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Auric Pacific Group: A Deep Value Stock?
In the Spotlight | 21 May 2010
By: Aw Jie Sheng
Articles (52) Profile

After an extended hiatus, the Closer Look @ column returns. This time, we zoom in on Auric Pacific Group, a diversified food distribution, food manufacturing and food retail group with operations mainly in Singapore and Malaysia.

Its marketing and distribution segment, organized under Auric Pacific Marketing (Singapore) and Auric Chun Yip (Malaysia) counts many leading global consumer goods brands, such as Anlene, Heinz, Lee Kum Kee, POST and Sara Lee as its business partners.

Auric Pacific’s has also established its own house brands which includes Sunshine and Top-One bread and bakery products, SCS butter, Gourmet processed meats and Buttercup dairy and margarine spread. It also owns the Delifrance Group and is the 57.8%-shareholder of Food Junction Holdings.

Despite such a strong portfolio of iconic brands, Auric Pacific remains a thinly traded stock. This could be largely due to the fact that out of its 125.7m issued shares outstanding, only an estimated 28.8% is floated freely, while the Lippo Group of companies has deemed interests of 49.3%.

Judging By Its Book Value

More importantly, what drew this writer’s attention to the company, was that despite a broad market rally since March 2009, recent corrections notwithstanding, Auric Pacific is still trading at a significant discount to its book value compared to its peers.

Based on our own database, Auric Pacific’s price-to-book (PB) ratio is 0.4 times, compared to Commerce sector’s weighted average of 1.3 times and FTSE ST Fledgling’s 0.8 times.

According to a widely cited study conducted in 1992 by American finance professors Eugene Fama and Kenneth French, the lower a company’s PB ratio, the higher its subsequent stock performance tended to be. Fama and French’s data showed that stocks with the lowest PB ratio outpaced those with the highest PB ratio by an average of 11-15.5% in returns over the past 34 years.

For those unfamiliar with the PB ratio, it is derived by dividing a company’s market capitalization over the book value of its equity. In our publication, PB is calculated by dividing a company’s price per share over its net asset value, both of which are the per share equivalents of market capitalization and book value of equity.

A cursory glance, reveals that most of the stocks listed in Singapore with low PB ratio, tend mostly to be loss-making companies; S-Chips that have, or are perceived to have corporate governance issues; or have acquired its assets at the peak of the cycle and market prices have since come down.

FY09 Better, But Still In The Red

The first instance most applies to Auric Pacific. The company remained in the red for its financial year ended 31 December 2009, but managed to trim its overall net loss to $3.4m, from $33.8m a year ago. The marked improvement was largely attributable to better results in investment related activities, which recorded a net gain of $4.4m compared to a net loss of $17.3m in the previous year. Auric Pacific had also recognized one-off impairment losses of $7.8m in FY08.

Although Auric Pacific’s food manufacturing, food retail and food court segments posted modest gains, FY09 total revenue still fell 3.3% to $406m. This was due to revenue reduction in the Delifrance Group, discontinuation of its non-food distribution operations in China as well as lower revenue from its securities investment.

Revenue contribution from its food retail and food court segment grew 16.1% to $133.1m, due mainly to the acquisition of additional shareholdings in Food Junction Holdings in 3Q08, allowing Auric Pacific to recognize a full year revenue of $47.3m in FY09, instead of a pro-rated revenue of $14.5m in FY08.

But this was mostly offset by the Delifrance’s 14.3% contraction in revenue contribution, to $85.9m in FY09 from $100.2m previously. This was brought about by the lower sales across all the market it operated in as well as the closure of loss-making outlets. The number of Delifrance retail outlets and franchise outlets fell to 91 and 113 respectively in FY09, from 100 and 115 in FY08.

Breakdown of revenue
Breakdown of revenue

Towards A Profitable FY10

Auric Pacific has taken steps to address the weakness in its food retail segment. Apart from the cost rationalization exercise, Auric Pacific has embarked on a re-branding exercise for its Delifrance brand and rolled out cafes under an Enhanced Cafe Concept. The latter focuses mainly on takeaways, which requires less space and labour. Coupled with an improving macroeconomic outlook in the backdrop, things look promising for Auric Pacific this coming year.

This buoyancy is perhaps reflected in its recently released 1Q10 results, where although revenue fell slightly, the company made a return to profitability, recording a slight profit of $0.6m against the previous year’s loss of $2m. This makes up about 35.3% of FY10 earnings forecast by SIAS Research.

SIAS Research in its 26 March initiation report, expects Auric Pacific net profit to hit $1.7m and $5.2m in FY10 and FY11 respectively, on the back of $426.4m and $448.7m in revenue. It has an Invest rating, saying that the company has an intrinsic value of $0.765 based on the sum-of-the-parts method, representing a potential upside of 15% as of 19 May.

This however, also represents a 56% discount from Auric Pacific’s 1Q10 book value of $1.75 per share as SIAS Research cautions that losses due to Delifrance may continue to widen if Asian consumers do not enthusiastically take up its products. Also, a sharper than expected increase in commodity prices, would increase its raw material price, impacting profitability.

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