The discounted cash flow method is used to value the company to achieve the most appropriate result. At the moment, the SAPPE share price reflects high market expectations about the company's earnings, which the company reported significantly lower than expected. However, the company's fundamentals remain strong and the company's performance is expected to grow by 19.0% in the year 2016 after the company has solved the overseas problem, especially in China.
Sales will not grow much in the last quarter of 2015, but will recover and achieve double-digit growth in 2016: Since the company tried to boost domestic sales by launching aggressive promotional activities; therefore, operating costs are likely to grow, while revenues will not grow as much as costs. The company first ventured into the beverage industry by introducing Mogu Mogu, the world's first coconut jelly juice. In 2006, the company again introduced a new health drink known as “SAPPE Beauti Drink”.
Later, the company's name was changed to SAPPE Public Company Limited on September 5, 2013 to become an internationally recognized brand. To achieve this goal, innovative products with stylish packaging must be created. These would not only make the company excellent but also provide customers with more choices and gain a larger market share. Therefore, the company focuses on bringing innovative products and unique packaging to the market to cater to customers' lifestyles.
Currently, both factories have not reached their maximum production capacity yet, both reaching about 70 percent of its maximum capacity according to the company's annual report (2014).
Subsidiaries Business
For the international market, the products are traded through two main channels which are modern trade like shop and supermarket and traditional trade where the products would be sold through importer in every country in Asia, Southeast Asia, Middle East, Europe, Africa , North and South America mostly with the condition of cash advance payment. However, for several countries such as Indonesia, Europe - through SAPPE Europe - and some other countries, products are not sold with a credit term for a customer who has a standby LC.
Industry Overview and Competitive Analysis
- Recession in key economic countries
- The upcoming AEC will benefit Thailand food and beverage industry
- Industry Analysis: Great market value of beverage industry
- Competitive Analysis: High competitive for domestic market - Functional drink
Laos: Lao is similar and quite familiar with Thai in many areas such as culture; therefore, Lao is more likely to use Thai products. However, a good business partner is recommended as there are likely to be imitation products in the future. The beverage industry in Thailand has a large market value due to several supporting factors such as population, purchasing power, tourists, including geographical location and climate in Thailand.
Moreover, there are numerous players in the market, so they need to create and launch promotion to attract customers. Similar to the export market, the value of the export beverage market in 2014 was USD 1,355.4 million, which is an increase of 8% compared to the same period of the previous year. As in the first five months of 2015, exports are continuously growing, reaching $656.2 million by 11.4% compared to the same period last year.
There are many players in the functional beverage market with different qualifications, so the market is quite competitive. The players need to create new products to meet consumer needs, such as functional drinks, especially for men, as men are likely to be more concerned about their health. For the functional casual drinks market for women, there are three major players: SAPPE Beauti Drink (33% market share), B-ing (19% market share) and If fruitamin (13% market share).
There are many competitors in the market such as Malee, Tipco, Doi comb and many more. However, SAPPE's products are outstanding from the other competitors in the market as SAPPE adds value and concept to each product, for example Mogu Mogu is a fruit juice with coconut jelly, SAPPE Aloe is a fruit juice with Aloe Vera jelly, SAPPE for a day is a product, that has enough fiber for a day, etc. There are four main competitors in the category, which are Naturgave, Preaw kaffe, Nescafe proslim and Buddy dean.
However, Preaw coffee has the highest sales volume in the market, also achieves the highest sales in traditional trade market. Since there are many players in the market, Preaw coffee focuses on holding a roadshow to introduce new products and to do integrated market communication. Yet there are no direct competitors for the international market, there are only substitute products such as OKF, Lotte, Tropical and Minute served for JUICES Aloe vela drink and counterfeit products for Mogu Mogu as there is no competitor that has the same quality as Mogu Mogu.
Investment Summary
Higher gross profit margin due to efficiency of new production line. SAPPE has invested in the new production line which is able reduce COGS and
Valuation
Discounted Cash Flow Model: Free Cash Flow to Firm (“FCFF”) Discount Cash Flow Model (DCF) is able to value firm value and equity
A fully operating production is like reducing company's COGS and gross profit margin increased to 40% in 2016. Terminal growth: terminal growth rate of 3% is calculated using the expected long-term inflation rate. CAPEX: The CAPEX in 2015 is in line with the year-to-date CAPEX and it is expected to be used for new production line, land acquisition to support sales growth in the future.
