Here's how China Minzhong will benefit from Indofood deal

Minzhong to raise S$89m to boost its dividend payment.

According to CIMB, Minzhong has issued 98m new shares to PT Indofood Sukses Makmur at S$0.915 each. After its subscription, Indofood’s 14.95% ownership of the enlarged share capital will make it a majority shareholder. Minzhong willraise S$89.7m, of which S$70m will be used for its capex and S$15.2m for working capital.

CIMB adds, the new shares will dilute our FY13 EPS by 15%. We are cutting our FY13-14 EPS by 8-15% to factor in the dilution. Our target price (4x CY14 P/E, sector average) dips accordingly. Benefits could accrue, earliest in FY14. The S$89m raised will strengthen Minzhong’s ability to pay dividends this year.

Here's more:

What We Think. Potential benefits from Indofood’s involvement are: 1) additional sales of processed vegetables to Indofood for use in Indomee. Minzhong is already a supplier and volumes can be ramped up. Indofood is arguably the largest producer of instant noodles in Indonesia;

2) the possible establishment of an industrialised farming facility on Indofood’s plantation land. The vegetables grown can be sold through Indofood’s distribution network. If management executes well, its processed sales could be lifted. The above alsosuggests that management is looking to Indonesia for its next stage of growth. Previously, it had relied on open farmland and general export markets.

An established corporate with a majority stake can, moreover, provide checks and balances for its cash business domestically and capex plans. The main thing to watch now is the number of board seats that Indofood will be taking up.

What You Should Do. Stay invested for the prospect of dividends and a possible re-rating of its stock as corporate-governance concerns wane.

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