CIC HOLDINGS (CIC.N/ X)

CIC is an interesting company to watch. While it’s currently trading at an attractive discount (TTM PE of 4.8 and 5.7 for its non-voting and voting shares respectively as per last quarter earnings), too many uncertainties remain on its future and sustainability of earnings. Most significant being the Government’s blanket ban on chemical fertiliser which directly impacts its Crop Solutions segment (34% of revenue; 42% of net profit), and has a cascading effect on its Agri Produce segment (9% revenues; segment is loss making).

While CIC remains optimistic in its ability to meet the demand for organic fertiliser (the company already provides an organic substitute and has scaled up production, as well as acquired an organic supplier in FY 2021) it does acknowledge the uncertainties which remain in this space, stating in its most recent annual report; “Due to lack of clarity in practical implementation of the policy direction at present, it would be premature to make an estimate of any potential financial implication arising from the said matter.” Even if CIC is able to successfully transition its core business into a purely organic one (and there’s no reason to assume it couldn’t), issues pertaining to the cost-effectiveness and yields from organic farming remain considerable factors in determining the segment’s performance going forward.

CIC’s Crop Solutions segment, while being the worst affected, is not the only victim of Government-led policies. Its loss-making Livestock Solutions segment (25% of revenue) has also been hit by a ban on imports of maize (corn) — the primary ingredient in its animal feed — which has prompted the company to look for scarce and expensive local substitutes. This not only affects its Feed business, but also its Poultry sales which are price controlled and thus unable to pass on the extra cost of feed to consumers. Additionally, this segment also faces pressure from LKR devaluation, particularly with regards to its Vet Care business where nearly all of its products are imported.

The future of CIC’s Industrial Solutions and Health & Personal Care segments — jointly accounting for a third of group revenues and contributing nearly 50% of its net profits seem more certain. Whilst subject to COVID-led lockdown and economic pressures, these segments’ competitiveness and market share remain buoyant, and is likely to remain profitable in the near future, notwithstanding the Government’s closed economic policies and LKR devaluation impacting its imported raw materials.

Given the above concerns, it’s difficult to assign a fair value for CIC at this point. However, it’s worth noting that its ordinary share is presently trading at just 1.51 times NAV (non-voting share at 1.27 times NAV). It is also worth pointing out that CIC is a formidable company with a strong balance sheet and competent management to face any challenges of a post-Covid era. If it manages to navigate itself through the choppy waters it finds itself in at the moment, a ‘buy’ at current levels can return an extremely attractive return to investors in the months and years to come.

(Disclosure: Holding CIC.X for the long haul)

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