Skystar Bio-Pharmaceutical: Significantly Undervalued

Skystar Bio-Pharmaceutical (SKBI) reported earnings last Friday, citing 40% revenue growth and $0.73 EPS (excluding one time non-cash charge).

SKBI's business is strongest in Q3 and Q4, with Q1 and Q2 being the weakest quarters. In 2008 (after adding back $1.1m of non-recurring financing expenses to the first half of the year), 72% of SKBI's annual revenues and 76% of annual net income were earned in the last six months of 2008. A similar trend occurred in 2007.

SKBI has grown revenue 40% year over year (YoY) in the first six months of 2009.

SKBI non-GAAP (excluded non-cash warrant charge and IPO costs) net income was $2.4m for the first six months of 2009. The comparable net income was $490k for the first six months of 2008. However, this included $1.1m of non-recurring financing charges so the true comparable for the first six months of 2008 is $1.6m. SKBI has grown net income 50% YoY so far in 2009.

SKBI's net income for the second half of 2008 was $5.1m (as mentioned 76% of 2008 total non-GAAP net income).

2009 EPS Analysis

If SKBI grows net income for the last six months of the year 50% (like the first six months) they would end up with $10m of net income ($5.1m last 6 mo. of 2008 X 50% + $2.4m first 6 mo of 2009). GAAP weighted average shares outstanding for 2009 will be approximately 2.669m (1.869m were outstanding the first 6 months of 2009 and 3.469m will be outstanding the last 6 months of 2009). 2009 EPS under this scenario would be approximately $3.75.

If SKBI grows net income for the last six months of the year only 25% they would end up with $8.8m of net income ($5.1m last 6 mo. of 2008 X 25% + $2.4m first 6 mo of 2009. GAAP weighted average shares outstanding for 2009 will be approximately 2.669m (1.869m were outstanding the first 6 months of 2009 and 3.469m will be outstanding the last 6 months of 2009). 2009 EPS under this scenario would be approximately $3.30.

If SKBI net income is flat for the last six months of the year they would end up with $7.5m of net income ($5.1m last 6 mo. of 2008 + $2.4m first 6 mo of 2009). GAAP weighted average shares outstanding for 2009 will be approximately 2.669m (1.869m were outstanding the first 6 months of 2009 and 3.469m will be outstanding the last 6 months of 2009). 2009 EPS under this scenario would be approximately $2.81.

2010 EPS Analysis

SKBI will have approximately 3.469m shares outstanding for 2010. Let's consider the three scenarios I presented above.

1. If SKBI grows second half 2009 net income by 50% (compared to 50% for first half 2009), they would end up with net income of $10m. Applying this 2009 net income to 2010 outstanding shares that would equal $2.89 EPS. To achieve $3 EPS in 2010 ($3 X 3.469m shares outstanding) they would need $10.4m of net income. They would need to grow net income by only $0.4m or 4% YOY.
2. If SKBI grows second half 2009 net income by 25% (compared to 50% for first half 2009), they would end up with net income of $8.8m. Applying this 2009 net income to 2010 outstanding shares that would equal $2.54 EPS. To achieve $3 EPS in 2010 ($3 X 3.469m shares outstanding) they would need $10.4m of net income. They would need to grow net income by only $1.6m or 18% YOY.
3. If SKBI second half 2009 net income is flat (compared to 50% growth for first half 2009), they would end up with net income of $7.5m. Applying this 2009 net income to 2010 outstanding shares that would equal $2.16 EPS. To achieve $3 EPS in 2010 ($3 X 3.469m shares outstanding) they would need $10.4m of net income. They would need to grow net income by only $2.9m or 39% YOY.

They will have significant capacity coming online in 2010 that could significantly add to net income.

Business Outlook

"We are in the process of completing our vaccine manufacturing facility and expanding our existing micro-organism facilities, which are expected to be completed later this year," stated Mr. Lu. "Once completed, the vaccine facility is expected to increase our vaccine production capacity by 2,300%, from 250 million units to 6 billion units, with a will have a projected increase in revenue of $14 million and related gross margins of 60-70% in 2010. Our micro-organism facility expansion is anticipated to increase our micro-organism and feed additives production capacity by 48.7% and add $2.7 million in revenue with a gross margin of 70% in 2010."

By my estimates, I believe SKBI will achieve around or above $3 EPS in 2009 and $3+ in 2010 and therefore is significantly undervalued with a P/E of 4-5.

Disclosure: I am long SKBI.

Comments

[fourstarz:]

A biochem company in only the BROADEST interpretation. They manufacture herbal remedies, they distribute vaccines made by other companies. Medicine, vaccine, treatment , etc are VERY close in Chinese with little distinction between them.

Aug 18 10:46 AM

[China Expert:]

A cash generator and value stock in the most "detailed" interpretation. The company generated $9.7M of EBITDA for the cumulative last twelve months and assuming $19M of net cash generated from the last raise at $12.80 per share, you can buy the whole company for $22.3M (net of cash/debt). I can't find a company in China or in the USA that is valued at less than 2.5x EBITDA, with such nice cash flow margins and that requires so little in capital expenditures to run the business. Can anyone top this value in any company out there ?

Aug 18 11:23 AM

[jamestrade:]

hi Paul, thanks for the article.

SKBI looks interesting. Any thoughts on this...

www.uschinachannel.net/

Your feedback would be helpful.

Aug 18 12:06 PM

[luvb2b:]

i am so glad you posted this research piece on seekingalpha so perhaps now there can be a real debate about the validity of this company's claims.

so please answer the critical questions about this company, starting with... how does a company make money selling vaccines at less than 1/4th of one cent per unit, and claim to make 70% margins on it?

from the company's march 2009 quarterly report (see link and quote at the bottom of this post), they claimed they are running at full capacity and generating $145,500 in quarterly revenue. this number is significant because it is annualized run rate of $582,000 per year. in the earnings release, as you note, the company plans to increase production 2300%.

2300% x $582,000 + $582,000 = $13.97 million, and again as you posted the company claims they will be able to sell $14 million worth of vaccine.

so please explain, how can a company produce 6 billion units of vaccine, sell them for $14 million, which is an average price of:
$14,000,000 / 6,000,000,000 units = $.0023
and claim they can make 60-70% margins on sales. i can't even buy thumbtacks in bulk for 1/4 of 1 cent each, much less a biologic product.

but why not call the company to ask them? that's the smart thing to do. perhaps they will make up an even more fantastic story of how to make vaccines for less than gumballs at higher profit.

so i did try calling the cfo, here is his contact information below. the voice mail says that he is with 'worldwide officers', which sounds like some kind of global placeholding management firm. so who really is the cfo, who is really in charge of financials, and who really knows how to produce vaccine at 70% margins for less than 1/4th of one cent per dose?
Bennet Tchaikovsky, CFO, Phone: [phone]

link and quote from 10-q
www.sec.gov/Archives/e...
Revenues — Vaccines. Revenues from sales of our vaccines product line increased from $133,391 for the three months ended March 31, 2008 to $ 145,466 for the three months ended March 31, 2009 or an increase of $12,075 or 9.05%. This increase was a result of an increase in customer demand of our vaccine products during the three months ended March 31, 2009. We are presently operating at full production capacity for our vaccine product line and therefore cannot significantly increase sales until we expand our production capabilities.

so there is a legitimate question here, is this a real piece of research? or is it just someone talking their book?

i would venture in another year, it will be very obvious.

Aug 18 04:21 PM