How I Made a a 2 243.5% R Return I M on IInv estment iin T T his Super IInv estment
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How did we identify the idea? 3
Branded Consumer Products 4 Raw Ingredients 4 Segmental Sales 5 The Tipping Point: Key Growth Drivers 6 Expansion Updates, of ingredients sales in 2010 6
Behaviour Analysis 7
Peers Analysis 10
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By Victor Chng & Rusmin Ang | The Fifth Person
It’s a great pleasure for us to share
stock price came crashing down with you our investment philosophy during the 2008/2009 recession. on how we identified and invested in Super Group in 2011 and later sold it That was a huge signal for us to look for a 243.5% gain just two years later. deeper into Super. We usually avoid companies who expand and diversify into non-core businesses (which Price appreciated in 2 years!
Super was “guilty” of). However by
that time in 2011 Super had decided The information provided below are to divest their non-core businesses all based on research and analysis and focus back onto their core done at that point in time. What is operations. crucial here is that you understand our investment thought process -- The other thing that caught our eye from identifying the investment idea was the growth of their ingredient to the analysis of the company to the segment sales which grew from a signs that told us to divest the meagre $1.5 million (2006) to $58.2 company. For a 243.5% gain million (2010). That’s an eye popping (excluding dividends) in two years, 3,780% growth (150%+ CAGR) in hey, I think we did not too bad here! just four years. Have fun reading! Of course, you don’t just jump in the
moment you pick up a piece or two good news. It’s supremely important
to understand the full picture and Back in 2011, we were screening for what you’re buying into before you stocks which were heavy on insider invest your hard-earned money in any buying. That was when we noticed stock. that the chairman and directors of Super Group were increasing their So how did we analyze Super and stakes in their company when its decide to go ahead with the investment? Read on :) FifthPerson.com
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Super’s core business consists of two segments – branded consumer products
and raw ingredients.
(Source: Company)
Super offers a range of over 200 instant coffee and convenience products. Brands include household names like Super, Café Nova, Coffee King, Owl, Super Power, Ye Ye, Gold Eagle, Liang Bo, Negresco and Super Kids. They have a strong brand presence in Singapore, Malaysia, Thailand & Myanmar and Super is ranked in the top 3 for in market share for instant coffee for those countries.
Super also produces raw ingredients such as non-dairy creamers, spray-dried coffee and freeze-dried coffee. Nearly 80% of ingredient sales are sold mainly to industrial users in Taiwan and China, while the rest is used by Super internally. FifthPerson.com
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Segmental Sales
South East Asia (Exc. Singapore) Singapore East Asia Others
South East Asia (excluding Singapore) is Super’s biggest
revenue contributor.
This is followed by East Asia (Taiwan & China), Singapore and Others.
Super’s coffee product is
still the largest revenue contributor at 62%. Ingredient sales which consists of Non-Dairy Creamer, Soluble Coffee and Other (Ingredient Sales) account for 16% of total revenue.
Coffee Cereal Others (Branded Consumer Sales) Non-Dairy Creamer Soluble Coffee Powder Other (Ingredient Sales)
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Other (Branded Consumer Sales) and Cereal Products account 14% and 8% respectively.
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Super’s ingredient sales grew from
larger capacities of production, the company enjoys economies of scale, increasing production efficiency and reducing production costs.
$1.5m (2006) to $58.2m (2010) which is a compound annual growth rate (CAGR) of 150%. In
2006,
ingredient
sales
only
accounted for 0.7% of Super’s total
revenue. At this amount of contribution, even a doubling of ingredient sales would have been insignificant
to
the
group’s
total
Due to strong demand in the market, Super completed the installation of two additional non-dairy creamer production lines in Wuxi, China increasing the existing production from 75,000mt to 125,000mt per annum.
