Technological advancement has transformed the shape of businesses over the past decade. While this has led to new success stories, it has also led to the downfall of many businesses. Going back 30 years in time, how many were able to predict the changes that the internet has brought about?
Looking at the data storage industry alone, the early floppy disk was replaced by rewritable compact discs, which were then surpassed by the higher capacity digital video discs and subsequently by flash storage devices. Today, cloud storage is easily available for free or at a low price.
Although still relevant to a certain extent, the postal service has not been spared by the internet as well. Electronic mail, or what we commonly refer to as email, has significantly affected the business of postal services across the world. Rather than waiting a day or more to receive a document or worry about whether the mail had been lost, most would probably prefer to receive that in mere seconds through digital means.
The list is endless and instead of looking at obsolete or almost obsolete businesses, could business that will never become obsolete be a good investment idea?
In the past, it was a common sight to see the morning papers at the breakfast table. Now news come through smartphones and tablets, but the breakfast remains the same. This is an example of something that can never be replaced – food and beverage.
A producer of cocoa ingredient products, JB Foods was founded in the 1980s but only listed on the Singapore Exchange in 2012. The group attracted the attention of investors around two months ago despite its shares being thinly traded over most of the past year.
JB Foods’ products include all things cocoa – butter, powder, mass and cakes – which are mainly processed at the group’s processing plant at the Port of Tanjung Pelepas, a free trade zone in Johor, Malaysia as well as the Indonesian cocoa processing facility acquired in 2015. In total, the group facilities have an annual production capacity of 145,000 tonnes of cocoa bean equivalent.
Improved Financial Performance
JB Foods’ post initial public offering performance was far from impressive as the group reported losses in FY13 and FY14 mainly due to negative gross profit margins.
Recently, things appear to be changing for the group. Despite revenue remaining largely unchanged, gross profit margin increased to nine percent in 9M17, while net profit margin expanded to 3.5 percent. The higher margins have pushed JB Foods’ net profit for 9M17 to US$7.7 million, already exceeding that of FY16, positioning the group to end the year on a strong note.
Apart from revenue and net profit, another component of interest is other gains or losses. Multinational corporations are exposed to foreign exchange risk due to financial transactions that are denominated in a currency other than the base currency.
JB Foods incurred other losses of US$1.9 million in 9M17, mainly due to higher foreign exchange loss arising from the group’s borrowings denominated in Great Britain Pound. In this case, the foreign exchange difference was a result of the group’s hedging mechanism and the corresponding exchange gain was embedded in the cost of sales.
Managing Foreign Exchange Risk
This highlights the importance of hedging, which is an investment to reduce the risk of adverse price movements of an asset. Without the hedging mechanism in place, the foreign exchange exposure would have taken off a significant portion of net profit. From the group’s financial reports, it would seem that this is the only hedge that is currently active.
Although JB Foods reports in the US dollar, a certain portion of operating expenses is expected to be denominated in the Malaysian ringgit and Indonesian rupiah due to the location of the group’s processing plants.
Recently, the ringgit, boosted by higher oil prices and the local bank’s increase in the overnight policy rate, broke the psychologically significant four level against the greenback. While it is unclear whether JB Foods has a cash flow hedge in place for expenses denominated in the ringgit, the absence could result in higher expenses for the fourth quarter as reported in the US dollar.
On the other hand, assuming the group charges in US dollars, the weaker greenback could possibly drive demand for the group’s products. This is especially so for Malaysia-based customers, which contributed to 76.6 percent of the group’s revenue for FY16.
One part of the investment journey that keeps investors on their toes is the dividend payouts. It is normal for a company not to pay out any dividends during bad times and often so during the recovery period as well, but that is not so for JB foods.
Following the surge in net profit for 9M17, the group announced a generous dividend of $0.02 per share. This works out to approximately $4.5 million (US$3.4 million), representing a payout ratio of 44 percent.
In comparison, the group’s total dividends per share for FY16 amounted to 0.5 Singapore cents. Based on FY16 dividends per share, JB Foods’ shares traded at a dividend yield of approximately 1.4 percent for most part of 2017 and currently at 0.8 percent. Even if JB Foods does not pay out anymore dividends for FY17, the full year dividend of $0.02 would still translate into a yield of 3.2 percent.
Despite the recent run up in share price, JB Foods’ current valuations are significantly lower compared to last year. Trailing price-to-earnings ratio has fallen to 11.4 times, below the 14.9 times average of companies in the food industry. Coupled with the likelihood that FY17 could be the group’s best year since listing, investors could be well rewarded for holding JB Foods shares.