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Cerebos Pacific: Dwindling Cash Position

I took a further look when i have the time on Cerebos Pacific this week. Great Stock that consistenly gives 25 cents dividend payout. They have been doing that for the past 4 years. That gives a yield of around 6.5% currently.

Cerebos business is in health products and food products used daily. It is a resilient business and pretty defensive during downturns. The eye catching  driver of this stock have to be its Brands chicken essence which alot of Singaporeans are familiar with.

Click to see larger image

Here is a price chart from 2007 to 2010 of Cerebos since going from 2005 $2.54 to $4.40 at the height in 2007, its earnings and cashflow have been growing steadily. Sounds like a good deal for a yield investor.

Althought the share price took a beating in the bear market, it rallied back strong.

Free Cashflow vs Dividends Paid

What i wanna bring to your attention is probably the free cashflow vs the dividends given out.

I have a google spreadsheet here for free viewing on Cerebos past 5 years, and quarterly results and ratio analysis [Link Here >>]

Here is a chart on the quarterly free cashflow minus capital expenditure for Cerebos from 2005 to 2009:

It would seem i sorta remember Cerebos paying out twice per year for dividends but on DBS clarity, it only showed once. But the general idea is that there will be one quarter where they need to pay out 75 mil in dividends. The reset of the quarter they should be able to have a positive FCF – capex.

However, FCF – capex were not consistent. We can observe at least 3 quarters where it was negative. Thats generally OK since CAPEX should translate to better future operating cashflow or net profits.

Here is another view, this time Free Cashflow and Dividend paid out yield

Here the dividend paid out is consistently high at greater than 6% of that year’s share price, but the free cashflow was not keeping up.

The logical way to finance this is through debt

However, Liabilities during this period have been going down steadily.

The reason why its sustainable now is due to its cash holdings:

Cash have been going down steadily, and have almost halved since 2005.

Conclusion

When we invest for yield we want the dividend to be sustainable by Free cashflow. Certain quarters of negative free cashflow can be tolerated as business may find cash not paid to them yet so they would have to borrow to fund dividend or capex.

A falling free cashflow in this case shows clearly that the 25 cents div may not be sustainable. Cerebos may want to deliberately reduce their cash holdings but if you are an investor investing for 6%, watch out.

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honyewl

Thursday 25th of March 2010

Hi Drizzt,

Nice post. The surge in capex for FY08 and 09 ($64M & $63M) versus the norms in previous years ($11 to $16M) were due to construction of new factories in Thailand & Malaysia according to the annual reports. When these come to pass, perhaps their current payout policy would be more sustainable?

Best regards

Drizzt

Thursday 25th of March 2010

hi honyewl, i got a feeling if the capex is reduced by 50 mil it will still be paying out more than free cashflow. if that is the case they need to show that the additional investment brings about higher free cashflow for us to continue invest in it.

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