revenue figure. The tipping point came when ingredient sales started to There was also a construction of a contribute to 16.5% of the group’s production facility to produce freezesales in 2010. At this point, any slight dried soluble coffee powder. In 2010, increase in ingredients sales would Super only produced spray-dried have significant impact on total coffee powder with an annual revenue. production of 10,000mt. Freeze-dried soluble coffee powder is viewed as In March 2011, Super’s first quarter superior in terms of flavour and aroma results showed that ingredient sales over spray-dried coffee. The plant was grew by 104%. The management completed in June 2012 with an mentioned it was the result of strong annual production of 1,500mt. demand in the East Asia market. The soaring consumer demand and Due to the strong demand, the Super’s financial and production management planned to increase capability to meet this demand meant production capacity by another that the company was well poised to 25,000mt to 100,000mt by 3Q2011. reap substantial profits due to this This signified a strong growth driver explosion in growth. for the company. Additionally, at FifthPerson.com
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In 2010, the management made a successful strategic decision (as you will see later) to divest all their noncore businesses and focused back onto their core business – branded consumer products and ingredients sales.
In 2008/2009, the chairman and directors of the company also purchased a substantial amount of Super stock from the open market increasing their ownership stake. This gave us further confidence in the future growth prospects of the company.
They also continued to innovate and introduce new branded consumer products with higher margins to the market.
As legendary Wall Street investor, Peter Lynch, used to say:
In alignment with shareholders, the management declared a dividend pay-out policy of at least 50% of the
“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
group’s annual profits as dividends
to shareholders.
“Insiders might sell their shares for any number of reasons, but they buy them for only on e: they think the price will rise.”
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Revenue
171.8
187.9
210.6
253.5
300.1
296.2
351.2
Net Profit
18.2
23.3
18.3
25.5
30.5
38.1
46.9
Cash Flow
26.4
21.7
5.5
5.1
35
66.4
55.4
Capex
9.4
19.1
18.9
11.4
7.2
6.8
14.5
Free Cash Flow
17
2.6
-13.4
-6.3
27.8
59.6
40.9
35.4
22.8
22.8
21.5
25.8
70.4
141.7
Revenue Y-O-Y Growth
9.4%
12.1%
20.4%
18.4%
-1.3%
18.6%
Net Profit Y-O-Y Growth
28.0%
-21.7%
39.8%
19.6%
24.9%
23.0%
Cash Flow Y-O-Y Growth
-17.8%
-74.7%
-7.3%
586.3%
89.7%
-16.6%
Account Receivables Y-O-Y Growth
16.6%
23.1%
8.1%
5.0%
-31.3%
57.2%
Inventory Y-O-Y Growth
39.9%
43.7%
10.7%
24.2%
-28.2%
26.4%
Cash & Cash Equivalent
Gross Profit Margin
42.5%
40.6%
35.8%
34.1%
33.2%
34.9%
37.2%
EBITDA Margin
20.1%
18.9%
15.6%
13.6%
15.0%
16.2%
17.2%
Net Profit Margin
10.6%
12.4%
8.7%
10.1%
10.2%
12.9%
13.3%
1.3
0.9
0.3
0.2
1.1
1.7
1.2
SGA Ratio
26.3%
25.9%
24.5%
23.6%
21.2%
22.0%
21.8%
Operating Expense to Sales Ratio
85.4%
85.9%
89.1%
89.8%
88.4%
87.2%
85.6%
Cash Flow to Net Income Ratio
When we had a look Super’s books, they told a story of company that was
financially sound and that was growing increasingly well. Few things stood out: Positive trend in their revenue and net profit.
Super’s business model was able to stand resilient during The Great
Recession. The group posted a stronger profit margin of 24.9% in 2008/09 despite a drop in revenue. Similarly, gross profit margins also increased from 33.2% (2008) to 37.2% (2010). This increase in margins was due to the introduction of new products with better margins, better cost management and increased production efficiency.
