One of the classic investment advices we often hear is to “invest in what you know”. Indeed, Warren Buffett has proven that this simple advice, if followed with utmost discipline, can reap enormous rewards. One such sector that retail investors can relate most to is none other than consumer staple stocks.
Buying stocks in goods we see every day, Buffett has made himself a lot of money from his investments in The Coca-Cola Company, The Kraft Heinz Company and other consumer staple stocks. In our local bourse, investors can also find a number of consumer staple offerings.
In the festive mood of Christmas and New Year holidays, I walked down the aisles of our supermarket to get a feel of how some of our local consumer staple companies are doing. In the beverage section stood local-listed Yeo Hiap Seng (YEO’s) brand of beverages, competing directly alongside against products from much larger peers like Coca-Cola, Frasers and Neave (F&N) and Pokka.
About Yeo Hiap Seng
YEO’s humble beginnings began in a little soy sauce shop in China. After uprooting to relocate to Singapore, YEO’s brand quickly became a household name.
Today, most of the younger generations of Singaporeans would recognise YEO’s for its packaged traditional Asian drinks such as the chrysanthemum tea, winter melon tea and grass jelly drink. The company has marketed its beverages so well that they became synonymous with gatherings during Chinese New Year and Hari Raya.
Apart from its sweetened Asian drinks, YEO’s also produce isotonic beverage H-Two-O, Pink Dolphin and other tea beverages under the Justea brand.
Ironically, despite its inspiring corporate background, YEO’s share performance speaks of a very different tale and is one that investors would not be cheering about. Since 2013, YEO’s share price has been on the downtrend, tumbling down from above $3 per share to the current $1.26 which is also near its 52-week low ($1.23).
Less Palatable For Consumers
Obviously for a company that has been popularised by its beverages, catering to consumers’ ever-changing tastes and preferences would be one of the most important indicators to the success of the business. For YEO’s, its recent years’ financial performances have shown that the company has been ailing in this factor.
In FY13, the company decided to return to its roots and focus all its efforts on its food and beverage business. Since then, its property development business segment has become dormant.
From FY14 onwards, YEO’s revenue (now consisting mainly of consumer food and beverage products) began its downtrend, falling from $439.4 million to $410 million by FY16. In the latest 9M17, revenue dropped a further 19.4 percent to $318.5 million, which the company attributed to the sales disruption in Cambodia due to disputes with previous distributors.
However, notwithstanding Cambodia’s operations, YEO’s key markets are seeing sales figures in Singapore and Malaysia slipping downwards. In addition to that, its gross margin is also on a downtrend, falling from 37.4 percent in FY14 to about 32 percent in 9M17. These figures clearly indicated that YEO’s products are becoming less palatable for its core consumers and hence giving rise to the doubt as to whether YEO’s products would be sticky enough in the growing markets over the long-term.
On the bright side, YEO’s has mostly been profitable and has not landed in losses since FY10 and the management definitely has the experience to manage a beverage company. As at 9M17, YEO’s net profit was $146 million, boosted by gains of $138.4 million owing to the disposal of investment in Super Group which was privatised in early 2017. Nonetheless, excluding the divestment gains of Super Group, YEO’s still made an operating profit of about $7.6 million compared to $18.6 million in 9M16.
Due to disposal of investments in Super Group, YEO’s cash pile swelled to $297.4 million. The company has no debt as at 9M17 and hence this leaves enormous financial headroom for YEO’s to make acquisitions or fund geographic expansion to drive growth. In our opinion, acquiring other fast-growing brands and offering new product lines would be more beneficial for the company, since its existing product offerings are losing demand rapidly.
Owing to its conservative management, YEO’s balance sheet is also extremely pristine and highly liquid. As at 9M17, current ratio was 5.9 times while the more stringent quick ratio is 5.1 times. Overall, investors of YEO’s are not exposed to significant solvency risks.
Going forward, YEO’s could also benefit from the Singapore government’s contemplation of imposing a “sugar tax”. Since more of its products boast the healthier choice symbol (issued by Health Promotion Board) than its peers’ sugary beverages. As such, it may be probable that some consumers would switch to healthier options like YEO’s.
Unlike other local-listed beverage companies like Thai Beverage Public Company (ThaiBev) and F&N, YEO’s is the only company that is in a net cash position. Based on its current share price of $1.26, YEO’s is trading at a price-to-earnings (P/E) multiple of 4.7 times and a price-to-book value (P/B) of 1.1 times. In the meantime, ThaiBev is trading at a P/E of 16.5 times and P/B of 4.4 times, while F&N trades at a P/E of 2.9 times and P/B of 1.3 times.
However, YEO’s P/E might be “deflated” due to gains from its disposal of investments in Super Group. Excluding Super Group’s disposal gains, trailing 12-months net profit would have been about $18 million which translates to earnings-per-share of $0.031. Correspondingly, YEO’s adjusted P/E would be 40.6 times, versus ThaiBev’s 23 times and F&N’s 37.3 times.
Consequently, for a business that is neither experiencing explosive growth nor has any concrete strategies to drive growth, YEO’s stock valuation may still seem over-stretched in spite of the tumble in 2017. Furthermore, despite its low public float of 20 percent, parent company Far East Organisation – which owns 53.5 percent stake in YEO’s – would also have little incentive to privatise the company since it is still trading at a premium of 10 percent its book value.
Apart from that, although YEO’s has been dishing out dividends of $0.02 per share, a yield of 1.6 percent is not attractive at all. As such, YEO’s may appear cheap to unbeknownst retail investors based on conventional financial metrics, but a deeper inspection would tell us that it is more of a value trap stock that Warren Buffett definitely would not invest in.