the flooding and borrowing to pay for replacement of damaged equipment/premises/inventories?

[Note: Points 2 and 3 point to moderate Balance Sheet deterioration unless these factors can be adequately explained]

4) Not sure what the cash flow history of Zagro is - do they have recurring FCF every year for the pasy say 5 years? FY 2011 can be seen as an anomaly due to the significant increase in inventories which impacted working capital changes and caused an operational cash outflow. Understand the Company mentioned it invested $3 million in bonds - is there any info on the yield/maturity and risk profile of these bonds?

5) I note that the Company's capex requirements seem to be rather low (i.e. about $1m to $2m at most), and if operational cash flows is normally around $8m (using FY 2010 as an example), then the Company should have no problems raising its dividend yearly as it will be generating lots of FCF. Perhaps a pertinent question to ask is why this was not so (you mentioned dividend remained at 1c/share for the last nine years).

6) Zagro is trading at about 6.38x historical PER (using closing price of 24c and EPS of 3.76 cents). Since the Company has shown not much growth potential in terms of expanding market share, product range or even increasing its pricing power over the years, perhaps this range or PER is justified. Unless the Company can show more room for growth, the PER should not extend past 6-8 times.

7) It would also be good to do a comparable analysis in terms of a close competitor (also listed) to Zagro to see how Zagro is positioned. Are their margins and other metrics such as inventory days, ROE etc comparable to their competitor? Are they a market leader, follower or in a niche of their own? Then you can assess industry potential and also potential for business expansion. [Note: If management repeats the same refrain every year by saying "The Group is constantly and actively searching and evaluating growth options and targets" and yet does nothing concrete, then it's time to seriously evaluate the business].

Just some thoughts as I browse through the latest financials.

Feel free to throw in some comments/opinions for a healthy discussion.

Thanks!

[dydx]

Based on last night's (29Feb12) announcement.....
http://info.sgx.com/webcoranncatth.nsf/V...3004F5CCF/$file/Zagro_Joint_Announcement_29Feb2012.pdf?openelement
, it looks like Zagro Asia's shareholders (other than Skopini Limited / Zuellig Group) stand to make some easy money soon when Skopini offers to sell its 24.7% interest in Zagro Asia (comprising 63,904,000 shares) to the other shareholders of Zagro Asia, via a non-renounceable preferential offering on a pro rata basis at an offer price of S$0.15/share. Based on my calculations, under the preferential offering, a shareholder holding 10,000 Zagro Asia would be entitled to buy another 3,300 (rounded off from 3,281) Zagro Asia shares from Skopini at $0.15/share.

I suppose the above is the main reason why Zagro Asia's share price has jumped $0.05 to $0.29 this morning.

[RBM]

.............. and about 16 hours ago, I was referring to Zagro as "boring"!!! Will take me a little time to digest and process your posting MW, and I'll need to reflect on the interesting announcement that dydx refers to.

Sincere thank you to you dydx for alerting VB's on this announcement - and moreover for your quick review and alaysis of the implications of it. You break these issues down extremely well - and quickly.

Vested ........... and yes, I don't mind at all the 21% share price increase this morning! (even though things have started to calm down a little now!)

[portuser]

Will Zagro be facing competition from Zuellig?
Why is Skopini divesting its shareholdings in Zagro?

[portuser]

Will Zagro be facing competition from Zuellig?
Why is Skopini divesting its shareholdings in Zagro?

[RBM]

As I understand it portuser.........

Will Zagro be facing competition from Zuellig?

Answer: Potentially/Probably yes. Zuellig will have the right to compete.

Why is Skopini divesting its shareholdings in Zagro?

Answer: (Its really related to you your first question) ........ So that a long-standing rigid non-compete clause will no longer apply. i.e. so that they can compete with Zagro. Skopini are selling at a heavily discounted ~ 37.7% price to yesterday's closing.

Vested,
RBM

Will Zagro be facing competition from Zuellig?
Why is Skopini divesting its shareholdings in Zagro?

[RBM]

Thank you for your posting of Wednesday evening MW - you have put a lot of carefull thought into your questions, which are, as usual, very good and pertinent ones. The events of Wednesday evening - or rather Zagro's later announcement of Wednesday evening (regarding the "Zuellig offer") - i.e. after we interchanged postings on this thread, has made life a little bit more interesting for those following Zagro.

Again, I apologise for my prior "epistle". I will try to compensate a tad with snappier answers to your questions............. (your questions are italicised)
+++++++++++++
My curiosity got piqued upon reading your epistle hehe, so I decided to check Zagro out. It was one of the companies which I routinely glanced through the results announcement every half-yearly. It is, as you say, a "boring" company - no announcements of any sort and just quietly going about its business.

I had also thought Zagro was a quiet/"boring" small-cap company until the later announcement of Wednesday evening. Chairman/CEO Poh is not inclined to "beat his chest", rather pursuing his business with a steely determination, diligence and integrity. But Zagro's track record over recent years demonstrates it does deliver....... and it is growing. With the exception of a minor downturn blip in 2009, turnover, revenue, earnings, EPS, etc. have all increased year-on-year from 2005 till now. And typically of Zagro's low-key style, the only key SGX announcement between the mid-year 2011 result and the FY 2011 Results and Zuellig Announcements of Wednesday evening was a rather sober update on the impact of the Thai Floods on Zagro's business.

