Friday, 21 March 2014

Sino Grandness Food

UOBKayhian on 21 Mar 2014

(SFGI SP/BUY/S$0.675/Target: S$1.06)
FY13F PE (x): 3.3
FY14F PE (x): 2.6
IPO process updates. Investors are keen to know the timeline of the Garden Fresh listing on an approved exchange as the company looks to raise additional funds for the fast-growth beverage segment as well as unlock value for investors in the subsidiary. By working backwards from October, Garden Fresh would have to submit the documents by June and to get approval by the authorities by September and conduct the IPO bookbuilding in October.

Contingency plans for Garden Fresh if the process gets delayed as the Hong Kong listing process has become stricter. While Garden Fresh can be listed in any exchange, market is already speculating Hong Kong to be the eventual listing place as there are many similar FMCG comparables such as Huiyuan and Tingyi listed on the HKEX. Investors are now concerned with recent news reports that the Hong Kong listing process has become stricter and several other listing candidates’ documents have been rejected and thus delayed. Management and the investment professionals are aware of these stricter listing rules and have already implemented these changes for the IPO.

Although the due diligence process may take longer than expected, the company believes it will be a greater testament to Garden Fresh new investors should the IPO be successful, and may even get a higher valuation post listing. The worst-case scenario is the listing gets delayed beyond Oct 14 due to unforeseen circumstance; the first CB will have the option to extend the redemption for another 8 months to Jun 15.

Maintain BUY with a target price of S$1.06. Our target price assumes that the Garden Fresh’s listing will go through in 2014 with a PE of 16x, and a 20% holding company discount on its eventual stake of GF and a 5.0x 2015F PE valuation on its remaining business. We see potential upgrade in our target price as the Garden Fresh listing gets closer, and if the listing comes with a lower-than-expected dilution or a higher valuation obtained during the book-building process.

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