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www.sharesinvestment.com

BATTERED BY a slowing global economy, the value of commodities, equities and properties has crumbled during the past few months.

Companies in the business of providing staple and affordable consumer products are most likely to emerge stronger from the financial fallout.

And one of these companies is Cerebos Pacific, a leading consumer food organisation best-known and loved for its flagship product, Brand’s Essence of Chicken, which has been consumed by generations of Asians.

While Brand’s Essence of Chicken is the flagship product for the health supplement business, the company has extended its reach to other parts of the food business, including coffee and sauce.

Currently, the company’s main markets are Thailand, Singapore, Taiwan, New Zealand and Australia, with Thailand being the leading contributor to sales.

As expected, health supplements continue to be the main sales driver.

Dividend Keeps Flowing
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Cerebos Pacific's flagship product - Brand's Essence of Chicken.

Since FY04, Cerebos has declared a total dividend of $0.25 for FY08, consisting of S$0.06 normal and S$0.19 bonus dividend, which translates into a current yield of 8.4% at current stock price (including bonus dividend).

As at 30 June 2008, Cerebos carried a cash balance of $165.5m, roughly 61.5% of its total liabilities.

The dividend policy is not likely to change in the light of its financial performance to date and ample cash balance.

Stable Margins

For the twelve months ended 30 September 2008, Cerebos booked an 11% rise in turnover with all segments (health supplements, coffee and sauces) reporting higher sales.

Earnings on the other hand fell 4% on higher administrative, distribution and promotion expenses. We note that top and bottom lines could be better if not for foreign exchange transaction loss of $4.8m.


Nonetheless, forex risk is part and parcel of being an international company and even commercial giants such as Sony and Toyota are not immune to the vicissitude of the forex market.

However, Cerebos does not incur actual forex loss as the cash earned in foreign countries are retained in their host nations.

Further, the increase in expenses was attributed to investments in brand building, research and development and capacity expansion, which we view as necessary for future growth.

From FY05 to FY07, Cerebos’ revenue and profit grew at a CAGR of 6.8% and 14.6% respectively.

We like Cerebos for its stable margins especially in the midst of financial turmoil. Gross profit and pre-tax margins have held steadily above the 50% and 9% mark respectively from FY05 to FY08.

Going forward, Cerebos has set a goal of increasing sales to S$1 billion by 2010 but could face considerable headwind as consumer confidence take a hit and the volatile forex movements curb earnings.

But with raw material prices slumping, the pressure on margins should ease. We also believe that Cerebos’ products like coffee, sauces and health supplements are basic items that take up a small fraction of disposable income.

Hence, consumers are more inclined to hold back the purchase of the latest model of a Toyota car rather than refrain from popping a pill or two.

Cerebos Pacific Profitability

S$’000FY05FY06FY071H08FY08
Revenue653,379657,768745,508419,657824,599
Gross Profit372,674364,620406,091231,727449,089
Profit Before Tax104,494108,009130,32673,448132,169
Net Profit64,23869,58184,42245,36480,960
Gross Profit Margin (%)57.055.454.555.254.5
Profit Before Tax Margin (%)16.016.417.517.516.0
Net Profit Margin (%)9.810.611.310.89.8


Peer Comparison
 Cerebos Pacific ($)Eu Yan Sang ($)Food Empire (US$)

Cash Balance

165,523,00015,873,0008,129,000
Total Liabilities269,150,00070,387,00046,616,000
Total Number of Shares314,820,000360,435,188529,043,999
Cash Per Share0.530.040.015
Dividend Per Share (Latest FY)0.250.020.0137
Share Price S$ (16 Dec 2008)2.980.320.335
Price-Earnings Ratio11.623.35.3


Trend Spotting

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Technical Analysis suggests share cosolidation at S$2.83-S$2.98. Data from Bloomberg

Cerebos has bounced off its lower bollinger bands and is trading towards upper bands.

The wide between the bands had widened, suggesting greater volatility. RSI indicator is consolidating above 60.

14 Days SMA (simple moving average) had crossed the 50 Days SMA which is a bullish indicator.

But although resistance level has been broken but the low volume is not convincing enough for a clear buy call.

The support level is S$2.23, which is the daily low on 25 November 2008 while resistance level remains at S$2.92, the high and close on 01 December 2008.

The counter appears to be consolidating at S$2.83 to S$2.98 level.



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Originally published at www.sharesinvestment.com, this article is reproduced here as part of a collaboration with NextInsight.

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