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Return on Equity EBITDA on Equity Return on Assets Receivable Days Payable Days Inventory Turnover Days Cash Conversion Cycle Days
11.9% 22.6% 8.1% 98.4 57.6 102.7 143.4
13.5% 20.6% 9.3% 104.9 65.1 127.2 167.0
9.8% 17.6% 6.3% 115.3 50.0 151.0 216.3
11.2% 15.1% 8.1% 103.5 43.9 135.2 194.8
10.0% 18.0% 7.3% 91.8 43.3 140.1 188.5
14.5% 17.3% 11.0% 64.0 37.3 104.5 131.2
14.2% 18.4% 10.5% 84.8 46.5 115.6 153.9
Market Cap Outstanding Shares Cash Ratio Total Debt to Equity Net Debt to Equity
202.4 493.7 0.7 2.6% -20.7%
219.6 493.4 0.4 2.3% -10.9%
313.2 493.2 0.3 18.8% 6.5%
428.6 542.5 0.4 3.2% -6.3%
219.4 541.6 0.4 3.4% -6.9%
344.1 537.6 1.1 1.4% -24.0%
785.9 557.4 1.5 0.9% -42.1%
Dividend Per Share ($) Dividend Yield Dividend Payout
0.0095 0.0111 2.3% 2.5% 22.7% 22.6%
0.0160 4.0% 33.2%
0.0260 4.1% 34.6%
0.0540 4.1% 50.8%
Price to Earning Ratio (PE) Price to Sales Ratio (PS) Price to Book Ratio (PB) Price to Cash Flow (PCFO) EV to EBITDA EV to Cash Flow (EV/CFO)
11.1 1.2 1.4 7.7 5.0 6.5
9.4 1.2 1.3 10.1 5.7 9.3
Cash & cash equivalents increased from $36.4m (2004) to $141.7m (2010). produces high quality Super earning as we can see from the cash flow to net income ratio; it is consistently above 1.0 from 2008 to 2010. Management also indicated that they would be reducing their costs which was reflected in the numbers with operating expenses decreasing. Return on equity increased from 10% (2008) to 14.2% (2010).
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0.0128 0.0160 2.0% 2.0% 25.0% 28.6% 17.2 1.5 1.7 56.9 9.9 59.2
16.8 1.7 1.9 84.0 12.0 81.2
8.7 0.7 0.9 6.3 4.5 5.8
8.6 1.2 1.3 5.2 5.8 4.2
16.8 2.2 2.2 14.2 9.8 11.7
We
also took a look at EBITDA on equity (which we view as a better tool for accessing management ability to generate returns) – Super posted 18.4% which is above our benchmark of 15%. Super is a cash rich company with a cash ratio of 1.5 which was reflected in their cash hoard of $141.7 million. Debt to equity ratio was as low as 0.9% which meant that they didn’t need any
debt to expand their business.
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Dividend per share was also increasing with an average dividend yield of 3%. Super’s historical dividend pay -out ratio was between 22%-34% which was increased to a minimum pay-out of 50%. In addition, Super’s profits were growing steadily as well which meant that the dividends per share were also going up and up.
Super’s PE ratio was a bit on the high side. We focused more on
EV/EBITDA because that took into account their huge cash position, which gave us a truer reflection of their value. In 2010, Super’s EV/EBITDA was
9.8 which was a fair valuation. But with ingredient sales growing at a rate of 150% p.a., that figure of 9.8x looked way much cheaper.
Peers Analysis Referring to the next page, Page 11 - Peers Comparison, Super’s ingredient segment that they were able to have better cost management and production efficiency which led to higher gross and net profit margins compared to their peers. As a testament to their management skills, Super was able to generate a higher ROE even with the lowest debt to equity compared to their peers.
Food Empire had the highest receivable days (115.5 days) because they sell to distributors instead of direct to end consumers. In our view, the disadvantages lie mainly in Food Empire’s business model.
Super was growing the fastest in the industry (25.5%) compared to Food Empire (-10.1%) and Viz Branz (6.3%).
Super might have the highest PE but they also had the lowest PEG because they were growing so much faster than the rest. Using the EV/EBITDA ratio, Viz Branz had the cheapest valuation, but Super’s
solid business model and strong growth made up for their more “expensive” EV/EBITDA, which at 9.8 was considered fair value.
Super also had the highest dividend yield among its peers.
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2004-2008 2006-2010 2004-2010
When we compared Super with its peers, the company was definitely the most financially sound and had the most growth potential among them.
