Golden Agri: Expanding China distribution reach

By Carey Wong
Mon, 21 Jun 2010, 09:13:03 SGT

Golden Agri-Resources (GAR) Ltd announced that it plans to acquire the entire business of Florentina International Holdings (FIH) Ltd from Asia Food & Properties for a cash consideration of RMB976m (US$142.8m) – FIH manufactures snack noodles, instant noodles and ice sticks in the PRC and owns eight production plants in seven provinces. According to GAR, the acquisition will allow it to leverage on the market knowledge, customer base and extensive distribution channels of FIH’s food business in China, especially for its consumer pack oil and specialty fats business. GAR also believes that it will be able to share production base and reduce its logistics cost. However, we intend to hold off adjusting our numbers just yet as it may still take some time before we see any significant synergies coming in. Nevertheless, we are positive on the latest development as it is in line with its stated strategy to expand its distribution reach in China. Hence we maintain our BUY rating and S$0.72 fair value.

Acquiring food business in China. Golden Agri-Resources (GAR) Ltd announced that it plans to acquire the entire business of Florentina International Holdings (FIH) Ltd from Asia Food & Properties (AFP) for a cash consideration of RMB976m (US$142.8m) – FIH manufactures snack noodles, instant noodles and ice sticks in the PRC and owns eight production plants in seven provinces. Independent valuer PwC has valued FIH at between US$140m and US$170m. We understand that FIH made a net profit of around S$23m on revenue of ~S$230m for the last two years; this effectively prices the acquisition at around 10.7x historical earnings and 1.6x over book value.

Leveraging on FIH’s China distribution network. According to GAR, the acquisition will allow it to leverage on the market knowledge, customer base and extensive distribution channels of FIH’s food business in China, especially for its consumer pack oil and specialty fats business. GAR further notes that FIH products are sold through ~26,500 distributors, ~4,600 supermarket/chain stores, ~600 hypermartkets as well as schools, Internet cafes and special outlets. GAR also believes that it will be able to share production base and reduce its logistics cost; this as GAR will be able to set up refineries, consumer pack oil filling and margarine and shortening factories in some of FIH’s existing production facilities or adjacent land. Last but not least, GAR expects to create business synergies through integration and sharing of human resources.

Financing via internal resources. GAR expects to complete the acquisition – which does not require shareholders’ approval as it is under 3% of its FY09 NTA – by 3Q10; subject to SGX approval and AFP’s minority shareholders’ approval. Meanwhile, GAR intends to finance the acquisition using internal resources (including bank loans), which we believe should not be an issue. As a recap, GAR raised around S$311m (US$222m) in Jul 2009 and is currently sitting on a cash balance of US$169.7m (as of end Mar) and has a net gearing of 0.06x; GAR also posted a positive operating cashflow of US$72.7m in 1Q10.

Maintain BUY. However, we intend to hold off adjusting our numbers just yet as it may still take some time before we see any significant synergies coming in. Nevertheless, we are positive on the latest development as it is in line with its stated strategy to expand its distribution reach in China. Hence we maintain our BUY rating and S$0.72 fair value.

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