Brokers' take: SAC Capital initiates 'buy' on undervalued kiwifruit producer Shenshan

SAC Capital on Monday (May 9) initiated coverage on mainboard-listed China Shenshan Orchard Holdings with a “buy” call and target price of S$0.70.

The target price implies a potential upside of 84.2 per cent from the kiwifruit producer’s Friday closing price of S$0.38. Shares of watch-listed Shenshan were up 11.8 per cent or S$0.04 at the time.

The target price is also 5.1 times SAC Capital’s FY2022 earnings estimates, after accounting for Shenshan’s nascent brands, shorter operating history and trading track record compared to competitors. Its earnings estimate only factored in organic growth from Shenshan’s own plantations over the next 2 years.

The research team noted that the stock is “undervalued” and expects volume harvested to increase by 10 per cent annually as more plants mature. The average selling price is projected to be between 30 and 35 yuan per kg. 

The research team projects an enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) ratio of 2.6 times for Shenshan, compared to competitor Seeka.

Seeka, the largest kiwifruit producer in Australia and New Zealand, is currently trading at a forward price-to-earnings ratio of 12.3 times and an EV/Ebitda ratio of 6.4 times.

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For Shenshan, SAC Capital is anticipating gross margins to improve from the company’s present 13 per cent on economies of scale with growing mature acreage. However, net margins will be maintained at around the 43 per cent mark as Shenshan invests in brand building and network expansion, the research team said.

Shenshan, previously known as Dukang Distillers Holdings, was renamed in July 2021 following a restructuring which saw the disposal of its liquor business and acquisition of the kiwifruit business. The business currently sells through distributors, wholesalers, corporates and e-commerce platforms.