China Minzhong set to secure more vegetable supply contracts

Indofood influence expected to help soon.

With China Minzhong expected to suffer a seasonally weak quarter in 4QFY6/13, Maybank Kim Eng said some rebound hopes lie in the company securing some processed vegetable supply contracts in the next few months as a result of the bilateral cooperation between the firm and new substantial shareholder Indofood.

Here's the complete China Minzhong results preview report from Maybank:

Expect a seasonally weak quarter, but nothing to worry. China Minzhong will publish its 4QFY6/13 results this Thursday before market. We are looking at revenue of RMB685m, down 15% YoY and 29% QoQ while expecting net profit to be RMB164m, down 4% YoY and 36% QoQ. QoQ earnings dip is nothing to worry as 2Q and 3Q are usually the peak quarters and Minzhong has locked in about 78% of our full year forecasts in the first three quarters. YoY drop can also be expected because 4Q last year was an exceptionally strong quarter due to late arrival of winter season in China. In our view, there are two short term catalysts for Minzhong: 1) supply contracts from Indofood and 2) first dividends payout since IPO. Although we do not think the first dividends payout could be anything significant, it is a good start in our view. Such practice could also help to argue for a re-rating case for the stock. Reiterate BUY and TP SGD1.36, pegged to 5x FY6/14 PER.

Upside potential in consensus earnings if Indofood opens wallet. It has been more than 6 months since Indofood stepped in as a substantial shareholder. We expect Minzhong to secure some processed vegetable supply contracts in the next few months as the first step of bilateral cooperation. Consensus FY14 revenue estimate has been raised by about RMB400m to RMB3.9b since Feb partly as people factored in some revenue contribution from Indofood. But given the multi-billion RMB dry vegetable purchase power per year by Indofood, we think there could be more upside if it opens up its wallet more generously than people currently expected.

First dividends could be expected. We also expect China Minzhong to announce the first dividends since IPO this quarter. Assuming Minzhong pays out 10% net profit as dividends, yield could potentially be about 2% at current price. Although not significant, we see it as a good start. Reiterate BUY. We continue to like Minzhong for its still-favorable riskreward profile. Recent developments of the company include the first-time credit rating (Ba3) given by Moody’s and the issuance of USD150m syndication loans underwritten by Citibank and Standard Chartered. In our view, this could help to rebuild investors’ confidence. Maintain BUY and TP SGD1.36, pegged to historical average of 5x FY6/14 PER.