Sino Grandness Food

UOBKayhian on 14 Jan 2013

Investment highlights

·      BUY Sino Grandness Food (SGF) for its better-than-expected earnings, improvement in gross margins and bigger juice production capacity. Our target price of S$0.91 is based on a 3-year historical average PE peg of 4.5x to our 2012F EPS of 20.4 S cents.

Our view

·      All eyes on 2012 earnings, particularly beverage segment. We expect the company to report a yoy top-line growth of 63.5% and net profit growth of 79.7% to Rmb1.67b and Rmb272.6m respectively. This is largely driven by strong sales at the canned food and beverage segment coupled with improved gross margins. Particularly in the beverage juice segment, the group will have to meet the Rmb140m net profit target for 2012 in order to achieve minimum dilution in the two convertible bonds.

·      Improvement in gross margins. Gross margins in 2011 were partially eroded by higher raw material costs for the canned food segment despite strong sales of higher-margin beverage products. However, we saw a turnaround in 9M12 as GPM made a substantial improvement to 37.9% from 34.4% for 2011, due to higher selling price, lower production costs and a positive shift towards higher-margin domestic sales of canned food and beverages. This, in our view, will be sustainable for 4Q12.

·      We expect forward earnings growth in 2013 to propel share price further. The canned food segment is expected to register a 15.7% growth in revenue for 2013 by securing new customers and introducing new products with higher margins, while the revenue of its beverage segment under Garden Fresh (GF) is set to jump 60% to Rmb1.4b with its new enlarged capacity. The group can also enjoy the earnings expansion of its new distribution networks such as the 600 7-Eleven convenience stalls in Guangdong province secured in 2012. All in all, we forecast SGF to report a yoy revenue and net profit growth of 39.0% and 27.3% in 2013 respectively.

·      Undemanding valuation with positive rerating catalyst in 2013-14. SGF is trading at 3.7x 2012F PE (year ended Dec 12), a fraction of the average valuations of 30.8x 2012F PE commanded by its Hong Kong-listed fast-moving consumer goods (FMCG) peers. As SGF is also looking to do a separate listing for GF in 2014, this would be a positive rerating catalyst for the group. We note the potential upside of S$1.28/share if the listing comes through, assuming a holding company discount of 20% to SGF’s GF stake and a 4.5x 2014F PE valuation for its remaining business.