BUY | Target price: SGD2.25

A pure F&B play again. Yeo Hiap Seng (YHS) is a household F&B brand in Singapore and Malaysia with a 112-year heritage. It was said that the late Mr Ng Teng Fong of Far East Organization (FEO) privatised YHS due to the value of its factory land in District 21. With the completion of its’s last property development project, Jardin, by this year, the story of YHS has turned full circle. We believe this new lease of life as a pure F&B play will be a key catalyst for the stock.

Major shareholder committed to revitalise core business. After the Far East Orchard restructuring, FEO will emerge as the direct major shareholder of YHS with a 66% stake. YHS is also seeking to privatise its 61%-owned subsidiary, YHS (Malaysia) Berhad, which will give it a bigger share of the F&B profit in Malaysia. This shareholding structure will align the major shareholders’ interest in driving YHS forward.

Margin upside could drive profit growth. Despite its substantial market share and distribution reach in the Sing/Malaysia drinks market, YHS recorded F&B net margins of only 2% with a net profit of SGD8m in the last financial year. In our view, there is much latent potential in its portfolio of valuable brands waiting to be unleashed. Assuming an improvement to the margins now enjoyed by closest peer Fraser & Neave’s soft drinks division, YHS’s F&B profit could rise fivefold. If recent results are any indication, profit is moving in the right direction.

Huge landbank a treasure trove. Over the years, YHS has amassed a huge landbank/property portfolio, especially in Malaysia where it owns over 2m sq metres of land area. We see hidden value in these lands which are often difficult to value. This treasure trove, currently worth at least SGD250m, may eventually be monetised via FEO’s other arms.

Act before PepsiCo’s Indra Nooyi; initiate with Buy. YHS has an agreement with PepsiCo that gives the latter a right of first refusal to buy YHS, its distributor and manufacturer in Singapore. However, as seen in the Asia Pacific Breweries saga, this does not preclude a bidding war that could well drive up YHS’s share price in excess of our SOTP-based target price of SGD2.25, which includes SGD0.435 per share of cash proceeds from the Jardin project. An improvement in free float from 15% to 29.5% post-restructuring will likely lift valuations over the long term too. We initiate coverage with a Buy recommendation.

Source: Maybank Kim Eng Research - 3 Oct 2012