Comparing Super Coffeemix, Food Empire and Tsit Wing on 26th June 2007

My love for coffee spurred my interest in coffee counters. Hence I decided to compare and contrast the three listed in SGX. Though I buy into companies on individual merit, regardless of sectors they operate in, my portfolio coincidentally hold 2 out of the 3 counters.

Overview

1) Food Empire operates primarily in Russia, Ukraine, Central Asia and Eastern Europe. Its main brands are MacCoffee, Klassno, FesAroma, Bésame, OrienBites, MacCandy, Zinties and Kracks.

2) Super Coffeemix operates primarily in Singapore, other parts of Southeast Asia and China. Its main brands are Super, Owl and Nova.

3) Tsit Wing operates primarily in Hong Kong and a lesser extent in China and Canada. Its main business is actually distribution of coffee and tea products to restaurants and hotels.

Business comparison


Figure 1 - Revenue from 2003 to 2006

It is clear from 2003 that Tsit Wing was running far behind Super Coffeemix and Food Empire in terms of sale. Tsit Wing had closed to 80% of market share in Hong Kong and due to limited expansion success overseas (esp. China), their sale basically stagnated across the years. Super Coffeemix expanded well in Southeast Asia and to a limited extent, China. The growth in Southeast Asia (incl. Singapore) already improved sales by a large margin. Food Empire seemed to have even a better success in Russia, Ukraine, Central Asia and parts of Eastern Europe. It's sale was a little behind Super Coffeemix in 2003 but caught up quite significantly by 2006.

Profitability



Figure 2- Profit Margin from 2003 to 2006

Coffee distribution business is a very competitive business. Competitive business environment without perceivable barriers to entry will ultimately drive down profits to zero for all players. As can be seen from the chart above, Tsit Wing was enjoying high profit margin but competition erodes the margin significantly. Super Coffeemix, profit margin after is no better off after 2005. In stark contrast, Food Empire's profit margin, though showing signs of erosion, kept above 10%.



Figure 3- Earnings per share from 2003 to 2006

Comparing earnings per share, it is clear Food Empire is a runaway success.


Figure 4- Return on equity from 2004 to 2006

Comparing return on equity, unsurprisingly, Food Empire lead the pack. However, Tsit Wing earned better returns on equity than Super Coffeemix.

Comparing the numbers

	Food Empire	Super Coffeemix	Tsit Wing
Revenue (Sale)	234,124	210,690	64,341
Cost of goods sold	117,509	135,161	36,827
Selling & distribution expense	56,746	27,211	10,886
General & administrative expense	23,904	24,440	8,520
Other expense	5,041	898	205
Efficiency
Cost of goods sold to sales	50.19%	64.15%	57.24%
Selling & distribution expense to sales	24.24%	12.92%	16.92%
General & administrative expense to sales	20.34%	18.08%	23.14%
Other expense to sales	2.15%	0.43%	0.32%
Profitability
Net income (excl. non-operating income)	26,319	17,159	6,874
Profit Margin (after tax)	11.24%	8.14%	10.68%
Return on Assets, ROA	17.08%	6.34%	13.02%
Return on Equity, ROE (incl. minority interest)	21.70%	9.17%	15.25%
Earnings per share, EPS
Earnings per share (Cents)	6.42	3.48	3.56
Valuation (As at 26 June 2007)
Historical P/E	20.47	22.43	7.31
Intrinsic Value (SGD)	1.04	0.72	0.30

Table 1 - Business performance across the 3 companies

Comparing their price

From the above figures, it is without doubt that the better performer is Food Empire. The only company amongst the 3 that can maintain a high, double digit ROE, a relatively high, double digit profit margin and yet speculator sales growth is Food Empire. Hence it is not surprising to note that's share price is traded at $1.05, above $0.97 and $0.28 for Super Coffeemix and Tsit Wing respectively.

One interesting fact to note is that the market valued Food Empire and Super Coffeemix relatively the same (97 cents is not that far off $1.05). However, Tsit Wing's ROE, ROA, profit margin and EPS was so much better than Super Coffeemix, yet Tsit Wing traded at only less than 30% of Super Coffeemix's share price.

One possibility was that the market might have anticipated a speculator growth in profitability of Super Coffeemix to justify current price valution. Hence, assume that Super Coffeemix is fairly valued, is there a possibility that Tsit Wing is actually unvalued, given its strong performance indicator? That its trading at such price because it is largely ignored, under researched, compared to Super Coffeemix?

Valuation

I decided to investigate for myself. Taking into consideration their current business prospects and factoring anticipated future earnings, I estimated their intrinsic value using the Residual Income Model. Using a Expected Rate of Return of 10%, I found that Food Empire and Tsit Wing was actually trading at fair value while Super Coffeemix was trading above its intrinsic value. Maybe I underestimated the potential earnings growth of Super Coffeemix.

United Food vs People's Food - 15th June 2007

Shortage of live pigs and rising cost
The current shortage of live pigs in China, due to disease and supply control by farmers (rising cost of rearing without passing cost to customers resulted in margin erosion), seemingly bode well for Unifood. For news on the shortage of live pigs can be found online, one of them is given here.

People's Food vs United Food
People's Food's core business focuses and does very well in processing live pigs into fresh, frozen and processed meat products. United Food, on the other hand, struggles to stick a hand in everything (nicely labelled as "vertical integration"). They are involved in pig rearing, animal feed, meat processing, soya bean processing, health care products etc.

