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Wednesday, 30 April 2008

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

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.


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.

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Anonymous donmihaihai said...

Hi Market Uncle,

Appreciate your effort. The reason given by the chairman on trade receivables is not the one I am expecting too.

Anyway I always query on inventories and receivables during AGM(need to take leave too) if I find them disproportional. The reason given by Food Empire is very uncomfortable because of 1) The nature of the business 2) their operating ground 3) from who.

For some companies from some industries it may be pretty ok for the disproportional year to year but for some companies like food empire, because of the nature of their business, I am more worry, especially going on for 3 years.

3 May 2008 at 09:40  
Blogger Market Uncle said...

Frankly, I don't feel comfortable too, that's why I specially took leave to find out.

I had faith in their business prospects, but if their growth in earnings is a result of growing receivables (since its not shown in income statement), then I have reasons to doubt.

Regardless of the real reasons, let's see whether the chairman is right that the receivables growth will indeed stablise before taking further actions.

5 May 2008 at 23:44  
Anonymous donmihaihai said...

hi market uncle,

Let say receivables stablise at a higher level then the next question to ask should be why longer credit term, why not shorter term? FE or its distributors has more bargaining power? Not to say that more cash are being tie up.

Sorry I do not use faith in investing and maybe I talk too much.

6 May 2008 at 00:18  
Blogger Market Uncle said...

By faith I mean believe, believe that the business can sustain the good performance as in the past.

Investment had a few stages:
1) Stock screen based on performance ratios

2) Business analysis for sustainability of the ratios

3) Forecast and valuation

Food Empire cleared stage 1 and I believe it cleared stage 2, i.e. I believe its business of selling coffee in the market it competed in had prospects, that's why the faith.

Hence I proceed to stage 3 and value it, then bought it at a price I think is below my valuation.

Valuation is not a number cast in stone. If things change for better or worse, the valuation changes and action had to be taken accordingly.

As for the receivables, assuming they do stabilise, I'll still find out the 'real' reasons behind the change in credit policy.

If the change can result in a bigger market share at the expense of a larger working capital, they better the returns exceed their enlarged deployed capital above a decent required rate of return.

6 May 2008 at 23:02  
Blogger eve+line said...

Somehow the management doesn't seem that candid to me, that's more my concern.

How much can we trust the financial statements if you can't even believe what the management says about them?

8 May 2008 at 12:38  
Blogger Market Uncle said...

Hi eve+line,
Given their response, as far as I am concerned, the integrity of the reported numbers definitely have taken a beating.

Ever since Donmihaihai pointed out the disproportional growth in receivables, I am already skeptical about their reported numbers and will scrutinize the coming financial statements.

No doubt I am still hopeful that they have some competitive advantage in terms of branding to continue to churn out good results quarter after quarter. The last thing I want to see is these 'good' results are just a another form of creative accounting gone wrong, just to prop up the numbers.

8 May 2008 at 20:35  
Anonymous donmihaihai said...

eve+line pointed out one of the most important question.

"How much can we trust the financial statements if you can't even believe what the management says about them?"

We want the numbers to match the words. This is how trust is earned. If not can we trust the financial statements? Depend on if one is good with acc and knowledge on the industry. Able to take out the main points and lump them together, knowing that as long as they are intact, the rest is secondary. But it is NEVER as good as when numbers match words.

Market Uncle. That is your investment steps. I do it differently. At times i don't even do a single ratio analysis if I think it is unnecessary. I fished out FE receivables not by doing ratios but because it mean alot on FE.

Something about faith. When everything went wrong, one will clinch on to faith, which is exactly the worse time to use faith.

11 May 2008 at 09:58  
Blogger Market Uncle said...

Hi Donmihaihai,

Thanks for sharing. I'd learned quite a lot from you. My experience in investment is still in its infancy (just began in 2005), hence I tried to adopt a systematic approach (the 3 steps I highlighted). I am still learning.

For your case, hope you can share how you select stocks for investment?

As for faith, I see it differently. I use it only for business analysis - i.e. sustainability of business.

Financial Statements only tell the management's story. Its up to us to believe. I'd neither trust the numbers fully nor my own analysis.

I do not know whether is it actually possible to read between the lines to decipher the actual truths. Hence, I require a substantial margin of safety before I part with my hard earned cash for any investment.

So, with margin of safety and adequate diversification, I hope to reduce such risk as a bad investment that arose of by believing a deceiving set of financial statements.

Thus, I had 12 companies in my portfolio, all nearly equal in amount when I buy them. This way, if I'm wrong, the damage is contained. The flip-side is if I'm right, my upside will be capped.

What's your opinion?

11 May 2008 at 15:42  
Anonymous donmihaihai said...

Hi market uncle,

Experience counts not number of years in the market. I started earlier but learn slower. I am not in the position to share or even teach ... yet but I don't mind having discussion.

I don't have a systematic way of stock selection. Only one rule is do not pick up a company in an industry that I don't even understand, like bank, IT, property and many more unless I want to learn. So I will never stuck in a situation where I am thinking of doing something(buy?) because of the time and effort put in.

Beside that, it is just like anyone. Big decline in stock price, something on the papers, expanding on the number of companies in the industries where I have some basic knowledge or just stock names that look interesting to me.