1) Even though the Company has experienced stable product sales and gross margins, revenues remaining stable is going to be a problem as staff costs and other related expenses will almost surely rise due to inflation. How will the Company begin to control this unless it somehow raises prices (i.e. increase margins) or lowers COGS?

Over the last seven years, with the exception of a moderate blip in 2009, Zagro has year-on-year delivered increased revenues, turnover, eps, NIAT every year - they have been able to raise product prices and proceeds levels. I do agree that there was a concerning increase in expenses comparing 2011 with 2010 but 2011 revenues were constrained by the Thai issues and, I suspect, some China pricing restrictions.

I also believe that we also need to be carefull in just comparing 2011 with 2010 - for example 2010 was unusually low for "Loans & Borrowings" (only S$ 7 Million in 2010) - it was not 2011 that was high on indebtedness, rather it was 2010 that was low in this regard - e.g. in 2008 loans were just under S$ 19 Million, 2009: S$ 10.7 Million.

2) Realized that the inventory levels increased quite a bit - was this due to the Thailand flooding where they needed to re-stock significantly, thereby creating a timing difference at year-end?

I understand the answer to this question is YES, this was the main driver.

3) Bank loans also jumped quite a bit from $7 million to $17.5 million - also as a result of the flooding and borrowing to pay for replacement of damaged equipment/premises/inventories?

[Note: Points 2 and 3 point to moderate Balance Sheet deterioration unless these factors can be adequately explained]

Again, the answer to your question is YES - but Zagro is pursuing its Thai Floods insurance claim - and we should see the benefits of this during the course of this year. Again, (sorry for the repetition) I stress that 2010 was unusually low for loans & borrowings rather than 2011 being unusually high. I strongly suspect the end-2011 indebtedness level is temporary.

4) Not sure what the cash flow history of Zagro is - do they have recurring FCF every year for the pasy say 5 years?

Yes they do - cash and cash equivalents were about S$ 19 Million in both 2009 and 2010, so Zagro has ample funds at hand to meet their dividend obligations and sustain the odd nasty surprise (e.g. Thai Floods).

FY 2011 can be seen as an anomaly due to the significant increase in inventories which impacted working capital changes and caused an operational cash outflow. Understand the Company mentioned it invested $3 million in bonds - is there any info on the yield/maturity and risk profile of these bonds?

Sorry, can not help on this one - I do not know which bonds they are invested in. I'll try to dig this out - may be its in a report but I overlooked it.

5) I note that the Company's capex requirements seem to be rather low (i.e. about $1m to $2m at most), and if operational cash flows is normally around $8m (using FY 2010 as an example), then the Company should have no problems raising its dividend yearly as it will be generating lots of FCF. Perhaps a pertinent question to ask is why this was not so (you mentioned dividend remained at 1c/share for the last nine years).

My key grumble with Zagro is that they have ample cash to pay an increased level of dividend. Even a mild year-on-year increase (to keep constant in real terms for example) would be better than the current fixation on "1 cent per year" and this could easily be accomodated by Zagro's ongoing cash generation. I sense Zagro's Board of Directors is a tad conservative and overly cautious.

6) Zagro is trading at about 6.38x historical PER (using closing price of 24c and EPS of 3.76 cents). Since the Company has shown not much growth potential in terms of expanding market share, product range or even increasing its pricing power over the years, perhaps this range or PER is justified. Unless the Company can show more room for growth, the PER should not extend past 6-8 times.

I need to push back a tad on this one MW. In my view, Zagro's year-on-year-growth in its key financial indicators (EPS, NIAT, Turnover, Revenue etc.) is "growth" - yes, it is not breakthrough and they don't make a somng and dance about it but when I see EPS more than double in the five year period 2006 thru 2010, then I believe that it is incorrect to suggest Zagro is not growing............ IMHO.

7) It would also be good to do a comparable analysis in terms of a close competitor (also listed) to Zagro to see how Zagro is positioned. Are their margins and other metrics such as inventory days, ROE etc comparable to their competitor? Are they a market leader, follower or in a niche of their own? Then you can assess industry potential and also potential for business expansion. [Note: If management repeats the same refrain every year by saying "The Group is constantly and actively searching and evaluating growth options and targets" and yet does nothing concrete, then it's time to seriously evaluate the business].

MW - I can not for the life of me find a comparable agribusiness competitor - they are operating in a field of some giant global companies, with market-caps orders of magnitude larger. I also believe Zagro has established or eeked out a niche on some of its vet care products.I'll keep looking.

Zagro is not for those who want to see regular "high-profile" announcements or to hold shares in a counter with assured liquidity on the SGX. Today's volumes of 1/4 million shares is higher than normal. For shareholders, as dydx points out in his message of yesterday, the "Zuellig Offer" (sounds like a Robert Ludlum novel doesn't it??!!) should give some upside - at least to those of us who were vested as of Wednesday evening.

Again, I am vested, so apologies for any unintended bias in the above.