Sino Grandness Food

UOBKayhian on 14 Nov 2012

Valuation
·      At the current share price of S$0.475, it is trading at 2.3x 2012F PE (ended Dec 12) and 0.135x PEG (2012-14F). Currently, the fast-moving consumer goods (FMCG) peers in Hong Kong are trading at an average of 33.2x FY11 PE.
·      We have a target price of S$0.78 which translates into 3.0x 2013F PE, pegged to Singapore-listed peers’ average. We note the potential upside of S$1.12/share if GF obtains approval from an exchange to list assuming a holding company discount of 20% to SGF’s Garden Fresh stake and a 3.0x 2014F PE valuation to its remaining business.
Financial Highlights
·      SGF reported a 72.4% leap in 9M12 net profit to Rmb224m on higher revenue, and stronger gross profit margins despite greater operating costs. Revenue increased 68.1% yoy to Rmb1.23b, boosted by yoy growth of 130.2% and 30.6% in sales for the beverages and canned food segments respectively.
·      Domestic sales of the canned food segment performed stronger than expected as SGF managed to leverage on the current beverage distribution network to sell their own-brand bottled fruits. This segment’s Rmb85.3m sales also enjoyed a higher gross margin of more than 40% that lifted the group’s gross margin to 39.2% in the same period from 34.4% in 9M11. However, selling and distribution expenses and administrative costs rose 116.2% yoy and 39.5% yoy respectively as higher sales volume resulted in higher labour costs and transportation expenses.
·      The group had announced that it had quadrupled its Garden Fresh bottled juices output capacity to 280,000 tonnes p.a. from 70,000 tonnes p.a. a year ago by securing new capacities based in Zhejiang, Beijing and Sichuan provinces.  The strategically-located supply points will also assist SGF in extending their distribution network to north and west China without incurring higher transport costs. Assuming that SGF fully utilised the capacity and sold juices at an ASP of Rmb5000/tonne, the group can record potential sales of Rmb1.4b and Rmb245.0m using historical net profit margins.
·      The group will also boost its sales and marketing efforts by increasing its A&P activities through advertisements, trade shows, sponsorship programmes as well as new TV commercials for Garden Fresh juices.
Risks
·      Volatility in raw material prices. Raw agricultural products accounted for more than 80% of total in-house production cost for canned F&B segment manufacturing. Any sharp movements in raw material prices would erode SGF's GPM if the group is unable to adjust the ASP accordingly.
·      Failure to launch an IPO listing of Garden Fresh (GF). As both CB1 and CB2 were issued on the premise for GF’s eventual listing, SGF would have to redeem the bonds at an effective interest rate of more than 24% if the beverage business is unable to complete the IPO process.