Yeo Hiap Seng

Kim Eng on 26 June 2012

Background: Yeo Hiap Seng (YHS) is a wellestablished F&B company, building on its roots as a soya sauce maker. Today, the group is engaged in the manufacture and distribution of a wide variety of still drinks and canned food, predominantly under its in-house Yeo’s brand. In addition, YHS is the exclusive agent for many renowned international brands in Singapore, such as Pepsi, Evian and Red Bull. It has also developed quality condominiums,such as Jardin and Gardenvista.

Why are we highlighting this stock? YHS is currently undergoing a restructuring. It is in the process of privatising its Malaysian-listed subsidiary Yeo Hiap Seng (Malaysia) Bhd (YHSM) by way of selective capital reduction. Substantial shareholder Orchard Parade Holdings (OPH) is also transferring a 35% stake in the company to its own parent company, Far East Organization (FEO), and distributing its remaining 14.5% stake to its minority shareholders as dividend in specie.

F&B margins have improved. Excluding fair value gains on its available-for-sale financial assets, YHS reported a core PATMI of SGD15.1m in 1Q12. The F&B division contributed SGD4.0m, as net margins improved from 2.8% in 1Q11 to 3.9% in 1Q12. Nonetheless, management expects margins to be squeezed by competitive selling prices over the next 12 months, but will continue to focus on operating efficiency and production processes to enhance the division’s profitability.

Corporate restructuring underway. YHS has proposed to privatise the 61.1%-owned YHSM by way of selective capital reduction at a cash consideration of MYR3.60 per share. This will value YHSM at 22.5x FY11 PER and 2.1x FY11 P/BV. Concurrently, YHS’s substantial shareholder OPH intends to divest a 35% stake in YHS to its own parent company FEO at SGD1.80 per YHS share as part of an asset swap.
This values YHS at 25x FY11 PER and 2.1x FY11 P/BV. Eventually, FEO will have a direct 66.2% stake in YHS. In addition, OPH will distribute its remaining 14.5% stake in YHS to its minority shareholders as dividend in specie.

Potential takeover target? In this part of the region, YHS and competitor Fraser and Neave (FNN SP) together have the lion’s share of the F&B market. Besides the bottling facilities and well-established brands, both companies have extensive distribution networks. In 2010, Japanese brewer Kirin acquired a 14.9% stake in FNN from Temasek Holdings at a valuation of 25x PER. Hence, we will not be surprised if YHS does attract the interest of bigger players, such as Danone, Kraft or Unilever. However, as part of its 5-year exclusive bottling agreement, PepsiCo has preferential rights if FEO and OPH intend to lower their collective stakes to below 51%.