Sino Grandness Food Industry

Maybank Kim Eng, July 2

SINO Grandness announced on Monday that it has obtained a no-objection letter from the Singapore Exchange (SGX) for the proposed Garden Fresh spin-off.

It is an important milestone that we have been waiting for; the approval from SGX came earlier than we had expected. Now, the big uncertainty is removed and the remaining steps are more under company's control.

We are more confident about a successful Garden Fresh initial public offering (IPO) than before, thus we change our valuation methodology to sum of the parts (SOTP).

The earlier-than-expected approval from SGX will give Sino Grandness more time to work on the remaining IPO preparation. The next step is to appoint an investment bank.

If everything goes smoothly, we expect the Garden Fresh IPO to finish in the next 12 months, about three months earlier than the first deadline for the convertible bonds (October 2014).

Some investors are not sure about what valuation Garden Fresh could get in Hong Kong. From our understanding, Sino Grandness has been approached by some investment banks already in the past few months, and all of them are quite interested in the proposed Garden Fresh IPO deal because Hong Kong has not seen any pure beverage company IPOs in the past few years.

Hong Kong allows companies to use forward earnings forecast to set the IPO price. (In Garden Fresh's case, it can use FY2014 forecasted earnings.) Thus, given the 30 per cent earnings growth of Garden Fresh on our estimates, even a very conservative low-teen FY2014 IPO PE ratio could translate into at least mid-teen FY2013 PE ratio.

Assuming a successful Garden Fresh IPO and parent company Sino Grandness selling some vendor shares, some special dividends can also be expected in FY2014.

It is still not clear whether or how many vendor shares will be sold. But based on our estimates, a 5 per cent vendor shares sale could potentially bring in about S$24 million capital gain, or about eigh`t Singapore cents per share.

We keep our earnings forecasts unchanged for the next three years, but change our valuation methodology to SOTP, as we are more optimistic than before on a successful Garden Fresh IPO.

We value Sino Grandness' holding on Garden Fresh at S$2,063 million post-spin-off and value the remaining business at S$711 million. Accordingly, our target price is raised to S$1.89.

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