Saturday, March 31, 2018

Chart of the Month #10: The Great Flood

The chart above depicts very clearly the QE program by the world's major central bank since the global financial crisis of 2009. The flood of liquidity exceeds trillions of dollars. We can also see that the bulk of the liquidity was created after 2011 by the Bank of Japan and the European Central Bank.

Hence while the US is tapering, the decline in liquidity is negligible when compared to the mountains of monies created over the last nine years. This great flood of cheap money is the reason for many phenomena that we are seeing including unicorn startups and the ever-increasing dollar psf of prime properties in global cities.

Why didn't Singapore property fall back to S$1,000 psf? That's because we are thinking in nominal terms. Our minds work best in nominal terms, we like to compare psf today vs psf in 2008 vs psf in 1998 thinking it's the same. But in real terms, the $1,500 psf we see today reflected the drop in real estate pricing because asset inflation had gone through the roof. Thanks to the central banks,  money itself had gotten ridiculously cheaper after the Great Flood!

Monday, March 19, 2018

Tangible Thoughts #3: Sg Condo vs US Island

In the US, one can buy an island for $8.7m while in Singapore it might not even pay for a toilet in a condominium? Something to think about yah? 

Excerpt from the news below of the most expensive condominium in Singapore.

GUOCOLAND will release later this year (2017) the super penthouse in its 99-year leasehold Wallich Residence project in Tanjong Pagar which supposedly has an auspicious-sounding price tag of S$108 million.

While the 21,108 square foot triplex is the highest residence in Singapore - the 64-storey tower in which Wallich Residence is located is 290 metres high.

But this is not to say that Singapore property is too expensive, it is another vindication that we have become the playground for the global rich and famous. Prices will stay exorbitantly high, just like the other playgrounds: Monaco, Hong Kong, London, Paris, Rome, Vienna, Bermuda amongst others.

Monday, March 12, 2018

F&N 6 Years On - Part 2

The is a continuation of the previous post.

We discussed how F&N had become a diary powerhouse in ASEAN (Association of South East Asian Nations) and the crown jewel is actually its 19% stake in Vinamilk which now accounts for 47% of its earnings. So what is Vinamilk? Well, Vinamilk is the largest diary company in Vietnam with 50% market share across the different diary products. It is also the largest listed company in Vietnam at S$17bn market cap!

F&N, at S$3.7bn market cap, implies that its stake in Vinamilk pretty much explains for its entire existence and the rest of its businesses and brands (100 Plus, Magnolia, King's ice cream) pretty much worth nothing. Albeit, the hype in Vietnam is causing every stock starting with Vina or Vin or Viet to rally hard, so it might not reflect the true intrinsic value of F&N's stake.

Nevertheless, let's take a brief look at Vinamilk. 

Vinamilk's Spokesperson

Vinamilk is helmed by helmed by Ms Mai Kieu Lien who was the spokesperson for the brand from 1995 to 2018 (pic above). She led the firm to dominance with provocative ads that flooded the internet deploring the nutrition benefits of milk to the 90 million Vietnamese. She is still single.

Just kidding.

The following is an abbreviated CV for Ms Mai (the real one), one of the most prominent businesswomen in Vietnam.

Born on 1st Sept 1953 in Paris, France
1976 to 1982: She was a Technology Engineer
1982 to 1983: She was Vice Technical Director
1983 to 1984: Studied at Leningrad Institute of Engineering and Economics
1984-1992: Deputy Chief Executive Officer in charge of sales
1992-Present: CEO of Vinamilk

She was also a member of the Central Committee of the Vietnamese Communist Party. In her 26 years as CEO, she led the firm to become the dominant market leader with 13 production plants, 10 product categories and 15,000 cows selling USD 2.2bn of diary products annually and generating USD 500m in profits and 400m in free cashflow. Most of these metrics will continue to grow at 20-30% for the next few years. Vinamilk has 40-80% market share in various products. Over the last 20 years this formidable lady trashed Dutch Lady, the UHT milk brand of South East Asia, including Singapore. Dutch Lady is now the distant #2 with a mere 20% market share in Vietnam. Here's her real pic below.

Mai Kieu Lien, not your normal Ah Lian, don't pray pray

With F&N owning almost 20% of Vinamilk with a legendary dragon lady running the show, it could be part of the reason why the stock market bidded up F&N from S$1.80 in 2015 all the way to $2.60 today. But there is another reason for the stock to go up. This has to do with the Elephant - Thai Beverage.

Recall that Thai Beverage took over the whole F&N during the saga of 2012 which included the property arm. Now, Thai Beverage had also pretty much did six years of thumb-sucking (ie not doing anything) and left a lot of stuff hanging for that period of time. Hence, it is rumoured that the whole
reorganization of Thai Beverage Group might be due. (Well to be fair, they were pretty busy with beating up Singha - the Lion in their home market.)

So here's how the organization might work. There is an ultimate parent entity called TCC which owns 59% of F&N, 59% of Fraser Centrepoint. Meanwhile Thai Beverage owns another 28% of Fraser Centrepoint. So the idea was for Thai Beverage to trade its 28% stake in Fraser Centrepoint for TCC's stake in F&N.

This would allow Thai Beverage to own around 60-70% of F&N (dependent on the transacted price) and consolidate its earnings. It would hopefully also speed up integration between Thai Beverage and F&N allowing synergies to be reaped. All in, this could mean a S$30-40m improvement in EBIT, together with additional valuation increase, we are talking about a S$500-600m increase in market cap and as Vinamilk continues to grow 15-20%, that adds another S$500-600m of market cap to F&N every year.

