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Celestial Nutrifoods Full Year Results: Cost Concerns


Celestial NutriFoods Limited is a manufacturer of soy protein-based food and beverage products. All its products are manufactured from non-genetically modified soybeans purchased from local farmers or government stock houses.

Celestial produces a range of soy protein-based food and beverage products under its Sun Moon Star brand name. The Company’s range of products covers both retail and industrial segments. Celestial manufactures protein powders, canned protein beverages, soybean milk powders and high-protein biscuits for the consumer market, while its soy protein isolate, soy functional protein and biochemical feedstuff are targeted at industrial users. Soybean oil and lecithin are marketed to both consumers and industrial customers. In September 2006, Celestial formed a joint venture with Daiki-Axis Co. Ltd. and Shanghai Nikki Environment System Inc. to produce bio-diesel in the People’s Republic of China using soybean oil, a by-product of its manufacturing process.

Premise and current operating environment

Celestial have just release their full year results. However, before the release of this results, they  like Pine Agritech have taken massive hit to their share price in the recent correction.

Taking away the negative market sentiments from subprime and financial woes of the US credit market, the high soya bean prices, for which constitutes the main cost of sales for Celestial’s product have been rising at an ever increasing rate.

Profit Results

  • Sales grew at 55.4% to RMB1799 million.
  • However, cost of sales out paced sales at 70.3%
  • Therefore, overall profits increased by 13% from 2006.
  • Gross margins dropped from 44% to 39%
  • Overall, net profit margins showed improvement from 22% to 23%
  • Net operating cashflow after tax (NOPAT) grew from 230 mil to 395 mil.
  • Free cashflow is positive and growing

Given the operating environment, this set of results is respectable. Sales grew and margins remain stable despite rising costs. I like the growing free cashflow after the huge capital outlay building factories for production.

Rising free cashflow is difficult to fake. And i believe Celestial is doing well in this area. This is the life blood of continual operations other then debt and equity. It is always good if you can grow money internally.

Operations and Market

Key contributors of improving operations were:

  • Overall favorable economic conditions in PRC
  • Improved recognition and Greater demand for Sun Moon Star products
  • improved utilization for all production lines, in particular Soya bean zones operations

The utilization rate at Soyabean Zone is high at 74%.

All product segment grew at a very good pace. However, it takes a while before other products outpaced the higher margin health beverage product, do that remains the main driver we looked to.

The management have highlighted the need to extensively market and advertise the Sun Moon Star brand. With better brand recognition, they should make demand much more inelastic to price changes and delay any forms of substitution effect from coming into place.

Balance sheet strength

Balance sheet strength indicates the sustainability of future operations, and Celestial have a very strong balance sheet.

  • interest bearing debt is 37% of assets
  • cash is 47% of assets
  • cash is 76% of market cap at SGD 61.5 cents
  • inventories are growing inline with sales growth
  • so are receivables

The cash from the issue of convertable bonds should act as a buffer for expansion and working capital.

Performance Indicators

Debt and equity placement have been relatively stable this year. A return on invested capital improvement of 14% to 27% is very good.

For a production oriented company like Celestial, we look at the return on assets to see if production translates well to operating cashflow. The ROA improved from 7% in 2006 to 11% in 2007. Therefore utilization, cashflow and cost controls are more or less inlined.

Operating Cashflow yield improved from 10% to 18%. Since the dividend yield declared is more or less the same as last year and capital expenditure is  stable, this company is slowly and steadily adding to its cash. Management is being very conservative in its dividend payout and capital spending.

I expect capital spending to be reduced in the next few years, thus if business continues like it is, the cash holding should improve.

The price to book ratio is 1.22 times. That is a rather fair valued level but doesnt tell all the story since a huge chunk of book value is in cash.

If we used what i did for Courage Marine over here on Celestial, Enterprise value, after taking cash and debt out of total assets stands at RMB 1836 mil. Cashflow from operations generated is 395 mil. Dividing Enterprise value with NOPAT you get roughtly 4.6.

That means the current share price values Celestial at a future cashflow of only 4.6 years should profit does not improve or fall. I think if you expect cashflow for 20 years at this price, it is very good value.

On the contrary, my calculations are based on WACC of 10% and GDP growth rate of 3%. Going forward, credit conditions and rising interest rates would most likely increase WACC to a higher level.

If i used WACC of 16% which is a 60% increase and 0 growth rate, the current performance of company is still 34% higher then that of current share performance.

My overall dividend yield is 3%. Doesn’t keep up with inflation but nevertheless its a good yield. I believe if the business is sustainable and management does a good job with the company, cashflow  should eventually translate to a good dividend payout in the future.

The current payout ratio is at 14% of its current cashflow. That should leave the majority of it for expansion and working capital. I see this company as a better prospect then a 5-6% yielder since it should provide an increasing dividend payout at a current buy in price.



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