HAG | Company Coverage - 01-12-2015

HOANG ANH GIA LAI JSC (HAG VN)

A fatty farmer

Diversification drove HAG to get bigger and made it more fragile than it was historically. The company’s total assets exploded from VND19trnin 2010 to VND47.6trn as of 3Q2015, yielding a CAGR 2010-3Q2015 of 20%, which has been fuelled mainly by debt. Its net debt expanded at an even more rapid pace, rising from VND2.2trn in 2010 to VND23.4trn by 3Q2015, a CAGR of 59%.

It seems that HAG’s board of directors is finding it very challenging to manage cash flow and liquidity for such a bulky operation, given its heavy debt burden and huge capital demands, all in the midst of a downturn for most of its agricultural products. Based on our forecast, HAG will need serious capital to complete its unfinished projects, including the cattle project, the HAGL MC project, as well as its rubber and palm oil projects—an amount likely around VND7-9trn each year for the next three years. Unfortunately, annual cash earnings may fall a bit below that, ranging at about VND3-5.5trn, which could lead net debt to balloon to ~VND30trn by 2018.

Additionally, we are concerned about the large amount of non-trade receivables, which account for more than 20% of HAG’s total assets. Of note, loans receivable were trending upward, from VND5.7trn in 2013 to VND10.2trn as of 3Q2015, in spite of HAG’s own heavy debt burden.

At present, investors are most interested in how HAG is dealing with its financial leverage situation. A strong rally in HAG’s top line in 9M2015 is not sufficient for it to re-enter our good graces, due to its messy core business and cash flow issues. The company’s earnings outlook is relatively impressive, with a CAGR for 2015-2019 of 45% in net sales and 19% in net profit, meaning that HAG’s stock will become attractive at a P/E forward of 2-3x; however we think investors should watch from the side lines until there is an obvious improvement in the company’s short-term financial position.

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