Food Empire's AGM on 29th April 2008

To date, I had built up a portfolio of 12 companies. With limited leave, I make it a point to attend AGMs if and only if I have questions for the management.

What trigger my queries

donmihaihai left a comment on my blog, highlighting to me the disproportional growth of accounts receivables, as compared to sales. I tried to email Food Empire to enquire about it but to date, I have not receive any reply. Hence, I specifically took leave just to find out more.

Query 1 - Disproportional growth of Account Receivables compared to Revenue

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%.

Is the company selling more on looser credit terms or is it facing more delays in collecting its payment?

The chairman attributed the the spike in trade receivables to a Russian plant they had set up recently, since the latter resulted in a lengthening of credit terms. They also mentioned that the growth in trade receivables would stablise soon. Since there are others waiting to query the management, I decided not to hog on to the Q & A.

However, after trying very hard to digest what I had heard, I still could not figure out how setting up a plant can cause a lengthening of credit terms. We'll see in coming quarters whether the disproportionate growth account receivables would indeed stablise before deciding my next cause of action (more aggressive queries?)

Query 2 - Reasons behind bonus shares

Giving bonus shares, in theory, does not add value to existing shareholders, i.e. the same market worth is merely divided over a larger pools of shares after bonus issue, and everybody gets the same increase, proportionately.

What is then, the rationale of giving bonus shares?

The chairman replied that the rationale behind bonus shares is to introduce more liquidity and make each share cheaper for purchase.

If the newly set up plant can lengthen credit terms is weird, this is even more bizarre. What has the liquidity in company share price got to do with the management? Company performance will ultimately reflect in the share price. If management need to raise equity and hence be concerned with the share price (not liquidity), they can easily buy back their shares, assuming it is undervalued now.

Other interesting queries (rephrased and summarized):


How has the raw material price increased and is the company able to pass on the cost to consumers.

For example, while the price of certain grade of coffee can go up from 3.5 to 5 per kg (43%) and some creamer can go up from 1 to 1.7 per kg (70%), the actual cost of raw materials in each sachet only went up by 10 to 15%. Food Empire would adjust its prices about 3 to 5% during each price review. For example, in Ukraine, it had already did one increase of 5% this year, it will perform another round of review in the 2nd half of the year.

Any update on how newly acquired Naturant Systems Inc would contribute to the bottom line?

Firstly, Food Empire is still trying to consolidate Naturant Systems Inc into its business in terms of both production and distribution network, so as to achieve further streamline in production and cost savings etc.


Secondly, Naturant Systems Inc have already start to contribute profits to Food Empire, about $2m for this year is mentioned, I believe the figure refers to profits.


How much does it cost to produce the Annual Reports?

About 30 to 35K is budgetted for churning out Annual Reports annually.

Other interesting facts about the AGM

I've been to many AGM's of penny stock companies and most only had finger food. This one had finger food before the AGM commenced and complete buffet lunch catering (salads, staple foods, deserts, soup and fruits) after.

Maybe I should start attending AGMs of even larger companies to do some food tasting surveys.


Conclusion

Though I did not find out exactly what I wanted (regarding the accounts receivables), I walked away with more knowledge than before I walked in. At least I knew they are able to pass on the rising cost of production to the consumers. Given what I know from the AGM, the annual reports and announcements made so far, I still have faith in the company and to stay invested.

Armarda's AGM on 28th April 2007

I was glad to learn from this AGM that Armarda's joint venture with FESCO group will start contributing profit to Armarda's consolidated profit as early as 2Q 2007, i.e. sometime in August 2007.

More light was also shed regarding the joint venture. FESCO group's HR business involved handling all contract staff for many companies operating in China. i.e. Any company that wished hire general staff, would have to approach FESCO and provide the budget and the number of staff required. FESCO will take care of the hiring, the legal issues and the administrative matters such as pay. FESCO group used to enjoyed a monopoly but not anymore. However, since FESCO group is 100% state owned and had been in the business for almost 20 years, their contacts was extensive. Hence it should be logical to assume its business would not disappear overnight.

Armarda's joint venture with FESCO group involved setting up an IT subsidiary (45% owned by Armarda) just to provide IT services for FESCO, e.g. running of data centre, call centres. This subsidiary should enjoy a recurring income and not a one-off contract. However, FESCO group only gave the subsidiary exclusive right to provide IT service to FESCO group for 5 years. In the worst case scenario, this right might not be renewed. Hence, Armarda, through the subsidiary, should be able to enjoy increased stream of income for at least 5 years, beginning as soon as 2Q 2007.

Thus this cigar butt might had some good puff remaining after all.

Armarda Special General Meeting on 3rd February 2007

This special meeting was originally called to get shareholders to vote (in favour) of allowing Armarda to form a joint venture with FESCO group in China, a provider of HR services.

The joint venture would see Armarda and FESCO group setting up an subsidiary to provide IT services to FESCO group. Armarda would own 45% of this new subsidiary and the latter would provide a steady stream of income to Armarda in the foreseeable future.

I managed to find out more about Armarda at this meeting than I would from simply googling around and reading Annual Reports. Armarda had about 80 million HKD, translating to about 5 cents (SGD) per share, while Armarda was trading around 4.5 cents then. It was flushing with cash!!! Things were not that simple thougth. The cash was real, no doubt. BUT, 40 million HKD was declared as paid up capital when Armarda ventured into China in 2004 (the year it IPO). This 40 million could not be touched unless the company wind up. 20 milliong HKD was required as working capital to operate the business. Only 20 million was left. Most of this 20 million was generated from business operations in China. Since Armarda was enjoying tax breaks in China (i.e. paid little or no tax), they could not move the cash out unless they pay a heavy charge for the remittance.

In other words, Armarda had cash, that it could not use. In order to form the joint venture with FESCO group, Armarda had to enter as a foreign entitiy. This meant that cash from Armarda had to be injected from outside China, and not from the cash it already had in China. Hence when Armarda need the 18 million RMB (about the same as HKD) to enter in the joint venture, Armarda had to raised this amount via placement (instead of using internal funds).

Unless Armarda start paying tax (another blow to its profit attributable to shareholders), the company would have problem taking funds out of its China operation. To simple shareholders, this meant that it would be next to impossible for Armarda to pay dividend in the immediate future. For the business, it would be difficult to invest in business opportunities outside China since its funds outside China was severly limited. Thus Armarda was not so cash rich after all.

Though not cash rich as it seemed from the financial statements, I was still confident of Armarda in the long run. Since I bought Armarda at an average of 5.2 cents per share, this price was not far from the averaged trading price of 4.5 cents in a period where Armarda's profit after tax had more or less bottomed. In this Q3 2006, Armarda's core business was generating about 300 thousand HKD while the 25% of BTL it acquired previously was giving it about 1000 thousand HKD per quarter. Armarda's profit per quarter (when it had been consistently giving profit guidance) before the acquisition was about 1000 thousand HKD. In short, Armarda's profit had bottomed out. Thus, going forward, I would expect Armarda's profit to be much more than just 1000 thousand HKD, due to profit from BTL and the joint venture with FESCO.

Anyway, at current business performance where its core business is almost insignificant, and with my average cost of 5.2 cents or about 50% NAV, Armarda is just another cigar butt in my portfolio.

1. Surface Mount Technology
2. United Food Holdings
3. Armarda