Sino Grandness

DMG & PARTNERS RESEARCH on 5 March 2013

SINO Grandness has announced a proposed placement of 28.5 million new ordinary shares at an issue price of 82 cents (9.66 per cent discount to last traded price). An estimated $22.7 million will be raised from this exercise, which would be earmarked for the expansion of its domestic canned fruits business.

The company just reported a strong 91 per cent growth in FY12 Patmi (profit after tax and minority interest), which came in line with our estimates. We raise our FY13-14 forecast earnings by 14-21 per cent to take into account higher gross margins and lower operating expenses. Rolling over our valuations to 4x FY14 forecast EPS, we derive a higher TP of $1.23 (based on enlarged share capital of 294 million shares). Maintain "buy".

Out of the $22.7 million estimated gains from the exercise, 60 per cent or $13.6 million will be used for capex as well as sales and marketing expenses for its domestic canned products segment. The balance 40 per cent or $9.1 million will be used for general working capital.

Pre-placement the company has a share capital of 265 million. Assuming all goes well for SGX (Singapore Exchange) approvals and an AGM (annual general meeting) on April 25, 2013, the share capital will rise to 294 million with Asdew Acquisitions announced to emerge as a substantial shareholder.

The group reported a stellar 91 per cent rise in FY12 earnings to 289.9 million yuan (S$58 million), in line with our forecast of 268.1 million yuan. Gross margin expansion was seen across all business segments.

Domestic canned fruits chalked up 42.9 per cent in gross margins versus 42.8 per cent for beverage and 31.4 per cent for export canned vegetables. The disparity in domestic and export canned products gross margins are due to the fact that export is under OEM (original equipment manufacturing), not their own brand.

BUY