Auric Pacific Group Limited - CIMB Research 2016-11-09: A conviction turnaround

AURIC PACIFIC GROUP LIMITED A23.SI

Auric Pacific Group Limited - A conviction turnaround

Auric’s 9M16 core net profit beat our expectations, at 104% of our full-year forecast.
Core net profit rose 76% yoy in 3Q16 (9M16: +207% yoy) due to broad-based profitability improvement across different business segments.
Management expects the rationalisation efforts to continue driving and sustaining profit recovery. We raise our FY16F-18F core EPS by 23-26%.
Net cash strengthened to S$81.3m in 3Q16, representing 55% of group market cap.

Maintain Add, TP raised to S$1.96 (based on 25% liquidity discount to FY17F SOP).

Auric’s 9M16 core net profit exceeded our full-year forecast, at 104%.
Core net profit rose 76% yoy in 3Q16 to S$5.5m (3Q15: S$3.1m) on broad-based profit improvement across all business segments. For 9M16, core net profit rose 207% yoy to S$15.7m (9M15: S$5.1m).
Group revenue saw a slight dip of 2.7% yoy in 3Q16 (9M16: 2.3% dip), due to the closure of a number of loss-making cafés under the Delifrance brand and some non-performing restaurant outlets under Food Junction Group.

The group’s two core businesses,
1. wholesale and distribution, and
2. bread and butter manufacturing,
continued yielding growth in 3Q16, with pretax profit improvement of S$0.4m and S$0.6m, respectively.
After years of losses, the Delifrance café operation posted its maiden positive profit in 3Q16 at S$1.1m (3Q15: S$0.6m loss, 2Q16: S$0.1m loss) thanks to the significant rationalisation efforts in the past two years.
Food Junction Group also saw higher pretax profit during the quarter at S$0.8m (3Q15: S$0.6m).

Auric’s net cash position continued to strengthen over the past few quarters, and stood at S$81.3m at end-3Q16 (4Q15: S$45m, 2Q16: S$69m), or 55% of group market cap.
Free cashflow improved substantially to S$37m in 9M16 (9M15: S$4.1m), a reflection of
1. overall improving group profitability, and
2. lower capex burden due to the scale-down of food retail business (i.e. Delifrance cafés and Food Junction restaurant operations).

We expect management’s rationalisation efforts to continue driving and sustaining Auric’s profit recovery ahead. On 10 Oct, Auric announced the disposal of two loss-making restaurant-related subsidiaries to a third party. We are positive on the disposal, considering that:
1. the S$2 consideration vs. the subsidiaries’ total net tangible liability position of S$7.2m would allow Auric to realise a gain of S$7.2m (to be recognised in 4Q16); and
2. the disposed subsidiaries would no longer be a drag to group profitability.

We raise our FY16F-18F core EPS by 23-26% to reflect its strong 3Q/9M16 profit and profit sustainability. Auric currently trades at FY16F/17F core P/E of 7.7x/7.3x, a heavy discount vs. bakery peers’ average of 17.1x/13.8x, or general F&B players’ 26.9x/23.3x.
This has yet to take into account its much stronger balance sheet vs. peers. Excluding net cash of S$0.65/share (end-3Q16), Auric trades at 3.5x/3.2x FY16F/17F ex-cash P/E.

Given Auric's significant net cash (55% of its market cap) and minority shareholder interest of only 23.83%, we think it is a proper privatisation target.
We note that Dr Andy Adhiwana, CEO and a major shareholder of the group, acquired over 5% of Auric's shares in the open market in the past one year or so.
Expensive M&A is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-09

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.96 Up 1.69