Singapore's first sizeable IPO of the year has kicked off pre-marketing, with Viz Branz hoping to capitalise on higher M&A-driven valuations for consumer goods companies.
The sector has long been an investor favourite as a play on rising disposable incomes within a widening Asian middle class. Viz Branz's flotation should also offer welcome diversification for the City State's IPO investors, who have been faced with a procession of oil and gas, or real-estate investment trust listings over the past few years.
According to Dealogic figures, three reit IPOs accounted for 85% of the exchange's $1.6 billion volume in 2016.
For Viz Branz, the new deal represents a re-listing in Singapore where it traded from 2002 until September 2013. It was taken private following a feud between the founder Chng Khoon Peng and his son Ben Chng.
This is said to have begun in October 2010 when Chng senior stepped down as executive chairman. The following year he filed a writ against his son over a tranche of shares and lodged a complaint with the Commercial Affairs Department alleging irregular payments between Chng junior and two Myanmar distributors.
The complaint was subsequently and unreservedly withdrawn, but it led auditor Ernst & Young to decline to offer an opinion on Viz Branz's 2012 accounts.
In 2013, the son acquired a 38.25% stake from his father for S$110 million ($78 million) and launched a S$121.26 million mandatory general offer for 41.91% of the company. Credit Suisse was financial advisor for the take-private deal, which was struck at 16.4 times forward earnings and a forward EV/Ebitda multiple of 8.8 times according to S&P Capital IQ figures.
Chng junior currently owns 100% of Viz Branz and the company's debt covenants require him to retain 51% post IPO. The exact split between primary and secondary shares for the flotation has not yet been set, although the pre-marketing term sheet says there will a greenshoe of up to 15% in secondary shares.
Fair value range
Syndicate research has assigned a fair value of S$617 million to S$763 million ($437 million to $540 million), which represents a 2018 price to earnings range of 17 to 21 times.
Pending investor feedback and an IPO discount, this suggests an IPO p/e valuation in the mid to high teens and an issue size around the S$300 million ($213 million) mark.
At this level, pricing would be fixed at roughly the same valuation that one of the company's closest comparables, Super Group, was trading at before an S$1.4 billion takeover bid was announced last November. Both Singapore-based groups are big in coffee and cereals across China, South East Asia and Indochina.
Super Group is still in the process of being acquired by Jacobs Douwe Egberts of the Netherlands, which offered $1.3 per share. This represented a 34% premium to the last close and 62.5% premium to the group's undisturbed share price of S$0.80 per share in early October.
Analysts have described the offer as "generous." At its last undisturbed price on October 3, Super Group was trading at 16.33 times forecast 2018 earnings according to Daiwa's estimates.
At the time, the securities house said peers were trading in a 15 to 20 times forward earnings range, but can trade up above 20 in strong markets.
With Super Group set to disappear from the Singapore Stock Exchange, attention has focused on a smaller comparable, Food Empire, which has a S$300 million market cap. The coffee mix company's share price has almost double since Jacob's announcement and is now trading around 13.1 times 2018 forecast earnings.
Del Monte Pacific, which is also listed in Singapore, will have a similar market cap to Viz Branz and also has strong operations in Myanmar, albeit in packaged fruit and vegetables rather than coffee and cereal. It is currently trading at 21.5 times 2018 earnings.
Syndicate analysts are also pitching two other comparables, which are far larger companies and trade at higher multiples: Singapore-listed Delfi and Jakarta-listed Mayora Indah. The former is a confectionary company trading at 35.69 times 2018 earnings and the latter is a sweets and biscuits manufacturer, trading around 27 times.
Profit kicker in 2018
Viz Branz is being marketed on a 2018 basis because revenues and net profits are likely to be flat in 2017. Analysts say this is because the company terminated its Myanmar distribution agreement in 2014 and is transitioning to a joint venture, which should commence operations this December.
According to the pre-deal research report, revenues rose from S$155 million in 2015 to S$161 million in 2016 (June year-end) and are forecast to rise marginally to S$165 million in 2017 and S$193 million in 2018,
Net profit stood at S$24 million in 2015 and 2016, with a forecast rise to S$29 million in 2017, S$36 million in 2018 and S$46 million in 2019.
The company currently has a core portfolio of 10 brands including Gold Roast, Cafe 21, Royal Myanmar and Madame Kim. In 2016, instant cereal mix accounted for 54% of revenues, instant coffee 17% and instant tea, 1.4%.
By country, China is the most important country accounting for 64% of sales, followed by Myanmar on 17%, Cambodia 6% and Singapore 5%. Other countries accounting for 9% include Lebanon, Liberia and Taiwan.
Analysts estimate that China’s share will fall to 57% by 2019, while South East Asia will rise from 32% to 40%.
The company says its main strategy is to expand cereal mix sales where margins are higher (60% gross margin compared to roughly 43% for coffee). In 2016, the company's overall gross margin stood at 47.9%. Analysts believe it will be able to expand this to 51.6% in 2017 before it falls back to 51.1% in 2017.
Cereal mix margins are higher for two reasons. Firstly, analysts say it faces less competition in this sector.
Secondly, cereal flakes are cheaper to produce than coffee. Whereas coffee inventories are at five-year lows, global wheat production is forecast to reach a record high in 2017, prompting prices to hit five-year lows.
Pre-marketing will continue until March 9, with formal roadshows expected to begin in mid to late March and listing at the end of the month. Joint global co-ordinators are Credit Suisse and Maybank.
