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 ( | 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.
Labels: Coffee, Comparison, Food Empire, Super Coffeemix, supercoffeemix, Tsit Wing
posted by Market Uncle at
21:46
8 Comments:
"Apples and Pears"
Tsit Wing is mainly a "Food Service" company whereas
Food Empire and Super Coffeemix are branded consumer product companies(fmcg).In my view two different businesses.
Tsit Wing`s attempted entry into the branded arena has yet to be crowned with success
PGL
Any comment on Food Empire decreasing cashflow for last 3 year as revenues and profit grew? While increasing raw materials prices will cause some adjustment on the cashflow, it was not the main reason. The main reason was trade receivables more than double in 2006 and 2007.
Hi donmihaihai,
In 2005, trade receivable is 35.436M, against a revenue of 184.0M, or 19.26%.
In 2006, trade receivable is 59.356M, against a revenue of 234.124M, or 25.35%.
In 2007, trade receivable is 80.187M, against a revenue of 276.859M, or 28.96%.
While revenue grew from 184.0M to 276.859M, or 50.46%, trade receivable went up from 35.436M to 80.187M, or 226%.
Trade receivables is obviously growing much faster than revenue!
I do agree with you that this might be an area of concern. It seems that either they had some trouble collecting their dues or they have been aggressive in recognizing sales too early.
Seems like it time to question the management on this in the next AGM/EGM.
Hi market uncle,
Do share on what they say.. thanks.
Food Empire management is quite conservative. I don't think they are someone who is aggressive in their accounting. The cashflows prior to 2005 were OK so u might want to look deeper and further back.
If not for the weak cashflow, the chances are FE might not need to issue new shares for capital in 2006(or 2007)
Hi market uncle, thanks for the detailed analysis on the receivables issue.
I wonder if you notice the breakdown of Food Empire's sales revenue. FY 2006 saw the inclusion of 'Royalty income' and 'Marketing Service fee'. Taking these two items out, one will notice that the revenue from actually selling goods isn't increasing that much.
It's the 6th year I'm holding on to Food Empire. But the dubious accounting standards have been pushing me to sell the company. What do you think?
Hi Augustine,
Thanks for pointing out the breakdown.
Indeed, the marketing service fee had been a sizable contributor to revenue for the past few years:
With marketing service fee:
2005: 183.982m
2006: 214.651m
2007: 223.831m
Without marketing service fee:
2005: 183.982m
2006: 195.849m
2007: 180.808m
Without the marketing fee, revenue actually dip!!!
Looking at the receivables, they had actually jumped by similar amount to the marketing fees, it might be possible that the marketing fees have longer collection period, hence a higher receivables.
Anyway, its good news to learn that Food Empire had another good source of revenue (the marketing fees), but quite another
to realise its core business is not doing as well.
But looking at the 2Q results released recently, it brings some relief to see that the receivables are no longer growing by leaps and bounds. This imply they do ultimately collect their due.
I had been holding FE since 2006 only and didn't mind holding longer since it does not make up a significant portion of my portfolio anyway. I will still be monitoring this closely see what new tricks they have up their sleeves.
Another thing:
Take a look at the annual reports of the past few years. Under foot note 3 (revenue), two new items only started to appear from 2006 onwards:
1) Royalty Income
2) Marketing service fee
And in 2007, a third item is added:
3) Packaging service fee.
While this number is not found in 2006's annual report. It appears in 2007. The packaging fee is merely split from 2006's reported revenue, hence the number still adds up.
Other than foot note 3 and 2 (revenue recognition), there was no further information to shed light on these income/fees.
Since these only start to appear in 2006, there is not enough results to assess their sustainability. One fact, though, is that the marketing fee increase from 18.8m SGD in 2006 to 43.023m SGD.
Looking at the way they breakdown the revenue, to show the packaging fee, it might be possible these fees are part of past revenue and are only recently broken down since 2006. If so, there is no concern for surprise. If not, it will only go to show that the core operations are slow down.
If we look at the receivable (trade receivables) changes in 2004 to 2007:
2004/03: +7.376m
2005/04: +7.469m
2006/05: +23.920m
2007/06: +20.831m
The marked increase in receivables coincidentally occur in 2006, the year the marketing fees are added. So my guess is the marketing fees are a new thing (not broken out from revenue like packaging fee. Thus their core operations should indeed be slowing, at a time when they seems to show their sales are growing, quarter after quarter.
I would avoid any stock involved in the coffee market. Theirs just to many players in this market.
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