Consciencefood Holding sells instant halal noodles in Indonesia The company went public in Singapore at the end of 2010 after showing excellent results in the previous years. In the IPO the company raised money to finance further growth, but these plans hit trouble. At the end of last year their new factory in Jakarta burned down and their entry in the beverages market has been delayed from 2011 to the second half of 2013. These two items are probably the biggest part of the explanation of why the shares are currently trading at an all time low. Some quick stats:
Last price (Sep 16, 2013): 0.149 SGD
Shares outstanding: 396,247,933
Market cap: 59.04M SGD (46.52M USD)
P/B (mrq): 0.74x
P/E (ttm): 5.9x
EV/EBIT (ttm): 2.7x
Financials
At first sight the company looks pretty cheap, and if we take the net cash position of the company in account it’s currently trading at a P/E of just 3.6x. When we examine the historical financials it looks like Consciencefood might be a excellent business that just hit some temporary troubles in the past years. The numbers:
The results from 2007 till 2011 are simply excellent. Gross margins are high, revenue growth is high and so is the return on equity. Since then revenue growth has slowed down and the return on equity is back to an average level. Part of the explanation of this deterioration is probably the Jakarta factory. They started operating the Jakarta factory in April 2012 and a fire in the warehouse caused a lot of damage on 25 December the same year. For the trailing twelve months the factory fire is a less obvious explanation because they actually received a big insurance payment in the second quarter of this year that more than offsets the impairment loss they took in the forth quarter last year. If we adjust for this their historical income statements look as following:
Part of the explanation of the lower profitability the past six months is the decrease in gross margins the first six months of the year. The company gives the following explanation:
The Group’s gross profit decreased by Rp11,061 million or by 19.1% from Rp57,764 million in 2QFY12 to Rp46,703 million in 2QFY13 due to the higher raw material cost, labor cost, depreciation expenses and other production costs. The higher cost was also due to the fire that affected our warehousing operations at our Jakarta factory on 25 December 2012.
The fire at the factory is obviously not a structural problem, but higher raw material costs are a problem if the company is unable to successfully pass through those costs to consumers. The outlook of raw material prices is not positive according to the company. They actually have prepaid a large amount of raw materials because lower fuel subsidies in the second half of the year are expected to have a negative price impact.
But what’s depressing earnings more are the high marketing and distribution expenses, and the high administrative expenses. Compared to 2011 both items have almost doubled in size. Once again the Jakarta factory is part of the explanation, from the 2012 results:
Administrative expenses increased by 72.5% or by Rp16,399 million from Rp22,612 million in FY2011 to Rp39,011 million in FY2012, due to the increase in employee benefit expenses and other operating expenses since we commenced the operation of Jakarta factory in April 2012, and due to the recognition of idle capacity cost incurred in production cost of Rp5,100 million since we have not fully utilized of our production capacity, mainly in the Jakarta factory and cup noodles production line.
The latest quarterly report also points in this direction:
Administration expenses increased by Rp1,607 million or by 32.1% from Rp5,013 million in 2QFY12 to Rp6,620 million in 2QFY13, due to the increase in salary expenses and the recorded of fixed overhead cost for unused production capacity of Jakarta factory which this cost was not recorded under operating expenses in 2QFY12.
The company is also preparing to launch beverages and while this project isn’t producing any revenue at the moment all sorts of costs are probably being incurred. The 2012 annual report discloses that they already have Rp105,262 million in assets related to their beverages segment: 16% of book value at that time. The depreciation expense alone related the this equipment must be significant and just like the factory fire this is not a structural problem. Those assets should start earning money when the beverages are launched in the second half of this year, at least if there are no more delays…
The investments in the beverages segment and the Jakarta factory also explain why free cash flow has been low recently, and this also introduces us to yet another probable reason why the stock isn’t liked. The company started paying out ~20% of net income after the IPO, but stopped paying a dividend in 2012. I have mixed feelings about this decision. Not paying out dividends when you have attractive growth opportunities and negative free cash flow makes sense, but not when you have a massive net cash position. They are probably going to need more working capital when the Jakarta factory is running at full capacity and when they have launched the beverages, but with this much cash on the balance sheet you should be able to do both. I also wonder why there is simultaneously a big debt and cash position.
Insiders
Consciencefood is run by Djoesianto Law who saw his stake diluted from 73.4 percent to 55.6 percent in the IPO. He didn’t sell any shares in the IPO though, and that’s positive in my opinion. It was not an event to cash out, but to raise cash for the business. He gets a salary between S$500,000 and S$750,000 so his stock is worth something between 40 and 65 times his yearly income at current market prices.
His big stake in the business should align his interests to a reasonable amount with shareholders, but since Consciencefood has a limited history as a public company there is not a whole lot to go on to form an opinion. What’s curious is that consciencefood.com hasn’t been updated since 2011. Communications with shareholders doesn’t seem to have the highest priority and you have to go to sgx.com to find the latest news. Yet another reason why the company might be undervalued, although this is not directly a positive.
Conclusion
How much is Consciencefood Holding worth? I don’t know, but at today’s prices you are paying a price for a mediocre and declining business while it’s probably at least an average business and potentially a great business. Together with a strong balance sheet I think that should provide a good margin of safety, and you are also not paying anything for the potential success of their entry in the beverages market. How that’s going to work out is of course a big question, but it’s good to see that in the past they were willing to exit from marginal segments. They tried selling snack noodles in previous years, but this didn’t generate any real money so they exited the business in 2011.
Rating: On a scale from one to five I’m going to give this idea three stars. There are a lot of unknowns, but the most obvious problems seem temporary in nature to me, and if they can repeat their past success the potential upside is huge.
