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
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.
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.
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.
Long Consciencefood Holding