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MGO, an opportunity?



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By stocklad

Posted: Tuesday Jun 20 2:07:05PM 2006

The last company I brought to the board (August/September? 2005) was SAT, which was growing nicely and had a track record of profitability, but had somewhat shaky financials at the time. Dundee, with good reason, had concerns about the financials. Notwithstanding, within 5 months it was over a four-bagger, but has since settled into three-bagger territory. Iíve forgotten the others I introduced to this forum, but Iím certain that there wasnít a dog in the bunch and I do recall that one of them (MDY) was priced somewhere between $.55 and .75 and is now over $3.00. I no longer own that one although I still own SAT. Oh yes, I think I brought HF to the attention of the board as well. Regardless, here is another for your consideration. Migao is a Chinese fertilizer company, like HF, but MGO produces high quality potassium (potash-based) fertilizers and is not generally in competition with HF. It has 4 almost new plants running at full capacity producing 130k tons/yr, and one of these plants is not fully reflected in the latest financials. It went public in May 06 and has a Sept year-end. Q2 results show basic and fd eps of .145/share, but one has to consider a couple of key points when looking at the numbers; first, that Q2 taxation is at just 5.1% and that the total possible number of shares, including shares just issued, warrants that are just barely in the money, and LTD conversion is 32,739,510 by my count (vs. the 20.4M used to calc Q2 basic and fd eps). Re taxation: China gives start-up tax breaks from its 33% rate to companies like HF and MGO, so this will give these companies more cash with which to expand, but letís back out that advantage to give MGO a Q2 basic and fd eps of .102. Re the share count: all of the extra shares and warrants happened after the end of Q2 and the debt conversion is just happening now at $3.40, well above the current price of $2.86. The funds from the extra shares will provide the company with funding to build an extra 85k tons/yr of capacity by the end of 2006. There are no options outstanding at the present time. My projection including the additional capacity and using the max # of shares is for quarterly fd eps of $.13 or $.52 annually. The company would also be debt free and have lots of cash on hand. Speaking of cash, cash flow should be much better than my eps calc due to the difference between my tax assumption and the low rate theyíll actually incur for the next few years. Another point: they also have another 25k tons of production that wonít come on stream until 2007 which Iíve excluded from the calcs. Valuation: Given that my fd eps calc is conservative, given that the company would have an extra $10M in cash if all warrants are exercised and given that Iíve excluded the 07 production in the pipe, MGO at a p/e of 10x might conservatively be worth something in the neighbourhood of $6.00 in a years time. Also, as long as the market for quality potassium fertilizers is there, MGO will have the cash, cash flow and borrowing power to build more plants without dilution. Here are a couple of concerns: Exchange rates: If you think that Chinese currency is going to go down against the $Cdn, then you should factor that into your analysis. Personally, I think itís more likely to go the other way. Small Customer Base: Most sales are to a limited number of customers, most of which are government. This is a big issue for MGO, and for HF to a lesser extent. In terms of the stock price, after the company went public, the shares rocketed to $3.65, but with the recent market meltdown they have dropped below $3.00. Iím told that there is an iceberg ask at $3.00, so it should be pretty easy for anyone who wants the stock to load up at $3.00 or less. Personally, I think this is another winner, but would appreciate comments from the board.

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