ConscienceFood Holdings – Want a taste?
Consciencefood Holdings was able to obtain >50% ROE prior to the IPO. I believe the business will be able to get back to similar ROE levels either through acquisitions or returning capital through dividends.
The ROE for Consciencefood has is significantly better than peers in the food manufacturing industry. The fact that there hasn’t been a lot of corporate activity since the IPO suggests that management isn’t likely to make any rash decisions.
Headquartered in Indonesia, Consciencefood manufactures instant noodles. The main factory in Medan has 6 lines, capable of manufacturing over 1bn packs of noodles every year. Consciencefood is focused on the Indonesian market but also exports to Malaysia, Papua New Guinea, South Africa, Hong Kong, Palestinian territories, Madagascar and Singapore.
The biggest issue with this company is whether the financial statements re an accurate reflection of the business. Are the margins real? Is the cash flow real? Is the cash real?
Consciencefood currently has $23.4m of cash in the bank vs the $56.4m market cap. The Board has been slow to initiate a dividend and doesn’t have any formal dividend policy in place at present.
For the IPO US$15.3m was earmarked for expansion and marketing activities. While the 2011 Annual Report suggested all of the cash had been used appropriately, the cash balance was $23.4m at the end of the year, significantly higher than the US$4.5m that Consciencefood had prior to the IPO. It appears that a majority of the expansion activity was completed through the use of internally generated cash flows. This means the cash that was raised through the IPO process is still sitting on the B/S.
EY have audited the 2007 through 2011 financial statements and there haven’t been any changes of auditors or qualified opinions on the state of the company’s accounts. Giving some comfort that there isn’t anything too dodgy going on behind the scenes.
Consciencefood attracts higher net margins than it’s peers. When compared against a broad range of food manufacturers Consciencefood is able to garner the highest net margin as a result of lower leverage (D/E = .43% vs the average of comps of 101.07%).
Valuation vs comps
Consciencefood is trading at a significant discount to peers (n.b. the P/E hasn’t been adjusted for excess cash currently US$23.4m), which could be attributed to the lack of size and thus liquidity. Economies of scale aren’t a problem for Consciencefood as it’s able to generate superior margins as demonstrated above. If Consciencefood is able to scale up and increase market share it could potentially trade at above the average at levels similar to other high margin producers (see Want Want).
Failing a rerating, this is still a company that is returning a 24% earnings yield, which is hard to beat in the global zero interest rate environment. Other than increasing research coverage and small incremental acquisitions it’s difficult to see any concrete catalysts in the near future for Consciencefood.
A quick back of the envelope comparison with the elephant of the industry (INDF) shows that if valued on noodle pack production capacity Consciencefood would be worth closer to S$1.50. This isn’t a fair comparison because INDF has a diversified range of businesses with noodles making up only making up a proportion of the total operations. Allowing a 30% discount for the diversification benefits from holding INDF vs Consciencefood would still get an a valuation of at least S$1.00 and this doesn’t include the recent capacity increase from the Jakarta factory which began operations in April this year.
Based on the current market multiples and the quick back of the envelope calculation I believe Consciencefood is worth at least S$1.00.
At present the market is dominated by the larger instant noodle makers PT Indofood Sukses Makmur, a subsidy of the Saim Group; and PT Wings Food, maker of Indomie and Mie Sedap brands. The larger companies hold 89% of the market share whereas ConscienceFood only has a 4% share at present.
There are two significant shareholders of note. Firstly, the CEO, Djoesianto Law holds 56% of the shares. Secondly, Hunter Hall the Australian institution holds just under 7% of the outstanding shares.
Disclosure: This is not meant to be interpreted as investment advice. If you’re considering investing, please do your own due diligence. As at writing I don’t have a position in Consciencefood but am intending to initiate one within 30 days.