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Tuesday, April 28, 2015

Teo Seng Capital - Acquires Singapore property for expansion BUY

- We reiterate our BUY call on Teo Seng Capital (TSC) with an unchanged fair value of RM2.70/share, pegged to an unchanged fully-diluted FY15F PE of 13x.

- In a filing to Bursa last Friday, TSC announced that the group, through its wholly-owned Singapore subsidiary Premium Egg Products Pte Ltd (PEPP), is acquiring the entire equity interest in BH Fresh Food Pte Ltd (BHFF) from Oceantrade Foods Pte Ltd and several individuals for a cash consideration of SGD9.8mil or RM26.4mil.

- Singapore-based BHFF is primarily involved in the production, processing, preserving and wholesaling of meat and meat-related products. At its central kitchen, which consists of a two-storey detached factory with cold, freezer and chiller rooms, BHFF produces ready-to-eat products for hotel and restaurants as well as retailing for its Mmmm! chain of specialty shops.

- Additionally, the group has simultaneously entered into a conditional agreement to dispose the business and certain assets of BHFF (namely everything save its factory) to L M Meat Pte Ltd (LMM) for a cash consideration of SGD1.8mil or RM4.9mil. LMM is involved in the retailing of frozen meat and operating of a central kitchen.

- Based on BHFF’s unaudited proforma net assets for FY14 (Dec YE) of SGD8mil (including a revaluation surplus of SGD7.3mil for its factory), the purchase consideration represents a P/BV of 1.2x. BHFF reported a loss after tax of SGD0.54mil (RM1.5mil) for FY14.

- Both the agreements are inter-conditional upon each other and the entire proceeds from the proposed disposal will be used to partially offset the purchase consideration (both amounts arrived at on a willing buyer-willing-seller basis). Management intends to fund the acquisition through internal funds and/or bank borrowings, the mix of which will be determined at a later date.

- Through these concurrent acquisition and disposal moves, TSC seeks to own BHFF’s factory, which it intends to use as a distribution centre to cater to the rising demand for its products in Singapore. At present, TSC exports ~30% of its products to the city-state.

- We are positive on this development given that it will underpin the group’s expansion in Singapore, of which it has a 16% market share currently. This is also in line with its aim to raise its market share there by 7ppts to 23% by FY19F.

- We are leaving our FY15F-FY17F earnings estimates unchanged for now pending completion of the agreements (expected in 2QFY15) and further information from management. At current price, the stock is trading at an undemanding fully-diluted FY15F PE of 9.5x - a steep 42% to the sector’s average of 18x.

Source: AmeSecurities Research - 28 Apr 2015

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