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Equity Bottom-Up

Haw Par reported another quarter of strong performance driven by solid healthcare segment sales partially offset by lower sales from the leisure segment. Revenues for the quarter were up 15% YoY to SG$60.5 mn while lower cost of sales and absence of one-time expenses resulted in a 23.8% increase in gross profits. EPS for the period came in at SG23.6 cents vs. SG22.1 cents for the corresponding period last year, an increase of about 6.8% YoY. The relatively lower EPS growth was a result of higher marketing and administrative expenses and a higher tax rate. The company has been aggressively growing its “Tiger Balm” business by expanding its product line as well as by increasing its presence in different geographies. As a result, distribution and marketing expenses went up by 18.1% during the period to SG$14.6 mn or 24% of sales. We expect these expenses to remain at similar levels for the next 2 to 3 years as the company continues to invest in its future. Reported income tax expense came in at SG$3.8 mn increasing by 36% YoY on account of higher profits from the base healthcare business. Other income, which includes the company’s investment and interest income, was at SG$35.2 mn, down 0.8% for the quarter. For the entire 1H2017, revenues were up 15.6% YoY at SG$121.4 mn while EPS was up 10.6% YoY at SG31.5 cents.
Share Swap Agreement with UOL
During the period, the company entered into a share swap agreement with <a href="https://www.smartkarma.com/entities/uol-group-ltd" target="_blank" data-smartkarma-citation="entities:142">UOL Group Ltd (UOL SP)</a>&nbsp;through which Haw Par will exchange 60mn of its shares in <a href="https://www.smartkarma.com/entities/united-industrial-corp-ltd" target="_blank" data-smartkarma-citation="entities:12891">United Industrial Corp Ltd (UIC SP)</a> for 27.27 mn of UOL shares based on an exchange ratio of 2.20 UIC shares per UOL share. We believe this to be a fair exchange ratio and Haw Par shareholders are getting pretty much the same in UOL shares as they are giving up in UIC shares. Haw Par currently holds a total of 69.6 mn UIC shares representing about 4.9% of UIC’s total shares outstanding. Following the transaction, Haw Par will thereafter have an interest in the balance of 9.6 mn UIC shares, comprising approximately 0.67% of the total outstanding shares of UIC whereas UOL’s stake in UIC will increase to 48.94% from 44.71% currently. The transaction is subject to shareholders’ approval in August 2017. If the transaction is approved,&nbsp;Haw Par’s investment in UOL Group will increase from 5.51% to 8.57%.
Based on the volume-weighted average price of UIC shares on the last market day on which the shares traded before the date of the agreement, the value of the UIC sale shares was approximately SG$196.8 mn. The deal "will offer us greater diversification by increasing access to UIC's commercial property portfolio in the Singapore Central Business District," UOL said in a statement. The transaction will be beneficial to Haw Par as well by allowing it to exchange its interest in UIC for a higher yielding and more liquid asset in UOL, while retaining an economic interest in UIC through UOL.
Maintain Estimates and PT
Our sum of the parts [SOTP] valuation of the company comes to SG$19.43 per share, which includes a value of SG$13.03 per share for its cash and investments and a value of SG$6.40 per share for the healthcare business, derived by applying a 20x multiple to its FY2017E earnings of SG32 cents per share. Considering its tremendous growth potential and strong brand value, we believe our valuation of the healthcare business is a fair base case. We derive a target price of SG$15.00 per share for the stock which implies a 20%+ discount to our SOTP valuation.

Haw Par reported another quarter of strong performance driven by solid healthcare segment sales partially offset by lower sales from the leisure segment. Revenues for the quarter were up 15% YoY to SG$60.5 mn while lower cost of sales and absence of one-time expenses resulted in a 23.8% increase in gross profits. EPS for the period came in at SG23.6 cents vs. SG22.1 cents for the corresponding period last year, an increase of about 6.8% YoY. The relatively lower EPS growth was a result of higher marketing and administrative expenses and a higher tax rate. The company has been aggressively growing its “Tiger Balm” business by expanding its product line as well as by increasing its presence in different geographies. As a result, distribution and marketing expenses went up by 18.1% during the period to SG$14.6 mn or 24% of sales. We expect these expenses to remain at similar levels for the next 2 to 3 years as the company continues to invest in its future. Reported income tax expense came in at SG$3.8 mn increasing by 36% YoY on account of higher profits from the base healthcare business. Other income, which includes the company’s investment and interest income, was at SG$35.2 mn, down 0.8% for the quarter. For the entire 1H2017, revenues were up 15.6% YoY at SG$121.4 mn while EPS was up 10.6% YoY at SG31.5 cents.
Share Swap Agreement with UOL
During the period, the company entered into a share swap agreement with UOL Group Ltd (UOL SP)&nbsp;through which Haw Par will exchange 60mn of its shares in United Industrial Corp Ltd (UIC SP) for 27.27 mn of UOL shares based on an exchange ratio of 2.20 UIC shares per UOL share. We believe this to be a fair exchange ratio and Haw Par shareholders are getting pretty much the same in UOL shares as they are giving up in UIC shares. Haw Par currently holds a total of 69.6 mn UIC shares representing about 4.9% of UIC’s total shares outstanding. Following the transaction, Haw Par will thereafter have an interest in the balance of 9.6 mn UIC shares, comprising approximately 0.67% of the total outstanding shares of UIC whereas UOL’s stake in UIC will increase to 48.94% from 44.71% currently. The transaction is subject to shareholders’ approval in August 2017. If the transaction is approved,&nbsp;Haw Par’s investment in UOL Group will increase from 5.51% to 8.57%.
Based on the volume-weighted average price of UIC shares on the last market day on which the shares traded before the date of the agreement, the value of the UIC sale shares was approximately SG$196.8 mn. The deal "will offer us greater diversification by increasing access to UIC's commercial property portfolio in the Singapore Central Business District," UOL said in a statement. The transaction will be beneficial to Haw Par as well by allowing it to exchange its interest in UIC for a higher yielding and more liquid asset in UOL, while retaining an economic interest in UIC through UOL.
Maintain Estimates and PT
Our sum of the parts [SOTP] valuation of the company comes to SG$19.43 per share, which includes a value of SG$13.03 per share for its cash and investments and a value of SG$6.40 per share for the healthcare business, derived by applying a 20x multiple to its FY2017E earnings of SG32 cents per share. Considering its tremendous growth potential and strong brand value, we believe our valuation of the healthcare business is a fair base case. We derive a target price of SG$15.00 per share for the stock which implies a 20%+ discount to our SOTP valuation.

Q2 FY2017: +6.8% EPS & +15% Revenue Growth

Haw Par Corp

Q2 FY2017: +6.8% EPS & +15% Revenue Growth