Sino-Forest Corp Down Nearly 10% as Credit Suisse Crunches The Q1 Numbers
Credit Suisse has a Neutral rating and $6 target price on Sino-Forest Corporation (TRE.TO) following yesterday's earnings result. But in reflecting lack of confidence in the stock across the market, the stock is down nearly 10% today at $3.05 and has touched $2.85, its lowest level since 2005.
Earnings review: "Sino-Forest reported headline Q1 2011 loss per share of US$0.08 and a stated adjusted EPS to be approximately US$0.18 after the impact of various items (e.g. convertible notes, fair value gains, IFRS changes). With the IFRS transition, the headline and adjusted figures are not overly comparable to our US$0.18 GAAP estimate. As we largely expected, the auditors issued a qualification statement in the MD&A related to the Independent Committee. Given the long-cycle nature of most of our coverage universe, we do not place undue emphasis on quarterly results."
Selected highlights: Highlights include: (a) hectares of trees sold in Q1 2011 were 15,767ha for a 27% increase from Q1 2010; (b) Q1 2011 average sales price was US$89/m3 against Q1 2010 at US$84/m3; (c) Q1 2011 gross profit margin declined to 37.1% from 39.1% in Q1 2010; (d) total fibre volume sold was 2.455m m3 which increased against the 1.861m m3 of volume in Q1 2010; and, (e) TRE stated it will "review its planned acquisition pace and report changes to the original plan in the coming months".
Investment thesis: "China's wood fibre supply-demand imbalance may provide longer-term investment opportunities."
Valuation: "We believe TRE's shares face a long road to redemption, but the process is fluid and subject to change as new information becomes known. At the current levels, we believe shares clearly highlight the market's loss of confidence as implied metrics on many measures are well below historic levels. Ongoing efforts to improve disclosures, among other things, may help slowly regain market confidence. Our financial model remains unchanged since the start of recent share price volatility, but, we apply an 80% discount to our C$28 NAV to obtain the C$6.00 target. That target is also supported by a conservative liquidation scenario. We retain our Neutral rating."
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