Possible recovery?
Due to the surge in price of the live pigs, People's Food is expected to be affected. They duly issued a business update. On the other hand, if the farmers does react in the way the report depicted, the first to benefit should be United Food's two business segments;

1. Pig rearing
2. Animal feed

Reservations
Will this result in better quarters ahead for United Food? I do hope so but I am still sceptical. Their Fresh, Chilled and Frozen Pork segment also faced the brunt from the escalating cost of live pigs. Their Q1 2007 results quoted 61.16% lower pre-tax profit compared to Q1 2006. Going forward, I wonder whether the above 2 segments can offset the expected plunge in this segment.

Inspired by a Chinese article at Zaobao and another article posted on Shareinvestor forum.

Traded Armarda for Manufacturing Integration Technology, 8th June 2007

With the recent run up in Armarda's share price (from my averaged cost of 5.2 cents per share) to a intra-day high of 16 cents. At 16 cents, Armarda is grossly overvalued under present business performance. However, factoring the unknown potential in profit contribution from its recently announced FESCO joint venture, there might indeed be a huge upside potential.

I have to reconsider my options carefully. It's either I stick to Armarda and wait for the impending turn around in business for the better, or I trade some of it for another undervalue stock. After serious consideration, I decided to lock in some profit and acquire another value stock. The problem is, in this bull run, it is difficult to find another undervalue stock with sufficient margin of safety. My holding's of Armarda had actually tripled in value. If I trade 1/3 of it (pure profit) for another stock, I think I could risk having a lower margin of safety. Thus I sold off 1/3 of my holdings at 16 cents, which happen to be an intra-day high (actually there were 2 one lot trade done at 16.5 cents). Armarda eventually close at 15 cents.

My continual stock screening effort already identified a few potential acquisition targets, one of them is Manufacturing Integration Technology (MITech). It came to my attention on the 8th April 2007.

Business
MIT is essentially have 2 main businesses

1. Manufacturing: Designing, developing and manufacturing of automated equipment for semiconductor industry. (profit contribution about 90%)
   
2. Distribution: Distributing automated equipment for semiconductor industry. (profit contribution about 10%)

Its revenue is evenly contributed from 3 main geographical sectors:

1. Singapore (32.7%)
2. Asia (36.7%)
3. Europe & USA (30.6%)

What makes MITech attractive is that for a high capex business such as equipment contract manufacturing, MITech was practically debt free, i.e. ultra low gearing (0.01x). In fact, this was MITech's business strategy to grow the business while keeping debt low. The following were quoted from its Annual Report in 2005 and 2006 respectively:

...we have consistently adopted an asset-light strategy to stay nimble in the highly competitive and ever-changing business landscape...

...management team had consciously worked hard to achieve strong earnings and maintain a solid balance sheet through stringent cost controls, prudent capital expenditure and cash flow management ...

Potential
Going forward, MITech hoped to diversify their business from narrowly focused semiconductor equipment manufacturer into a broader equipment contract manufacturing house. Their main focus will still be semiconductor equipment manufacturing as the diversification merely seek to stabilise earnings for sustainable growth. With its strong balance sheet, it hope to achieve this via merger and acquisition. It had already done so recently (all funded with internal resources):

1. Acquisition of a 70% interest in Right Industrial Systems Engineering (RISE). RISE specializes in providing wet bench equipment for wafer fabs and air pollution control systems for the different industry uses.
2. Acquistion of 100% interest in AMS Biomedical Pte Ltd ("AMS") in 24th May 2007. AMS Biomedical (AMS) is a Singapore-based contract manufacturer focusing on manufacture of complex electro-mechanical equipment and devices for medical industry.

Valuation
Using residal income model and using business results in 2004 to 2006 as an anchor, I forecasted the earnings for 2007 and 2008 without considering the potential business contribution from acquiring AMS.

Business Forecast and valuation (SGD $‘000)

	2004	2005	2006	2007(F)	2008(F)
Revenue	51,438	53,676	55,523	55,823	58,056
Income (Sales)	8,170	7,110	7286	6,603	6,030
Profit margin (Sales)	15.88	13.25	13.12	11.83	10.39
earnings per share (EPS)	3.71 cts	3.23 cts	3.30 cts	2.99 cts	2.73 cts
residual earnings	NA	1.82 cts	1.59 cts	0.90 cts	0.82 cts

Assumptions:

• required rate of return = 10%
• revenue growth in 2007/08 = 4% (avg)
• overall expense growth in 2007/08 = 5.7% (avg)
• perpetual growth thereafter = 0%

I hence arrived at a valuation of 34 SGD cents, an upside of only 36% from my acquired price of 25.5 SGD cents. (I normally look for at least 70% upside as a margin of safety).

Reservation
However, all is not rosy. One unsettled alleged patent infringement law suit stains the otherwise beautiful picture of a quite clearly unvalued gem. As quoted from its annoucement:

The Company wishes to announce that it has been served with a writ of summons issued by the High Court of Singapore for its alleged infringement of a patent involving certain equipment part used for one component of its business.

The Company is seeking professional advice on the alleged claim and will be entering an appearance in the matter.

The Company is of the opinion that the alleged claim and its outcome will not have any material impact on the financial results of the Company for the financial year ending 31 December 2006 as well as for the 2007 financial year.

In the unfortunate event that the company loses, will there be a potential of inviting more patent law suits in the future?