Revenue Earnings Cash flow
Looking at the CAGR table above, Super’s revenue and earnings growth
from 2006-2010 is 13.6% and 26.5% respectively. Taking into account that future growth may not always pan out as expected (as witnessed when Super’s revenue and earnings growth
Super had a strong balance sheet with $141.7 million cash hoard and a low debt to equity ratio of 0.9%. Their ingredient sales segment was growing at a massive 150% p.a. for the past four years. The latest quarter that was released at the point in time (March 2011) showed that ingredients sales doubled up again!
during 2008-2010 dropped to 8.1% and 24% respectively), we used a more Management had divested all their conservative growth projection of 15%. non-core businesses and decided to focus back on their core business. Super’s intrinsic value was estimated at Management also declared a $1.78 (please note the intrinsic value minimum dividend pay-out of 50% of took into account the sizeable cash annual net profit to shareholders. position Super had). At that point in With all these positive factors and time, Super was trading at a hardly any negative ones, we were , with PE more than willing to pay a fair price ratio and EV/EBITDA was 15.6 times for Super, especially with all the and 9.8 times respectively. growth drivers already in place. In March 2011, we entered and purchased Super at $1.31.
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(Source: markets.ft.com) We bought Super at a price of $1.31 in March 2011 and later sold it at $4.50 in June 2013 – .
Many were expecting Super to shoot above $5. Well, it didn’t happen and the stock has since dropped to $3.76 at this time of writing (Feb 2014).
When we sold the stock, many of our How were we so sure that it was the friends questioned our decision right time to sell? because the stock shot to an all-time high of $4.93 right after we sold! There were certain factors that we reasoned that finally triggered our decision to sell Super in 2013.
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rate, theoretically the company will revenue and net profit growth at 9% eventually grow at the same rate as its and 25% respectively. The slowing ROE. revenue growth was due to ingredient sales growth slowing to 33% and Applying that to Super with its ROE branded consumer sales growth at at 19%, its growth rate will similarly only 1%. be 19%. Based on a PE of 33.0 and a Super’s
1Q2013
results
showed
growth rate of 19%, Super’s PEG is
Moreover, the 25% growth in net profit in 1Q2013 was due to cost reduction in raw materials and a forex exchange gain. Hence it was not organic growth. We also didn’t, and couldn’t , expect ingredients sales to
continue to growing at a whopping 150% p.a. anymore.
1.73x which is overvalued. In addition, Super actually pays out 50% of profits as dividends which means its true growth rate is even less in fact. Finally, we did a discounted earnings projection with a highly optimistic growth rate of 25% and its intrinsic value only worked out to $4.48 (also taking into account the net cash position) – which was two cents away from where Super was already trading at.
When Super was trading at $4.50, the PE and EV/EBITDA was 33.0 and 25.0 respectively. This is considered to be on the high side, especially so when compared to when we bought it at PE 15.6 and EV/EBITDA 9.8. Based on these factors, we decided to cash in and sold the stock at $4.50. In Theoretically, we can also “deduce” hindsight, with Super’s stock hovering the growth rate of a company through below $4.00 as of now (Jan 2014), it its ROE. Assuming a company does seem that our decision has paid doesn’t give out any dividends and off rather handsomely. they maintain their ROE at a certain
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We hope this simple report has opened your eyes to what safe, rational investing is and how it can make you a very tidy profit if you do your proper research and due diligence.
purchasing the stock. With our valuation models in hand and using the ones that best fit Super and its scenarios, only then were we certain that the stock was undervalued and represented a good deal.
Super was already an established brand in the market and like all established players, growth can be rather limited. We would have missed the boat on Super had we not taken a deeper look at its business model and financials and noticed that a segment (ingredient sales) was growing at a searing pace of 150% p.a. This kind of growth of in a mature company is rare and hard to come by.
Once you have done your full research and you are certain of your conclusions, waste no time in investing because time and tide wait for no man. If you wait too long because you are unsure, you might miss the boat altogether. You have to trust your logic and analysis and jump (assuming you really did your homework!). As in was in our case, our conclusions did prove right after all. A 243.5% gain in a little over two years is nothing to sniff at. Not to toot our own horn here, but we just want to show you how profitable it can be when you apply logic and knowledge
However this alone was not enough to invest in the stock; we had to make sure that the company was financially sound and all risk factors were properly considered – protecting our downside. Once we were certain that the risks were limited and the to your investing. A “Super” stock probability of this investment going was only super because it all made sour was unlikely, we still didn’t jump sense . in! Happy investing! We had to make sure that we were Victor Chng & Rusmin Ang getting a good or fair price for
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