So, what’s going on?
The dirty shop window: It’s hard to see what’s on offer unless one actually reads CSF’s quarterly and annual reports. The financials, as reported, look like this (give or take some minor rounding errors):
The notes to the financials and management’s discussion and analysis add the following information:
First, CSF had tried to make a go of adding snack noodles to its repertoire. But the demand for snack noodles just wasn’t there. The gross margins were thin or negative, the opportunity cost of using the production lines for snack noodles rather than for instant noodles were therefore high, and CSF stopped making them.
Second, CSF invested in, and opened, a factory and warehouse complex 30km from Jakarta in order to serve western Java. Soon after, however, that complex was subject to a major fire, causing Rp. 27 billion in damage to property and inventory and slowing production to 30% of what had been its capacity. In addition, an additional Rp. 11.6 billion in G&A expenditure was tied to that plant and that spending was therefore mostly unproductive in 2012. The factory should be up and running at full tilt in the second half of 2013.
Third, CSF’s marketing and distribution costs rose by 84% in 2012 partly for the purpose of establishing a distribution system to service Western Java and partly to promote the full launch, in 2013, of its line of beverages. Capital spending also rose. These increased expenses and capital investments had little or no corresponding revenues in 2012, and margins and asset turns were therefore crushed:
So, as I say, that’s part of it. No-one likes to see such a steep collapse in margins and turns and, if one hasn’t read the filings and if one is also of the view that big is beautiful everywhere and every time (that, for example, Coke will see off Irn-Bru) then one will read in these numbers cause for alarm: this is just the start and it’s going to get worse; “reversion to the mean” and all the rest of it.
The custom in the Singapore exchange is for listed companies to pay dividends. It is so much the custom that it is quite normal for companies go public and pay out dividends in their first quarter of being listed. Following this norm, the declared dividend policy in CSF’s IPO prospectus was 20% of earnings. CSF paid out dividends in 2010 and 2011. But in 2012 it amended its dividend policy: henceforth it would pay dividends in the absence of capex claims on cash. In 2012 it didn’t pay out a dividend.
And these two overall factors – dirty windows, dividend policy – are the long and short of it. I don’t think that they add up to an enterprise yield of 30% but the market apparently does.
There’s a lot more to say – about the cup noodles and beverages, about CSF’s prospects in the Jakarta market, etc – but I’ll leave it at that. If you’re reading this and are interested in researching it further, you should know that the market for the stock is not as illiquid as it may appear: there are days when no shares trade and there are days when 600,000 shares change hands; it wouldn’t take a month to buy $100,000 worth.
Disclosure: I am long Consciencefood Holding