Global food prices have recently come off since July 2008. Corn prices reached the highest on
27 July 2008 at US$7.15 per bushel. However, since the week of 6 October 2008 corn prices
have crashed below US$4.00 per bushel. Prices for rice have also dropped from US$20.32 per
bushel in September 2008 to US$16.74 per bushel as of last week. Soya bean prices have
fallen US$15.69 per bushel in September 2008 to US$7.95 per bushel on 10 Oct 2008.
Given the softening food commodity prices, we have lowered our earnings forecasts for China
Farm Equipment (CFE) and China Milk on anticipation of lower sales volume. However we have
maintained our earnings for China XLX Fertiliser.
Share prices for CFE, China Milk, China XLX and other S-chips have fallen tremendously, partly
due to the global credit concerns. The P/E ratio for the FSTC index has plunged from a high of
18.4x in January 2008 to 4.3x as of 10 October 2008. The estimate FY09 P/E of the index is
4.0x. We are therefore lowering our P/E valuations for the three agriculture stocks.
Maintain BUY for CFE. We have lowered our price target of S$0.56 to S$0.36 based on 6x
FY08 P/E which is a premium to the FSTC P/E estimate of 4.0x. We believe that demand for
farm equipment will remain relatively strong.
Maintain BUY for China Milk. We have lowered our price target of S$1.00 to S$0.975 based
on 6.5x FY09 P/E. We have given China Milk a premium to the FSTC P/E because we believe
that the company’s core business in producing pedigree bull semen is still a growth area. The
company is currently trading at 3.1x FY09 P/E and 2.8x FY10 P/E which is considerably lower
compared to the FSTC P/E of 4.0x.
Maintain BUY for China XLX. China XLX is currently trading at 3.7x FY08 P/E. We maintain
our earnings forecast for China XLX. However, we have lowered our price target of S$0.99 to
S$0.70 which is pegged to 8.5x FY08 P/E. We have given China XLX a premium because we
believe that the Chinese government will raise the current price cap of RMB1,725/tonne of urea
based fertiliser.
The table below provides a clearer picture of CFE’s, China Milk’s, and China XLX’s debt
situation. China Farm Equipment is in a net cash position, China Milk is in a strong net cash
position, and China XLX is the only company with net gearing of 13% which is relatively low.
The 13% is due to its gearing for the 3rd plant which will cost about RMB930m and will be
operational by 3Q09.
The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned
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