Eu Yan Sang (DMG)

Key takeaways from meeting with CEO (BUY, S$0.80, TP S$0.99)

We met up with CEO Richard Eu this morning and here are some of the key takeaways: 1) EYS intends to leverage on HZL’s extensive distribution network of 127 retail stores in Australia by placing its products on their shelves. Likewise, it will be retailing some of HZL’s Healthy Life’s products in its stores. The objective is to offer customers a wider variety of products and to transition from a pure TCM company to a health wellness company. 2) Although HZL has only three HealthyLife outlets in Shanghai, it owns the Aurinda brand which is sold through 1,600 retail counters in China. The Aurinda brand consists of more than 45 vitamin and dietary supplements products. 3) Management does not rule out a Hong Kong listing if its China business does well or if it further engages in another M&A. We continue to recommend BUY on EYS with a TP of S$0.99.

Ups stake in HZL to 19.99%. EYS has agreed to acquire an additional 7.3m ordinary shares in ASX-listed Healthzone (HZL AU) for A$0.38/share for a total purchase consideration of A$2.8m (~S$3.7m), thereby increasing its stake in the latter from 14.99% to 19.99%. This is just below the 20% threshold that would trigger a General Offer (GO) according to Australian law. Purchase price is a 9% premium over HZL’s last closing and includes one free unlisted warrant for every five ordinary shares, giving EYS 1.5m warrants exercisable at A$0.48, which expires on 3 June 2016. It has an additional 4m warrants with a strike price of A$0.38 which expires on 28 February 2015. At A$0.38/share, it is valuing HZL at 4.8x FY10 P/E. Under the “creep provision” in Australia, it will be able to accumulate up to 3% of the company every six months without triggering a GO. We believe that this will be the intention of management.

Background on Healthzone. HZL is a distributor, retailer and brand owner of health, beauty and natural health products. It owns a wide number of brands including Healthy Life, Australia’s leading health food retail franchise which was established more than 20 years ago. It has three HealthyLife stores in China but operates more than 1,600 retail counters for its Aurinda brand, a well-known Australian wellness brand in China which offers more than 45 vitamin and dietary supplement products. Listed on the Australian Stock Exchange, it has a market cap of A$31m. For FYE 30 June 2010, HZL registered a 47% YoY growth in PATMI to A$4.4m on the back of an 8% growth in revenue to A$113m. EPS was up 16% to A$0.08 per share. For 1H11, it posted a 25.4% growth in earnings.

Re-iterate BUY with TP of S$0.99. The stock has risen 7% since our initiation on 27 May 2011. We remain bullish on the counter as its resilient TCM business grows on the back of stronger consumer discretionary income in its main markets and remain excited over its prospects of further penetration into China and Australia via Healthzone. Re-iterate BUY with unchanged TP of S$0.99, pegged to 15x FY12F earnings.