Gulf Resources (GFRE) will be reporting second quarter results in a little less than two weeks and the consensus analyst estimate of $36.97 million in revenues does not take into consideration Gulf's seasonal sales trends and bromine price increases. By my estimate, revenues could be $46.0 million in the quarter. Gulf's revenues are broken down into bromine, crude salt, and specialty chemical sales. Bromine reserves are found mainly in the U.S., in the Dead Sea and in China, which account for 96% of the world's total bromine production. Gulf Resources is the largest bromine producer in China and one of a few companies with a bromine exploration license in China. The bromine demand in China is larger than the domestic supply, which has led to significant price increases. The Company has $56 million in cash ($1.60 per share in cash) and no debt.
Bromine sales are approximately 58% of overall sales. During the first quarter of 2010, the amount of bromine sold declined by 4.4% compared to the first quarter of 2009 due to extremely cold weather in Shandong. Management commented on its analyst call that first quarter orders not fulfilled would be fulfilled in the second quarter. Given last year's jump in bromine sales from 7,448 metric tons in Q1-2009 to 10,895 metric tons in Q2-2009, we could see a similar jump this year from 7,124 metric tons in Q1-2010 to approximately 11,300 metric tons in Q2-1010 to make up for the unfulfilled sales orders and the seasonal nature of the bromine industry. Based on my estimates for the rest of the year, total bromine sold in metric tons would increase by 14% while capacity increased in 2010 by an average of 8.6%.
click to enlarge
Click to enlarge
In order to test these assumptions, it is necessary to estimate Gulf's utilization rates at its nine factories. If you review my 2010 utilization estimates, the assumptions seem more than reasonable when compared to 2009 actual utilization rates. The majority of the overall utilization increase comes from recent acquisitions ramping to their expected production capacities.
Click to enlarge
In order to calculate revenues, we need to look at bromine prices. Bromine prices have been rising steadily and the latest price was $2,850 per metric ton in March 2010 according to page 9 of the Company's latest investor presentation on their website. Using the most recent price for bromine for the rest of 2010 and my capacity utilization rates, bromine sales would total over $110 million in 2010, a 72.4% increase over 2009.
Crude Salt Sales
Gulf Resources started with 100,000 metric tons of production capacity in crude salt sales from its original factory. However, its last three acquisitions in January 2009, September 2009, and June 2010, have increased the total annual capacity to 550,000 metric tons. In 2009, capacity utilization was 79.3% based on the 450,000 metric tons of capacity. I assume an increase to 83.3% in capacity utilization in 2010 based on the fact that last year's acquisitions are fully up to speed and this year's increase in capacity by acquisition came in June as opposed to September. As a result, crude salt sales should increase 32.4% from $10.06 million in 2009 to $13.32 million in 2010.
Gulf Resources grew chemical sales by 50.9% in 2009 over 2008. First quarter 2010 chemical sales grew by 20.9%. The Company completed construction of its new chemical additives production line for wastewater treatment and has started trial production in June 2010. The Company estimates incremental revenue of approximately $3.2 million in 2010 for the wastewater treatment product, which will occur in the second half of 2010. As a result, overall chemical sales should increase by at least 18.0% from $35.95 million in 2009 to $46.43 million in 2010.
By my estimate, overall sales should increase by 55.6% in the second quarter and 51.0% for 2010.
Click to enlarge
In conclusion, there is a possibility for up to a 25% revenue beat compared to consensus analyst estimates for the second quarter and an increase in Company guidance for the rest of 2010. The major risk to my forecast would be a decline in bromine prices. However, given that China is a net importer of bromine and imported 14% of their bromine needs last year and Albermarle (NYSE:ALB) continues to raise prices on brominated flame retardants, a price decline seems unlikely.
Based on my revenue estimates and flat margins, I calculate 2010 earnings per share of $1.48 for Gulf Resources, which is a P/E multiple of 6.0x. Albemarle is currently trading at 2010 P/E multiple of 14.6x. As Gulf Resources is discovered for its excellent investment characteristics, it should see multiple expansion to 12x earnings, which would result in a price per share of $17.75 for Gulf Resources.
Disclosure: Long GFRE at the time of this writing