F&N 5 year share price chart

Not forgetting if F&N could turn the other loss-making stuff (like publishing) back into positive territory, we would get an additional S$10-20m in EBIT. So, just estimating F&N's full upside potential,  it should be at least 1.2 billion dollars from today's market cap. That's more than 30% upside. Of course, these are just numbers in the air, I haven't done the detailed work. On first cut, things definitely looks interesting. To sum up:

1. F&N has a solid ASEAN diary business generating c.$90m going to S$100m EBIT if it turn its loss-making segments positive.

2. Its stake in Vinamilk is worth almost its whole market cap, implying that the market is not ascribing value to its existing businesses mentioned above.

3. A reorganization of the Thai Beverage Group could bring about more synergies allowing for a high market cap, all in, we could see market cap increase by S$1.2bn which is a c.30% upside.

So, time to take closer look!

This author does not own F&N yet!

Monday, March 05, 2018

F&N 6 Years On - Part 1

6 years ago, we discussed Fraser & Neave (F&N)'s fate in a tongue-in-cheek Battle of the Animals post. As per our short term attention span in today's world, we left it hanging, without an update, for six long years. Well, today is the day. We shall stop our sucking thumbs! We shall follow up with the long await instalment to our own saga and analyze things clearly. 

To recap, the saga came about as the Elephant in the ASEAN (Association of Southeast Asian Nations) room charged into our tiny red dot to try to grab Tiger, F&N's baby - Asia Pacific Breweries. In the end, Star Player - Heineken, refusing to give up its control on this profitable joint venture that brewed various beer brands: Tiger Beer, Anchor and ABC stout, swallowed the whole alcohol business i.e. Asian Pacific Breweries expensively. Thai Beverage, the elephant, then took control of F&N, the parent of Asian Pacific Breweries, or rather, the portion left after the Star took out Tiger. 

Our Tiger Girl: Jessica Alba

We also speculated what would happen to Chairman Lee Hsien Yang and Tiger Girl: Jessica Alba. In the end, Hsien Yang had no choice but to relinquish the Chairman role to Charoen (Thai Beverage boss), a precursor to his subsequent fate in the Battle for Oxley Road. Unfortunately, he lost on both counts. But he still had various prominent roles including the Chairman of CAAS, President of Insead Singapore and Chairman of the Islamic Bank of Asia amongst others which he would probably be leading using Jedi force projection outside Singapore! Meanwhile, Jessica Alba, unfortunately moved on and launched her own company - The Honest Company, with milk products competing with F&N's Magnolia. Alcohol and honesty don't mix well I guess.

So what's F&N today? After Tiger Beer was taken, the portions left were non-alcoholic beverages, dairies, publishing and property. Subsequently, property was spun off into a separate entity Fraser Centrepoint while the F&N today is left with the remaining three business segments. With more clarity today, we can now see better what are the key drivers for this beloved Singapore brand. The charts below shows F&N's breakdown by revenue as well as by profit in 2017.

F&N revenue split

We can see that F&N is roughly 60% dairies by products and 60% Thailand and Malaysia by region. The beverage business and the publishing business are actually small in the big scheme of things. Despite 100 Plus being such a big brand name, it doesn't really punch its weight in terms of revenue and as we shall see later, in profits too. Also, Singapore is only a mere 25%. The more important markets are in Indochina. The earnings split below is even more telling.

F&N EBIT split

For me, this chart was kind of a surprise! F&N makes all of its earnings from diary products. The beverages, publishing and other businesses are all loss-making. What's more, when we see EBIT (earnings before interest and taxes) contribution by country, Thailand, Malaysia and Vietnam makes the money and Singapore is loss-making. Vietnam is 47% of total EBIT! F&N is a Vietnam play! 

When I first thought about this, I couldn't recall what are F&N's dairy products and what kind of businesses it had in Vietnam. Only with further digging then things came to light. F&N's diary products are Carnation and Magnolia, household products in South East Asia. Carnation is the leading condensed milk brand in Malaysia and Thailand. Building on that the firm had built a strong business selling all kinds of dairy products with local popularity. The cherry on top is F&N's ice-cream business. It has three brands: King's, Magnolia and Meadow Gold. These were my childhood ice-cream brands!

While Singapore has since moved on from F&N's ice cream brands for higher end treats like Magnum and Haagen Daaz, I believe these brands are still doing well in other parts of ASEAN and hence delivering the dough for Charoen. The diaries segment in Malaysia and Thailand earns c.S$45m and c.S$73m pretax profits last year. As for Vietnam: this is actually equity accounted profits because F&N bought its stake in Vinamilk up to 19%, making it the largest foreign shareholder in the firm. 

Dairy business in detail!

The chart above from the firm provided detailed breakdowns of the different parts in its diary segment which was super helpful. We can see that the Malaysia and Thailand have healthy 12-15% EBIT margins over the last two years. With the additional of Vinamilk, F&N becomes a powerhouse in diary in ASEAN that could dream about becoming a Danone or Meiji someday!

Alas the stock is not cheap trading at 24x forward PE  and 12-13x forward EBITDA. On the free cashflow matrix, it is earning c.S$70-140m which translates to a 2-4% free cashflow yield based on its market cap of S$3.8bn. That's not really cheap by Singapore's standard where other names are doing 5-6%. Overseas Education is doing 9% FCF yield! (albeit it's small cap.) But wait, there are other things going for F&N. The Lion shall rise again!

Next post we shall discuss Vinamilk and the reorg with Thai Beverage!