Cerebos Pacific

Been a while! Been wanting to update on ARA but unfortunately, yours truly, is a lazy bum. All I can say is that ARA has been up 50% since I first wrote my post, partly due to bottom line growth and partly due to mutiples expansion (yield compression). Both which are expected but the latter surprised on the upside.

K. Now that I got that out of the way (k. fine. i will write a longer one later), let us take a look at this stock called Cerebos Pacific. I am writing this off the top of my head, so pardon me if I may be a tad brief on the details.

*spoiler alert* i am not recommending a buy on this one *spoiler alert*

I am writing this primarily to note down some salient points about this company.

Cerebos Pacific is the company best known for its Brands Essence of Chicken and related products. Its has 2 main business segment - Health Supplements and Food.

Health Supplement
The Health Supplements business operates primarily in Asia. The products under this division can be split into liquid health supplements (e.g. Essence of Chicken) and tablet health supplements. The company has been trying to leverage off the strong brand name of "Brands" by creating new products such as "Bird Nest with Rock Sugar" under the same brand name.

The 2 key markets are Taiwan and Thailand. These 2 markets provides almost all the net profit of Cerebos's. Other minor markets include Singapore, Hong Kong and Malaysia. They also have operations in China but that has been perenially unprofitable, though one can argue that the small losses in the short run help lay the way for large potential returns when the brand gets established.

Food
The Food division can be sub-divided into coffee, asian sauces (think the Woh Hup brand) and western sauces.

The food division operates primarily in Australia and NZ. The company focuses on gourmet coffee and western sauces. The Asian sauces sub-segment mainly exports to U.S and Europe. The Asian sauces sub-segment is small compared to the other 2 segments.

The food division contributes significantly to the top line but nothing to the bottom line.

Financial Performance
The truth is that the business as a whole is not great. The only gem in the business is the Health Supplement division. The Food division does not contribute meaningfully. In fact, losses in the division drag down earnings and compresses margins by contributing signficantly to the topline but nothing to the bottomline. Maintaining and attempting to grow the Food business in Australiasia consumes money and it begs the question - why deploy equity into an area that is not making any returns? The Food business may turn a profit in the future but it did not in the past and one should not harbour hopes that it will in the future. If it does, then it should just be taken as icing on the cake.

The only reason why anyone would buy into Cerebos is for its Health Supplement business. The "Brands" brand name is one which is well known for quality. Essentially, it is the thing that keeps giving in both good times and bad. One should note, however, that the key markets are Thailand and Taiwan. These 2 markets contributes >90% of the earnings. Hence, put simply, buying Cerebos for the Health Supplement business is to underwrite the risk/growth in the markets of Thailand and Taiwan.

The company has consistently returned a ROE of >20% over the past 5 years. The company's earnings has been growing through the past 10 years though it tends to face a dip in earnings in poor economic condition too. But they have always bounced back up to the long term secular growth trend when the economy recovers. The rationale goes like this - People might cut back a bit on health supplements when the economy is down and the wallet is tight. However, many would still continue to be a consumer especially since the product is usually targeted to students (parents will pay a good price to make sure their kids do well with 'brain food' such as Essence of Chicken).

A Branded Cash Cow
The company is a cash cow. It has been giving out 25cents of dividends per share consistently for the past 5 years. I note that there were years where the payout ratio was more than 100%.

The company claims that good management with good cost control and innovative packaging to mitigate pricing pressure (e.g. selling in packs of 3 at X price instead of packs of 2 for Y price) allows the company to continue churning out cash. I say that all these might be true. But the real reason is that its brand name allows it to maintain pricing power and be the preferred choice despite being a pricer option. And this benefit does not cost a significant amount to maintain as compared to the benefits it churn out. The company has been hiring celebrities such as Wang Lee Hom and organizing activities such as Suduko to promote the brand name (their target audience is the student population).

Liquidity
The market cap is >S$1b. However, the free float is low because its parent, Suntory, holds >80% of the stock. Conseuqently, there is a lack of liquidity. For most months, <1m stocks gets traded in the month itself.

Why Buy This Stock
At its current price, the dividend yield is ~6%. That is pretty decent. You also get consistent earnings growth of 20% y-o-y.

And the dividend might increase beyond 25cents because the company is churning out more and more cash while not deploying it since they have already spent most of the capex they needed to increase production capacity.

It is however trading at 3x book and will take a good 6years for you to get your initial investment back.

Don't expect the stock price to move up too much since the float is low and there won't be stock catalysts coming into the picture (its a nice, stable, growing business) and there won't be liquidity coming in from institutionals to boost up the stock price.

So buy it if you are a long term holder and accumulate on any dips because it will always bounce up.

Conclusion
As it stands, I don't find the price particularly attractive (or unattractive for that matter). Hence, I doubt I will put my money up for this unless the pricing goes down to a more attractive level. Moreover, will need to do a bit more further research/digging before the funds can be committed.