29 May 2019
(Stocks Discussion) SGX: Yeo Hiap Seng Limited (SGX: Y03)?
Discuss anything about share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment!
Source: Yahoo Finance__** **
Yeo's is one of Singapore's most famous drink brands, with products such as Pink Dolphin, Just Tea and many other tea drinks under their arm. They also sell food pastes, condiments and even canned food. Additionally, they have several agency brands as well.
Over the last few years, however, the revenues of Yeo's had fallen, with a slight pick up in 2018. This can be attributed to more intense competition rising from new brands as well as consumer fatigue. One worry for me is how competitive the F&B space has been as well, with swtiching costs for consumers being quite low.
On the birght side, the company had launched a range of premium teas with low or zero sugar in early 2019. This move to differentiate itself from competitive might help to generate more sales as well as to stave off consumer fatigue.
Additionally, the firm is expected to commence commercial operations of their factory in Cambodia to meet growing local demand for their beverages.
I expect revenues to increase by 3% in 2019 with the introduction of their new brand of drinks and entrance into the Cambodia market. I believe that sales would also pick up in 2020 in Cambodia, as distribution channels increase and consumers are more aware of their products.
However, I believe revenue growth will like drop as the market for Yeo's products are already quite mature in their dominant markets.
Due to the strong brand equity as well as its competitive advantage over potential new entrants, Yeo's can defend their market share.
Despite the changing landscape of F&B, their products are likely to still find a place in households. Hence, I did not believe that the firm will shrink over time.
Operating Income Margin
One of Yeo's weakness over the past few years are their weak operating margins, though this had improved slowly over time. I believe that management's focus would thus be to improve operating margins over time. I award an increase in 1% of operating margin each year, quite a conservative number. I doubt that significant changes to efficiency can occur, due to how weak the margins had been run down over the past few years. Moreover, this is much lower than the industry average.
The Sales/Capital Ratio of the firm had improved over the last few years. With improved projected efficiency, I award the firm high Sales/Capital ratio over the next few years. However, I would be rather conservative and allow the Sales/Capital ratio to fall below the industry average, as with the Operating Income Margins.
Cost of Capital Calculation
The risk-free rate I used is the Implied Risk-Free Rate of Singapore, which traces the 10-year SGS government bond closely. The market risk premium that I used was also the implied market risk premium. These 2 figures are from the Market Risk Premia. I obtained beta from taking the average unlevered beta, and then relevered it, which made no difference since the company had no debt. I added country-specific risk premium from exposure to Malaysia, China and emerging markets as described in the annual report. It seems that the company does not want to take on any debt, as with quite some other local companies. Hence, I don't think the capital structure would change.
After discounting the free cash flows at the cost of capital, the target price that I received is exactly $0.99. This is $0.06 higher than the current trading price of $0.93, representing an upside of 6.45%. Even if you take my calculation at face value, that is not considered good returns especially if the market does not adjust to relfect this value. I do believe, however, that I have been quite conservative especially with the revenue growth rates and improvement in operating margins. I would say that the bottleneck this firm faces is the very weak operating margins, which results in low return on capital. Since ROC is lower than the WACC until 2023, this means that growth destroys value until then. This also explains why the terminal value forms a disproportionate amount of the EV of the firm.
This was just a very brief DCF done out of curiosity for this firm. If I rely on this valuation, the margin of safety is quite low.
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