Value hunting #2: Cerebos

Got interested in this when wifey wanted to buy me some Brands Essence of Chicken when I was sleepy on the weekend. And I thought "$20 for squashed chicken. Who makes this....?"

Cerebos (80% owned by Japanese company Suntory) makes it, among other things.

1) What do they do:

A breakdown of their 3Q08 results by product and region:

- 89% of their profit comes from 'liquid health supplements', mainly BEC. Most of that profit comes from Thailand (82m), a little from Taiwan (15m), neglible amounts from S'pore & Malaysia (<4m).2) Balance sheet:
From 3Q08 results: About 130m surplus cash on the balance sheet (approx 20c per share).

3) Cyclical Factors:

You would expect that demand for health products would be resilient in bad economic times. You would be wrong. From digging through old Netresearch-Asia reports (subscription required):

• 3rd Dec 01:"The 1998 crisis already showed us that Brands, although a premium health supplement, was not immune to economic downturns and the consequent decline in consumption."
• 26th Jun 2000: "Margins for BEC had collapsed from more than 20% to less than 8% at the height of the crisis".
• 20th Jan 2000, talking about their subsequent recovery: "Brands was operating at close to 50% capacity utilisation in FY98 is now back at close to 70%"

4) Valuation:

The current low PE of about 9 (excluding their surplus cash) seems a value trap, given that sales are expected to fall in a recession.

When the trough comes, the PE may not be low as this is a cyclical stock. As an example, in Dec 01 it was trading at $2.12, with a PE of 12 (excluding the 66c cash/share).

5) Conclusion

This is a cyclical stock. Wait for a year or two, to see the effect of falling sales on their share price. Buy when we are in the middle of a recession. If we have a rapid and sustained recovery, we should see (cyclical) 20-30% profit growth for several years afterwards.