M&A actions fired up in the local F&B space over the past two months. First off the block was Heineken's general offer for Asia Pacific Breweries for $50/share in July, which was eventually raised to $53/share. This was followed by Suntory Beverage's delisting offer to buy out the minority shareholders of Cerebos Pacific for $6.60/share. A year ago, Nestle bought out minorities of Hsu Fu Chi in a S$3.5b deal. In all of these privatisations/delisting deals, the premium averaged in excess of 20% over the last traded prices, and even more over a 6-month timeframe.
Introducing an under-the-radar F&B player. Our screen of the few remaining F&B players in the sector throws out Viz Branz as an attractive buyout candidate for food & beverage multi-national companies looking to establish their presence in Asian markets. Viz Branz is a manufacturer of instant beverages and snack foods, carried under brands such as Gold Roast, BenCafe, Caf''21, CappaRoma and JaffaJuice. The company has a well-established sales network in Southeast Asia and Southern China, with leading market shares for its instant beverages. In China, the group has built up a leadership position for its instant cerealmix under the 'Gold Roast' brand in the coastal cities of Guangdong, Fujian, Zhejiang and Hainan while in Myanmar, the group's instant teamix under the 'Royal Myanmar' brand and instant cerealmix under 'Calsome' continued to gain traction in
Myanmar. Financially, the company has done well, compounding earnings at 14% per annum over the past five years. For its most recent financial year ended June 2012, Viz Branz saw a 48% increase in net profit to S$17m. We believe earnings will continue to remain firm on the back of further brand-building activities and declining raw material prices.
A potential change in ownership? A dispute between the two major shareholders, Ben Chng Beng Beng and his father Chng Khoon Peng was resolved recently. Through a court settlement, Chng Beng Beng transferred 15% of his Viz Branz's stake to Chng Khoon Peng. The latter thus ended up with a stake of 38%, while Chng Beng Beng saw his stake reduce from 51% to 36%. Subsequently, Viz Branz announced that one of its major shareholders has been in discussion with interested parties and has signed a preliminary letter of interest with a prospective buyer. We believe Viz Branz's well-established position and strong brands in its key markets will be attractive to trade buyers looking to gain a foothold in Southeast Asia/China.
Valuation & Recommendation
A transaction involving a full stake of either one of the major shareholders (Chng Beng Beng or Chng Khoon Peng) will trigger a buyout offer for the rest of the company, once it crossed the mandatory 30% shareholding level.
To reference an offer price range in the event of a buyout offer, we review the transaction multiples of F&B deals such as APB, Hsu Fu Chi and Cerebos. We also compare Viz Branz with its larger peer Super Group. In terms of EV/EBIT, Viz Branz's 8.5x is at a 50% discount to its peer group average of 17.1x while in P/E terms, the stock trades at 14.6x, a 47% discount to the peers' average of 27.6x. Similar discounts are seen from other valuation metrics such as EV/EVITDA and P/Sales. Granted, Viz Branz's relatively smaller size should see it trade at a discount to its peers, but we believe the steep discount of 47-55% is excessive and offer scope for upward re-rating in any M&A transaction. Applying a 40% discount to peers' multiples, we derive a valuation range of S$0.79-0.93/share. Our target price of $0.86/share is based on the mid-range of our valuation band, and represents an upside of 23% from current levels. We recommend a Trading BUY, with a T.P of $0.86.
Any M&A deal is tentative at this stage, and such a transaction may not occur for various reasons. The stock price may weaken under such a scenario. We believe, however, any downside will be capped given the stock's reasonable valuation (14.6x P/E), net cash of 9cts/share and prospects for continuing growth in its core China market. The best price is likely to be obtained if both major shareholders sell out to third parties, as the motivation to obtain the best price will be strongest. However, if either major shareholder is buying out the other party, either solely or in concert with third parties, the potential upside would be more modest, in our view.