JB Foods - CGS-CIMB Research 2018-10-12: From Bean To Bar

JB FOODS LIMITED (SGX:BEW)

JB Foods - From Bean To Bar

JB Foods is one of the top 10 cocoa-processing companies globally, based on its processing capacity (145,000mt p.a.) in Malaysia and Indonesia.
JB Foods’ 1H18 net profit growth of above 300% y-o-y was the result of sales volume growth and current favourable market dynamics, according to the company.
The stock now trades at FY17 P/E of 7.3x, at a 63% discount to the global food and beverage (F&B) industry average of 19.8x.

We recently met with JB Foods, a cocoa-processing company listed since Jul 2012 with operations in Malaysia and Indonesia (the third-largest cocoa-producing country globally). Its processing capacity of 145,000mt p.a. ranks it as one of the top 10 players worldwide, behind Barry Callebaut, Cargill and Olam International.
JB Foods supplies cocoa ingredients to both trading houses and confectionery producers, and counts international brands like Mars, Nestle and Hershey among its long-standing customers.

Listed on the SGX Mainboard in Jul 2012, JB Foods is one of the major cocoa ingredient producers in Asia by production capacity. It produces and sells cocoa products such as cocoa butter, cocoa powder, cocoa mass and cocoa cake, under its own “JB Cocoa” brand.
Apart from processing operations in Malaysia and Indonesia, JB Foods has set up offices in the US, China and more recently, Switzerland.

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JB Foods first commenced operations in 2003, with a 85,000 metric tonne (mt) bean-equivalent processing facility situated in the Port of Tanjung Pelepas (PTP), within a free trade zone in Johor, Malaysia. JB Foods subsequently exercised its call option in 2014 to acquire an 80% stake in PT Jebe Koyo (Unlisted), a cocoa bean-processing facility located in Maspion Industrial Estate in Gresik, Indonesia, which is approximately 30km from the Surabaya port. According to management, this not only increases the group’s processing capacity by another 60,000 mt p.a., but also saves the group from incurring Indonesian export taxes on raw cocoa beans, as per the government regulation implemented in Apr 2010 (current cocoa bean tax rate: 5%).
Management estimates that both of its manufacturing plants are operating at average utilisation rates of 60-70% (historical maximum: 90%).

JB Foods supplies cocoa ingredients to a diverse customer base, ranging from international trade houses to end-users such as F&B producers and confectionery manufacturers. These include Mars Inc (Unlisted), Nestle SA (NESN SW), Mondelez International (MDLZ US), Hershey Co (HSY US), ITOCHU Corporation (8001 JP), Theobroma BV (Unlisted), General Cocoa Company Inc (Unlisted), and Olam Europe Limited, many of which are long-standing customers.
Based on JB Foods’ FY17 annual report, two major customers contributed 32% of its FY17 sales (FY16: 20%).

On Dec 2014, the Financial Times reported that Barry Callebaut (BARN SW), Cargill (CARGILL BZ) and Olam International (SGX:O32) combined accounted for about 60% of the world’s cocoa processing capacity in 2014, up from 41% in 2006. This was the result of significant industry consolidation, which saw the number of major cocoa grinders fall from 40 in the early 1990s to around 9 in the early 2000s. The global industry consolidation started in 1996 with the merger of Belgian industrial chocolate maker Callebaut and Cacao Barry of France.
In terms of cocoa-grinding capacity, JB Foods is one of the top 10 grinders globally in 2017, with annual capacity of 145,000mt, based on Barry Callebaut’s industry statistics. This puts it behind Guan Chong (GUAN MK) with 200,000mt, Olam with 700,000mt and Barry Callebaut with over 1,000,000mt. Management cites heavy capital investment and working capital requirements as natural entry barriers to the cocoa processing industry.

JB Foods registered net losses in FY13-14, as a result of processing overcapacity (after Indonesia introduced the export tax), aggressive price competition and sluggish demand in the industry. Global cocoa prices also skyrocketed on supply concerns, which eventually put some of the smaller, older or less-utilised grinders out of business.
JB Foods turned around from net loss of US$13.0m in FY14 to net profit of US$2.1m in FY15, as industry consolidation took away some competition and sales volume continued to rise on the back of more customers, according to management.
We saw FY17 sales volume rise 17% y-o-y, but revenue dipped 2% y-o-y as cocoa beans became cheaper because of harvest surplus, which enables grinders to enjoy better processing margins.
1H18 topline grew 2.6% y-o-y on the back of stronger customer demand, mitigating the softer cocoa bean prices. The higher shipment volume also contributed to the improvements in gross margin, which expanded from 7.3% in 1H17 to 16.6% in 1H18, underpinning the 332% y-o-y growth in net profit in 1H18.
Management expects the current cocoa business sentiment in 1H18 to sustain into 2H18F, according to its SGX announcements.

JB Foods’ total asset value was S$198m at-end FY17, of which inventories comprised 42%, PPE constituted 28% and cash & trade receivables accounted for the remaining 26%. Of the S$83m inventories, raw materials made up S$54m (65%) while finished goods represented S$23m (28%).

JB Foods reported net gearing of 0.38x at end-1H18, significantly lower from than its 1.28x at end-FY16 and stronger than most of its global peers (average of 0.86x). The majority of its borrowings are in the form of trade bills.

JB Foods currently trades at 7.3x FY17 P/E and 1.2x FY17 P/BV, which are at discounts of 60-70% to the global industry average at present.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-12

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