Disclosure
Long Consciencefood Holding
More reading
The company was written up earlier this year at “the red corner”-blog (part 1, part 2).
More color:
http://www.argutori.com/consciencefood-the-money-or-the-bag/
Thanks for the link. Given the state of their website I’m not surprised that the communication with the company wasn’t easy. I have to admit though that I’m not quite sure why the company has both a lot of cash and debt. Their interest income is higher than the interest expense, so they are not leaking (a lot) of money away, but it’s certainly a bit weird. I don’t really see the case for a fraud thesis though, because what’s the motive? Transfer the funds raised in the IPO from the company to the owner? Seems like an incredible complex scheme when you could just have sold some of your own shares. But we’ll see: corporate governance could certainly become an issue. I think that so far nothing bad has happened, but there is also not a (long) track record of doing good stuff.
I agree that there’s no coherent fraud narrative.
The simplest story: he’s a conservative guy, wants to run his business his way, & expects minority shareholders to be in it for the long haul.
There’s a point at which too much cash becomes a plainly unreasonable amount of cash but that’s a fair way off, I think.
Yeah, I think something like this way more probable, but no way to really know.
p.s. While you’re loking in Singapore, you might find Jason Marine (5PF) interesting
Thanks, I added it to my (rapidly exploding) research todo list :).
Well, by coincidence…
http://www.valueinvestingblog.net/jason-marine/
One thing I am wondering is the near-absence of these noodles in the online world. If I google for: “Alhami Noodles” which is supposed to be their flagship brand I only find articles about the stock itself, not about the products. For example:
1. Alibaba supposedly offers 90k Noodle products; but only one(!) Alhami noodle pack?
http://www.alibaba.com/trade/search?fsb=y&IndexArea=product_en&CatId=&SearchText=alhami
2. Alhami Facebook page has only 4 likes … Even “Grafenwalder” has a factor 1000 more. Knorr has 3 million.
https://www.facebook.com/pages/Alhami/136029859804763
3. Ebay: 20k hits for noodles. Zero hits for Alhami. Zero hits for Maitri. Zero hits for their other brands.
I might be looking for the wrong search terms. Or these brands do not have much of an online presence. Could very well be, especially in Indonesia. But if I google for some competitors, e.g. Indomie or Mie Sedaap I actually get to see images, videos, recipes, shops etc.
Conscience Food apparently sells ~1 billion packs of noodles per annum but I can’t find ANY picture, post, video of this stuff at all. Bit strange.
I think your results will be similar if you look at the various products of Indofood, their biggest competitor. They have a >15 billion pack/year production capacity and they have plenty of brands that also produce zero or just a few hits on Ebay or Alibaba. They do have more of a presence of Facebook, but I don’t think that is saying much. If you check for example “Euroshopper” on Facebook you find few likes.
Nice experimental research: try to buy a pack!
While it’s difficult to build a bullet proof fraud thesis on Consciencefood, I have no intention of selling it short. At the same time, it’s not something that I want to hold. I deal with Indonesian companies frequently and can say with authority that business is done differently there. If there is any malfeasance then the corporate governance laws aren’t strong enough to protect shareholders to ensure they are treated fairly. If you’re investing based on the cash flows of the business then you might be left hanging if the cash flows aren’t real or the cash just isn’t there.
If the cash is real then why not pay out a dividend to reassure shareholders (it’d also improve the RoE)? Why increase debt when you could use idle cash to finance working capital needs (the interest rate on the debt > interest rate on deposits, so it’s disadvantaging shareholders)? There isn’t a credible narrative to justify the actions of management and they’re also incredibly difficult to get in touch with. Since there are so many question marks over the business, I struggle to see where are the marginal buyers going to come from. There isn’t enough substance here to justify instos getting involved so you need to rely on the retail market. The retail market likes dividends. So we’re going to need to see dividends appearing before Consciencefood is rerated. Once I see dividends, I’ll run the numbers again but I’m comfortable sitting on the sidelines with this one.
The reason that it might be difficult finding the noodle brands online is because they’re only sold in Sumatra. I believe there is some agreement (implicit or otherwise) with Indofood, such that; Indofood doesn’t encroach on Consciencefood’s territory and Consciencefood won’t head to the mainland. This allows Consciencefood to maintain it’s margins (although I’m unsure about the accuracy of the accounting) and market share on Sumatra. Consciencefood are happy selling their products in Sumatra and have a supposedly good business doing so.
Thanks for your post, and I certainly share some of your concerns, but the one thing I don’t worry about is who needs to be the marginal buyer to push the share price higher. If the value is there it will become clear in time, but once it becomes clear and they start for example paying a dividend again odds are that the price is already up. The time to buy is imo when the story is ugly and uncertainty is high.
About corporate governance: I absolutely believe that corporate governance laws aren’t strong enough to protect shareholders, but unfortunately that’s in my opinion also the case in more developed countries. What I think is positive is that a huge part of the IPO shares were bought by wealthy Indonesian business people and just 2 million of the 102 million shares were allocated to retail investors. You can probably screw foreign retail investors, but it’s probably not the smartest plan to defraud the wealthy (and influential) in your own country.
Nice post!
I’m wondering: why did they decide to list in Singapore and not on the Indonesia Stock Exchange? In Indonesia investors would be very familiar with Indofood and I assume they would have received a company like Consciencefood enthusiastically as well. A listing in Indonesia seems more convenient for Indonesian investors as well.
I don’t know exactly, but Singapore isn’t that weird of a choice given that it’s a bigger and more developed market. But it could of course also be a red flag; better to defraud investors at a foreign exchange than at home…