Auric Pacific Group Limited - CIMB Research 2016-12-05: A conviction turnaround

AURIC PACIFIC GROUP LIMITED A23.SI

Auric Pacific Group Limited - A conviction turnaround

Auric is a diversified F&B play with well-established brands. Its Sunshine bread, SCS butter and Buttercup spread have leading positions in local markets.
With the completion of most rationalisation efforts, Auric managed a turnaround into profitability in 9M16. We expect profitability to continue to improve in FY17-18F.

Significant net cash position at 47% of market cap. We recommend Add with a target price of S$1.96 (based on FY17 SOP). Auric is a Singapore top pick.

Auric manufactures and distributes fast-moving consumer goods in Singapore and Malaysia. Its house brands, including Sunshine bread (c.30% market share in Singapore in FY16), SCS butter (38% in Singapore, 40% in Malaysia) and Buttercup spread (78% in Malaysia), have leading positions in the local markets.
Auric also has a food retail arm, managing and operating a chain of food courts under the Food Junction brand in Singapore and Malaysia as well as over 130 Délifrance café outlets in Singapore and Hong Kong.

Auric achieved a turnaround in 9M16, with reported net profit at S$7.5m vs. net loss of S$21.7m in 9M15. Core net profit rose by a significant 207% yoy to S$15.7m in 9M16 from S$5.1m in 9M15.
The turnaround in reported net profit and the remarkable improvement in the core figure were mainly due to the rationalisation exercise at Auric’s food retail businesses in the past two years while the group’s core strength, i.e. its manufacturing and distribution business, remained solid.
We expect Auric’s profitability to be sustainable and to continue to expand in FY17- 18F as
1. the group should continue to benefit from its past rationalisation exercises (Auric also disposed of two loss-making restaurant-related subsidiaries in Oct 16), and
2. we expect Sunshine bread to continue gaining market share in Singapore, driven by relentless R&D, spearheaded by management.

Auric’s net cash position continued to strengthen over the past few quarters and stood at S$81.3m as at end-3Q16 (4Q15: S$45m) or 50% of group market cap. Free cash flow improved substantially to S$37m in 9M16 (9M15: S$4.1m).
We expect Auric to remain cash generative in FY17-18F on the back of
1. overall improving group profitability, and
2. lower capex burden due to the scale-down of the cash-draining food retail business (i.e. Délifrance cafés and Food Junction restaurant operations).

Auric currently trades at FY16F/17F core P/E of 9.0x/8.4x, 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 4.8x/4.3x FY16F/17F ex-cash P/E.
Sustainable and expanding profitability is a key re-rating catalyst ahead. Expensive M&A is a key risk.

Given Auric’s significant net cash (47% of its market cap) and minority shareholder interest of only 23.28%, we think Auric is a proper privatisation target.
We note that Dr Andy Adhiwana, CEO and a major shareholder of Auric, acquired 5.57% of Auric shares in the open market in the past one year or so.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05

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