Share distribution complete.Orchard Parade Holdings (OPH) shareholders received their dividend-in-specie of YHS shares on 3rd December (220 YHS shares for each 1000 OPH shares) and they are now freely traded. This completes the shareholding restructuring of Yeo Hiap Seng, and we estimate free-float improves from 15% to 21%.

Far East Organization (FEO) holding their stake. Major shareholders FEO have announced they will not sell their dividend-in-specie entitlement of YHS shares. As a result, this takes their stake to around 74.6%. This provides clear ownership. We believe minority shareholders will benefit from FEO’s much greater incentive to spur YHS’s business ahead. YHS will become a pure F&B business as its property development projects wind down next year.

Lacklustre 3Q12 results; improvement will take time. Net profit for the quarter came in at just SGD3.3m on lower recognition of property sales, while the F&B business was only marginally profitable at SGD0.4m, despite a 4% increase in revenue yoy. We see much latent potential in its portfolio of F&B brands, but expect that significant improvements in profitability will be a multi-year effort. There are signs of such effort, such as an expansion of sales network in Indonesia as well as consolidation of manufacturing facilities in Malaysia this year.

Kirin’s SGD2.7b bid for FNN is a good valuation gauge. In conjunction with its partner Overseas Union Enterprises (OUE), Japanese beer-brewer Kirin has agreed to pay SGD2.7b for Fraser&Neave’s F&B business which includes soft drinks and dairies. This implies a valuation of almost 40x PER, based on the latest full-year results. In our opinion, this is a very close comparable (abeit a larger one) to YHS’s F&B business and provides a good valuation gauge.

Share price ahead of fundamentals, downgrade to HOLD. We use the new valuation yardstick provided by Kirin’s solid FNN foods bid and adjust our SOTP valuation accordingly. Though excited by YHS’s latent potential, we also recognize that share price has probably run too far ahead of fundamentals and we downgrade the stock to a HOLD, with a new SOTP TP of SGD2.65.

Source: Maybank Kim Eng Research - 12 Dec 2012