CMZ key takeaways from management meeting

Valuation
- Maintain BUY but with a lower target price of S$1.10, pegged at its 3-year average PE of 4.6x to 2015F earnings (4.9x previously). Catalysts include supply contracts between MINZ and Indofood, higher dividend payout to match Indofood’s dividend payout of 40% and investment in industrialised farming in Indonesia for the longer term.

Financial highlights
- MINZ reported a 25.8% yoy decline in net profit to Rmb250.3m in 1HFY14 despite revenue rising 4.6% yoy, driven by higher sales in the cultivation (+15.3% yoy) and branded business (+10.5% yoy) segments. Revenue from processed vegetables declined 3.8% yoy mainly due to reduced orders for fresh-packed products.

- Gross profit fell 2.7% yoy to Rmb486.8m with gross margin declining 2.3ppt to
31.6% as the group was hit by higher raw material and labour costs. Selling and administrative expenses soared 78.4% yoy to Rmb108.3m due to increased marketing and advertising expenses for their branded products sold domestically.

Our view
- We believe MINZ is setting the stage for growth in FY15. While we expect gross margins to face pressure from higher operating costs, the company can improve margins through the sale of higher-value products, better yields on maturing farmland, and increased industrialised farming to boost profitability. More than half of the farmland is still in the maturing phase and will take another year to achieve a 90% optimum yield. MINZ has successfully developed industrialised farming for the cultivation of champignon mushrooms to cater for in-house processing needs or sell in domestic markets during off-peak season when margins are stronger.

- MINZ has also strengthened its balance sheet by boosting its cash level through prompt receivables collection and significant reduction in advances to raw material suppliers. Cash conversion days improved from 93 days to 73 days with the company recording a net cash of Rmb1.17b (S$234m) against its market cap of S$606m.

- In 1HFY14, MINZ has started to supply processed vegetables to major shareholder, PT Indofood, with sales amounting to Rmb1.2m. This is just one of the many potential collaborations with Indofood, including duplicating MINZ’s industrialised farming technology in Indonesia for products such as fresh garlic which Indonesia has an import quota, or Shiitake mushrooms for export to Taiwan. In the longer term, MINZ may become an OEM partner of Indofood for its products to be distributed in China.