Initiate with BUY. In our view, the odds are still good for buying Sino Grandness now to bet on the catalyst of it pulling off a successful spinoff of Garden Fresh, its beverage subsidiary, at substantially higher valuations in HK than what investors in Singapore are currently giving the whole group. Sino Grandness could be worth up to SGD2.52 (158% upside) on our best case scenario and SGD1.31 (34% upside) on the worst case scenario, with potential 20% downside even if the listing does not take place. The shares have doubled since 2012 as the market factored in good progress toward a successful spinoff but the odds are still good as a recent share placement drew in new institutional investors. We initiate coverage with a BUY and target price of SGD1.60 pegged to 6x FY13F PER. Sino Grandness is still in the early stages of a multi-year growth cycle and the impending listing of its main growth engine will see it valued higher as a separate unit, unlocking substantial value for shareholders.

The Grandest Catalyst. Sino Grandness is a stock with a very specific catalyst, the impendng listing of its beverage subsidiary in HK by Oct 2014. A successful listing of this subsidiary will make Sino Grandness a much more valuable company as HK comparables trade at significantly higher valuations than the entire group. Sino Grandness’s holding in Garden Fresh alone could potentially worth SGD360m on our base case scenario relative vs Sino Grandness’ market cap of SGD285m.

The Grandest Risk. The flip side is Sino Grandness would be severely penalised if the listing does not take place by October 2014 as the CBs will be redeemed at substantial premiums. However, we think Sino Grandness has made significant progress toward meeting its obligations. The next milestones would be mainly regulatory and market in nature and the prognosis for meeting them is positive, in our view.

Valuation and recommendation. At the current undemanding 4x PE, buying Sino Grandness is akin to a pre-IPO investment in Garden Fresh. Apart from substantial returns in the event of a successful listing of Garden Fresh, 4x earnings seems too cheap for a company with a forecasted profit growth of 20-30% over the next few years. We initiate coverage with a BUY and target price of SGD1.60, pegged to an FY13 PER of 6x.

Source: Maybank Kim Eng Research - 8 Apr 2013