That is how I started on any company. Then I will read all available IPO prospectus, annual reports, announcement, circular, news, research reports, etc from the earliest to latest. Labour intensive work. When completed, I will dump it in my watch list folder and continue follow it even if I decided not to buy for whatever reason. So I always have a number of companies where I can buy anytime if the company and price is right. After some years if I get sick of the company, I will dump them further into "other folder" and stop follow it but who know someday I might look into it again and the time and effort require is much lesser.

Trust is a very strange thing. It build confident and conviction. In fact if one don't trust the financial statements and his own ability to smell something and refuse to do both in the future, i would say that he does not bother to invest in stock.

Financial statement tells the company story in the way(in some ways) management wants it but not any way. The best way to overcome and tear open the financial statement is keep reading it, especially annual reports, read page by page. You can try book like "Financial Shenanigans" or look into the financial statements of infamous local listed companies prior happening to see whether anything can be spot to jump start the process. The most important thing when looking at the company is to count the cash. "Where is the cash" was the question I keep asking when reading FE financial statements.

My opinion? Even in so call value investing, there are two extremes. 1st is the pure Benjamin Graham method. Buying stock below net tangible asset, net-net as long as the company is still alive. Buy a basket, hold them and good thing will happen even some stock may be gone.

2nd is exciting but difficult, buying below the intrinsic value of the company base on future cashflow, which depend on market position, management, etc etc.

For 1st method, an equal amount work fine. 2nd method work on conviction, putting the same amount on the 1st and last choice is crazy. So which one you belong to? You make your own decision.

If you going for the more exciting one, spend some time reading notes from Berkshire and Wesco annual meetings 2008. And if still interested after that, its time to start acquiring knowledge from everywhere and only you know where u are head to. Hope to see you there.
Thanks to Wesco/Berkshire shareholders/value investor and internet.

11 May 2008 at 20:11  
Blogger Market Uncle said...

Hi donmihaihai,

How do you determine "...if the company and price is right..." ?

For myself, the stage 3 of my systematic analysis requires "Forecast and valuation". In order to do that, I had to go through each line of the annual report footnote and reformat the 3 financial statements.

Repeating the painstaking process for at least 5 years will enable me to make conservative forecast of earnings for another 2 years. Using these indicative (inaccurate) numbers, I derived a valuation for the business. And try to buy the business at 50% this estimated value I termed intrinsic value.

It is because stage 3 is very time consuming, involves extensive research beyond annual reports, past announcements, google work etc, that's why I need stage 1's ratio analysis to narrow down the list of companies to work on. And Stage 2's business analysis to ensure the financial performance is sustainable to make forecasting meaningful.

Nonetheless, though I dare say I've completed financial text like Financial Statement Analysis and Security Valuation by Stephen Penman, my research into the numbers is none the skillful yet. Its still a long way to learn, in order to pick up tell tale signs of trouble before its too late. (e.g. this FE's example).

As for which type I belong, I'd say I have both in my portfolio. I began in 2005 being a pure Benjamin Graham follower, buying purely below 50% NTA, perferably below cash per share. Then I moved on to buying below intrinsic value once I'm introduced by another fellow value investor to residual income model. I got the theory part from the above mentioned textbook.

Anyway, the blog and book you've recommended should be a good place for me to start. Thanks!

13 May 2008 at 22:58  
Anonymous donmihaihai said...


How do you determine "...if the company and price is right..." ?

1st of all, a big portion of the companies in my watch list are not those right companies. They are there because I want to learn about the industries or holding on/watching other companies somehow in the similar industries.

Anyway I follow good and cheap rule.

What is good? Easy. Sustainable competitive advantage, high ROE and good management. Saying is easy but to dig them out is hard because the key is sustainable. So I just do the opp. and throw out all with no sustainable competitive advantage and rank the rest on how much I understand their business and how good they are.

Cheap is even easier. I use anything but no DCF, DMM, etc. Anything that need to project into the future I skip. Wondering and in doubt of the valuation, I skip. I just follow one rule which actually being said out by WB:

“If somebody comes to the door, whether they weigh 300 pounds or 325 pounds, it doesn’t matter: they’re fat. We don’t need to know more.”

Cheap must come into my mind instantly when looking at share price and financial statements. Flipping the number, add or min some % does not give me any confident at all.

Spending so much time but only project 2 years into the future? I think you can do better than that because I think it is not worth the effort.

I am not skillful too. All top sportsmen are not there because of talent alone. How much time they practice? How young they start?

I still remember years ago, a number of ppls telling me, "Hey, you know how to invest meh. How can you beat the market? You think you are WB? There is only one WB. Maybe he got inside information, etc, etc."

Guess what? They are still going round and round with cannot lah, unable lah, don't trust them, etc, etc while I am happily investing.

14 May 2008 at 00:24  
Blogger Market Uncle said...


I still remember years ago, a number of ppls telling me, "Hey, you know how to invest meh. How can you beat the market? You think you are WB? There is only one WB. Maybe he got inside information, etc, etc."

Guess what? They are still going round and round with cannot lah, unable lah, don't trust them, etc, etc while I am happily investing.


From my blogging so far, I am already pleased to know and learn from people like you, musicwhiz, Mr ICICI. At least we are not alone. :)

18 May 2008 at 15:01  
Anonymous Successfull Penny stock Investing said...

Some companies in the food business look very attactive here. The rising price of raw material in food stuffs has depressed earnings of many companies in the food business.

12 December 2011 at 03:12  

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