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

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).

Substantial profit improvement in 3Q and 9M16 

  • 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.

Core businesses stayed upbeat; previous drags turned around 

  • 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).

Significant net cash position and strengthened free cashflow 

  • 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).

Rationalisation driving and sustaining profit recovery 

  • 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.

Deeply undervalued consumer staple play 

  • 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.

A possible privatisation target 

  • 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 | 2016-11-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.96 Up 1.69