Glaucus attacked in April this year a Chinese company called SouFun which is listed on the New York Stock Exchange. The stock price was 22 usd then. Now 38 usd.
Minzhong’s biggest investor isn’t concerned. PT Indofood Sukses Makmur, the parent of Indonesia’s biggest instant-noodle maker and Minzhong’s largest shareholder, is comfortable with its investment, director Thomas Tjhie said yesterday by telephone from Jakarta.
Indofood, which doubled its stake in Minzhong to 29.3 percent in March, conducted due diligence on the company before it made its investment, Tjhie said, adding that he has spoken to Minzhong’s chief financial officer about the Glaucus report.
MINZ SP / CMFC.SI | S$1.02
Mkt.Cap: US$519.20m | Avg.Daily Vol: US$2.33m | Free Float: 56.40%
Food & Beverages | Author(s): Kenneth NG, CFA +65 6210 8610, Mou Hua LEE
We share Glaucus Research?s concerns about MINZ?s reliance on capital markets for cash generation and ballooning receivable days. We cease coverage of MINZ, with our last rating being Outperform with a target price of S$1.27 (5x CY14 P/E, its peer average).
What Happened
Glaucus Research, an independent US-based research house, this morning issued a sell report on MINZ, alluding to its reliance on debt & equity financing as a primary source of cash generation ballooning receivables ?fabricated? sales and ?suspicious? capex. MINZ?s stock subsequently tanked 50% and trading in its shares has been halted.
What We Think
We have been sharing Glaucus?s concerns for some time, especially the first two. MINZ had issued new shares (98m) to Indofood on 15 Feb 13, at S$0.915 apiece or 0.7x its FY12 book value. It soon followed this up with an unsuccessful attempt to issue bonds on 8 Mar 13. We found this intensive capital-raising worrying. The company?s willingness to dilute EPS at such an unfavourable price suggests to us a desperate need for cash when this shouldn?t have been the case. Capex was supposed to be lower this year (according to guidance) with positive free cash flow anticipated by us. Further, Olympus Capital, one of its major shareholders before IPO, had disposed of its remaining 10.3% stake on 6 Dec 12. It is hard to believe management was not aware of both Indofood?s and Olympus Capital?s intentions, considering their transactions were back-to-back. If Indofood?s expertise had been what MINZ was solely after, management could have arranged for Indofood to take over Olympus?s stake. Pressure from investors to pay dividends probably weighed on the company. We sensed that it was going to pay dividends for the first time this quarter, which could have catalysed its share price hence, our previous Outperform. However, we believe raising equity from Indofood to pay dividends would have compromised the quality of any payout, as it could have represented a mere ?transfer? of cash. We were also worried by its spiking receivable days. FY12 receivable days were 85, up from 45 in FY10 and 43 in FY11. See our report: Look beyond the stellar earnings.
What You Should Do
We are ceasing coverage of the stock.
Indofood should also defend Minzhong vigorously
In our view, the next thing to watch for is how Indofood will respond.
Indofood management has been quoted by the media as saying they are comfortable with their investment. If Indofood really has that much confidence in Minzhong, they may launch a general offer for all the remaining shares that they do not own.
Assuming a full GO, the war chest that Indofood needs is expected to be SGD519m (at SGD1.12/share because the Singapore Takeover Code dictates the
price offered by any offerer should be set at the highest price paid in the 12 months before the offer was announced), which forms about 1/3 of its cash balance.
Is this Wei Bin serious ? Why would they take more risks by spending SGD519m to takeover ? Think of the amount of veggies they need to sell to make back this investment , esp in light of the allegations ? That said, I am impressed with their yearly sales of SGD680m annualized ( value is at distributor level). The logistics, warehousing , transportation etc to move the huge amount of veggies to their customers daily are massive. Not vested.
yeh wrote: Maybank Kim Eng analyst Wei Bin:
Indofood should also defend Minzhong vigorously
In our view, the next thing to watch for is how Indofood will respond.
Indofood management has been quoted by the media as saying they are comfortable with their investment. If Indofood really has that much confidence in Minzhong, they may launch a general offer for all the remaining shares that they do not own.
Assuming a full GO, the war chest that Indofood needs is expected to be SGD519m (at SGD1.12/share because the Singapore Takeover Code dictates the
price offered by any offerer should be set at the highest price paid in the 12 months before the offer was announced), which forms about 1/3 of its cash balance.
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