Viz Branz

OCBC on 12 Jul 2012

After Viz Branz’s announcement of a share sale discussion, its share price gained an additional 6.3% to bring its YTD gain to 116%. Although the discussions are non-binding, this recent news has clearly provided a strong catalyst for the counter. Meanwhile, we updated our projections for Viz Branz on account of an anticipated strong set of 4Q12 results, on the back of resilient demand in its core markets and lower operating costs. As such, we raised our valuation to S$0.69 for Viz Branz and reiterate our HOLD rating. However, should a takeover occur, we deemed that a high premium would be highly unlikely. In fact, evaluation of past takeovers have led us to believe that only a small premium of 2% would be applied for a takeover estimated price of around S$0.70/share. Therefore, as the difference between our derived fair values is minute, we urge investors to exercise caution. Reiterate our HOLD rating at a fair value estimate of S$0.69.

Discussions on share sale & jump in share price
Two days ago, Viz Branz (VB) announced that a third party (offeror) approached a substantial VB shareholder for preliminary discussions on the possibility of acquiring his stake. Although nothing concrete has been agreed upon – and VB made an additional SGX announcement to further emphasize the non-binding nature of the news – VB’s share price gained an additional 6.3% yesterday to bring its YTD gain to 116%. While this recent news has clearly provided a strong catalyst for the counter, is this share appreciation warranted?

Fundamentally sound: encouraging growth prospects
Going forward, we expect VB to continue posting healthy growth on the back of support from its cereal mix business and lower costs. We project revenue growth of about 8-9% over the next three years with demand stability in its core markets of China and Indochina. Coupled with a gradual change to its cost structure from the benefits from economies of scale and scope in VB’s operations, we expect operating margins to continuously improve. As such, we raised our valuation to S$0.69 for Viz Branz, which represents an upside potential of 3% over its last transacted price, and reiterate our HOLD rating.

But will the valuation change if takeover occurs?
We assessed the possibility of a takeover occurring and determined it to be highly probably. However, after evaluating previous takeovers/privatizations over the past few years, we found that only a small premium of 2% would be applied in VB’s instance. Applying this small premium to our revised fair value of S$0.69, we attain a takeover estimated price of S$0.70/share. Therefore, as the difference between our derived fair values is small, we urge investors to exercise caution. Reiterate our HOLD rating at a fair value estimate of S$0.69.