Sino Grandness Food

UOBKayhian on 3 Oct 2012

Valuation

·      We re-iterate our BUY recommendation on Sino Grandness Food (SGF) with a target price of S$0.64. This translates into 3.0x 2013F PE, pegged to Singapore-listed peers’ average.

Investment Highlights

·      SGF has completed the Rmb270m issue of convertible bonds (CB) to Goldman Sachs Investments Holdings Asia Limited and its co-investor. This is to fund its beverage business for the eventual spin-off and listing in an approved exchange. With the cash in hand, we expect the group to speed up the advertising and promotion (A&P) activities and increase its distribution points. To recap, the beverage segment has to achieve Rmb140m in net profit for 2012 and Rmb250m for 2013 within the CBs’ performance target to obtain minimal dilution. As of 1H12, we estimate the company had recorded NPAT of Rmb70.6m in the beverage segment on Rmb392.4m (+120.7% yoy) of sales.

·      Canned fruits and vegetables business remains as cash cow, with a targeted 15-20% growth in annual revenue. This will be driven by new customers and new products. Sales of canned products for the domestic market have expanded tremendously in 1H12 to Rmb53.6m from a mere Rmb2.8m in 1H11. To cater for more domestic demand, SGF is looking to distribute bottled cut fruits to supermarkets such as Walmart and Carrefour.

·      Expect strong revenue and net profit in 2013.We forecast SGF to report revenue of Rmb1911.2m (+24.4% yoy growth) and net profit of Rmb285.3m (+35.9% yoy growth) in 2013. SGF will be able to enjoy the full economic benefits of the increased production capacity for the beverage business and the expansion of canned food business within the domestic market. 

Share Price Catalyst

·      We note the potential upside of S$1.12/share if Garden Fresh obtains approval from an exchange to list assuming a holding company discount of 20% to SGF’s Garden stake and a 3.0x 2014F PE valuation to its remaining business.

·      SGF is also able to enjoy a re-rating once the company announces the engagement of any financial advisors for this listing. Last week, we saw an infrastructure-related stock jump more than 20% the day the company announced the intention to demerge and list its assets in an overseas exchange.