Yeo Hiap Seng now focused on expanding F&B business

Re-organization and investment in the pipeline.

Yeo Hiap Seng is looking to build up its "neglected" F&B business, noted research firm Maybank Kim Eng, and it is doing so by overhauling its plants to boost efficiency and expanding Singapore facilities to streamline operations.

Here's more from Maybank:

Management focused on F&B business. Our latest discussions with management confirm they are indeed focused on building up its F&B business. Despite the brand's long heritage and leadership position in Asian drinks, this business has been neglected pre-restructuring (of Far East Orchard) in favor of property development. We believe the company is taking steps in the right direction.

Reorganising operations to move ahead. For FY12, F&B operating margins were just 2.3%. These margins, which are significantly lower than peers, form our belief that there is upside potential given its market share (no.1 for Asian drinks in Singapore/ Malaysia). The company is in the midst of reorganizing its plants to improve overall efficiency. For example, it is consolidating into 3 plants in Malaysia and 1 plant in Guangdong, China. It is also expanding warehousing and manufacturing facilities in Singapore to reduce contract outsourcing and meet additional demand.

Investing in Cambodia, Indonesia. These are two markets which the company has been enjoying high growth. It is therefore attaching strategic importance, by investing significantly in manufacturing locality. In the former, it is an early entrant, enjoying premium pricing and dominant market share. In the latter, management sees a huge market which is similar to Malaysia. These two major new plants will likely commence operations in 2015/2016.

Privatisation of YHS Berhad complete. The company completed the privatization of its Malaysia subsidiary in Jan 2013. This will give it a higher share of F&B profit going forward, which we have factored in. Its last property project (Jardin) will be completed this year, and management will also seek to divest its sizeable landbank should opportunity arises.

Grinding forward, patience needed. We see latent potential in the Group's F&B business, but warn that improvements in margin and more meaningful geographical expansion will likely be a multi-year story. In the immediate term, costs are likely to remain high due to new product launches and start-up costs. We introduce FY15F estimates and adjust our SOTP TP to SGD2.55 Maintain HOLD.