For other years, we assume that the only CAPEX the company invests is likely to be a maintenance CAPEX; Thus, the CAPEX level will be in the same line as before. Weighted average cost of capital (WACC): The cost of equity (Ke) is calculated using the CAPM model. The risk-free rate is from 10-year government bonds at 2.71% as of December 1, 2015, the expected risk premium of 8.15% from Professor Aswath Damodaran's research paper as the risk premium from Professor Aswath Damodaran's research was strong and adjusted beta of 1.105 these factors reflect a weighted average cost of capital (WACC) of 9.42%.
Financial Statement Analysis
Earnings
SAPPE ranks last in terms of sales revenue; however, SAPPE is successful in cost of goods sold (COGS), the COGS percentage of sales for SAPPE is 60.5%.
Balance Sheet & Financing
Financial Ratio
Additionally, the company's selling, general and administrative (SG&A) expenses are in line with the peer average at 24.1%. Net profit margin: SAPPE still has a higher net profit margin at 13.2% compared to peers at 10.9%. This means that SAPPE has a high ability to control all operating costs, including financial costs and tax costs.
It measures the company's ability to make enough profit to compensate for the risk of investing in the company. While only percentage of SG&A to sales was at the same level as the peers. Debt ratio, debt-to-equity ratio, equity multiplier and long-term debt ratio: this is the ratio that measures the extent to which the company uses debt or equity to finance the operation.
Interest coverage ratio: measures the ability of the company to pay the financial cost with the income from its business. A ratio close to 1 indicates that the company may struggle to generate enough cash to pay interest. SAPPE has a very high interest coverage ratio from a very small outstanding debt figure.
The company uses a small amount of debt financing, which means that the company's cash flow is sufficient to meet its obligations. There is also an opportunity for the company to expand its business through debt financing and benefit from the tax shield in the future. Furthermore, the company's liquidity ratio indicates good financial health of the company compared to its peers.
The ratios show that SAPPE is able to use its assets to generate returns to the company that are better than the average among similar companies. SAPPE uses 1 unit of assets to generate 1.6 units of sales, while the average of comparable companies could generate 1.3 units of sales. Asset turnover is combined with other components from Dupont's analysis, giving SAPPE a higher than average ROE.
Additional Downside Possibility
High competitive situation. Even though domestic beverage market has as high market value as 400 billion Baht, it is a high competition market especially
Cash ratio: is the most conservative liquidity ratio as it excludes all other current assets and uses only cash and cash equivalents for the calculation. In terms of cash only compared to current liabilities, SAPPE still has enough cash to pay off its existing current liabilities. SAPPE's export transactions relate to the distributor and/or exporter in each country; therefore, SAPPE can deal with the distributor and/or exporter in any country; therefore, SAPPE may face the risk of counterparty causing sales decline similar to the problem that SAPPE currently faces with the establishment of SAPPE in China.
Investment Risk
The company is managed by majority shareholders
Possible dilution of share prices in the future
Operational Risk
The company’s factories are not on its own land
Fluctuation of raw material cost
High competition
In conclusion, the company must constantly monitor the fluctuation of the exchange rate and the cost of raw material as they are the most important factors as they can reduce the performance in terms of net income of the company. Another important risk that should not be neglected is the opposite side of the risk, it may not happen often, but its outcome has a great impact on the company's income. In addition, the company must constantly monitor and stimulate sales as SAPPE is in a highly competitive market and with the current economic situation.
Sensitivity analysis
In conclusion, the lower the weighted average cost of capital (WACC), the higher the share price holding other variables constant and the higher the growth rate (both high growth and terminal growth), the higher the share price holding other variables constant.
DATA
Company’s Information
- Business Structure
- Income Statement
- Statement of Financial Position
- Statement of Cash Flow
- Breakdown of revenue
- Key Financial Ratio Table 2.6 Key Financial Ratio
- Financial Statement Analysis (Income Statement) Table 2.7 YE 2014 Income Statement among peers
- Financial Statement Analysis (Statement of Financial Position) Table 2.8 YE 2014 Statement of Financial position among peers
- Financial Statement Analysis (Key ratio) Table 2.9 Key ratio among peers
- Free Cash Flow to Firm Model and Assumption
- Risk Matrix
- Corporate Governance and Corporate Responsibility
Unlikely: Risks that have a small chance of occurring, but cannot be completely ruled out. The consequences of risks can be classified and classified into five categories, based on how serious the damage can be. Significant: These are the risks that can completely disrupt the business and should be a top priority during risk management.
In 2014, the Thai Institute of Directors (IOD) rated the company's corporate governance as "good".
