Investors have scant appetite for Aquatic Foods (AFG:AIM) as the Chinese seafood processor warns tough market conditions seen last year are set to ‘continue in the near term’.

Shares in the fish, sea cucumber, squid and cuttlefish producer sink 27.6% to 10.5p on a rotten update containing worrying news on competition, a reduced cash pile and its ability to pay dividends to UK investors.

ROTTING REVENUES

In a full year and fourth quarter update, Aquatic Foods, which sells marine foods to Chinese supermarkets under the ‘Zhenhaitang’ brand, reports a 5.2% decline in sales to RMB 927.8m or £110.5m.

In a statement that does nothing to alleviate wider concerns over the credibility Chinese AIM stocks, there’s also a savage £6.6m drop in gross profits to £26.7m for investors to chew over.

While the £16.4m cap offers a long-term play on growing disposable income and appetites for healthier foods within the Chinese middle classes, 2016 marked the slowest year for economic growth in China since 1990.

This hit consumer spending, while the weaker Chinese Yuan – the bulk of Aquatic Foods’ fish is bought from Norway, the UK and Ireland - combined with rising wage and packaging costs also constrained profitability.

CEO Li Xianzhi warns ‘the market environment in 2017 continues to present challenges with turnover in January 2017 at a similar level to that of 2016. Notwithstanding this backdrop, the board is satisfied with the company's continued profitability which demonstrates the strength and resilience of our business model.’

Breaded Fish

PRICING PRESSURE

Pressure on margins reflects price cuts required to protect market share amid ‘strong market competition’ in the core fish category.

Cephalopods – squid and cuttlefish for the uninitiated – were the only product category to show year-on-year growth. However, this is a small part of the business and profits still headed south due to lower selling prices and rising input costs.

CASH CONCERNS

While Aquatic Foods did see a strong pick-up in sales in the seasonally strong final quarter, year-end cash of £44m was down from £49.6m at the interim stage with cash tied up in working capital.

Trading at less than half its still-significant net cash pile, Aquatic Foods does at least have the firepower to consolidate the market by snacking on distressed rivals in a challenged market.

Aquatic Foods, which slashed the dividend to 0.2p (2015: 0.7p) at the half year stage as profit before tax slumped more than 50% to RMB 49m, also warns it has been ‘facing difficulties in remitting funds from its operating entities in China to the UK due to more stringent cross border fund remittance control by the PRC State Administration of Foreign Exchange (SAFE).’

The company is having problems transferring cash out of China ‘on a timely, regular basis to meet the company's ongoing UK expenses and to provide for the payment of future dividends should such be declared.’

Payment of the final dividend was delayed, although ultimately paid, back in August, due to what the company described as a ‘technical administrative delay’.


Issue Date: 20 Mar 2017