China Minzhong Food
We share Glaucus Research’s concerns about MINZ’s reliance on capital markets for cash generation and ballooning receivable days. We cease coverage of MINZ, with our last rating being Outperform with a target price of S$1.27 (5x CY14 P/E, its peer average).
Glaucus Research, an independent US-based research house, this morning issued a sell report on MINZ, alluding to its reliance on debt & equity financing as a primary source of cash generation; ballooning receivables; “fabricated” sales; and “suspicious” capex. MINZ’s stock subsequently tanked 50% and trading in its shares has been halted.
What We Think
We have been sharing Glaucus’s concerns for some time, especially the first two. MINZ had issued new shares (98m) to Indofood on 15 Feb 13, at S$0.915 apiece or 0.7x its FY12 book value. It soon followed this up with an unsuccessful attempt to issue bonds on 8 Mar 13. We found this intensive capital-raising worrying. The company’s willingness to dilute EPS at such an unfavourable price suggests to us a desperate need for cash when this shouldn’t have been the case. Capex was supposed to be lower this year (according to guidance) with positive free cash flow anticipated by us. Further, Olympus Capital, one of its major shareholders before IPO, had disposed of its remaining 10.3% stake on 6 Dec 12. It is hard to believe management was not aware of both Indofood’s and Olympus Capital’s intentions, considering their transactions were back-to-back. If Indofood’s expertise had been what MINZ was solely after, management could have arranged for Indofood to take over Olympus’s stake. Pressure from investors to pay dividends probably weighed on the company. We sensed that it was going to pay dividends for the first time this quarter, which could have catalysed its share price; hence, our previous Outperform. However, we believe raising equity from Indofood to pay dividends would have compromised the quality of any payout, as it could have represented a mere “transfer” of cash. We were also worried by its spiking receivable days. FY12 receivable days were 85, up from 45 in FY10 and 43 in FY11. See our report: Look beyond the stellar earnings.
What You Should Do
We are ceasing coverage of the stock.
Publish date: 27/08/13