|Shares Out. (in M):||9||P/E||0.0x||0.0x|
|Market Cap (in $M):||450||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-105||EBIT||0||0|
Boring business + cheap stock = an opportunity to earn an above-average return on investment with below-average level or risk. And this is exactly what comes to mind when looking at Binggrae Co. Ltd. ("Binggrae") shares.
Binggrae is one of the largest dairy companies in South Korea boasting a stable cash-generative business, returns on equity in mid-teens, and substantial excess cash on the balance sheet. At the same time the company's stock is selling at an attractive price of approximately 7.6X NFY EPS, or approximately 5.8X NFY EPS net of excess cash.
Binggrae is one of the stalwarts of the South Korean dairy industry with a roughly 18% market share and a stable of brands, which dominate their respective categories in such segments as ice cream, dairy-based beverages, and yogurt. So strong is the company's brand equity that one of Binggrae's largest brands, Yoplait, has become a general term for spoonable yogurt in Korea. The dominant position of the company's brands is Binggrae's main competitive advantage. Branded dairy products businesses generally posses a high degree of continuity - as long as a company's products occupy #1 or #2 positions within their categories, they are likely to maintain and improve their position over time by taking market share from marginal players absent a major managerial mishap. The explanation of this phenomenon is quite simple: dairy products end up in one's mouth - which is a very personal place - so there is little incentive to switch from a well-known brand to a nameless brand just to save a little bit of money. A market leader's ability to extract a healthy markup allows it to continuously solidify its position versus profit-strapped rivals. Further, having a broad array of leading brands generally implies a highly developed distribution system, which further enhances the leader's position by making it a more desirable partner to its customers.
Given Binggrae's stable of market-leading brands it is highly likely that the company will expand sales and profits over time at the expense of weaker competitors. Binggrae's growth in South Korea will probably not exceed GDP growth by more than a couple of percentage points at best given the highly consolidated nature of the market, in which the Top 3 players (Namyang Dairy, Maeil Dairy, and Binggrae) account for over 60% of sales. At the same time Binggrae may be able to add to its long term growth rate somewhat as the company expands overseas, particularly in China, where the high-growth/high-fragmentation nature of the market offers Binggrae an excellent chance to build a dominant franchise. While the company's main advantage is its dominant brands, Binggrae has a number of other advantages that further enhance the company's ability to compete:
1) Scale. Being an industry leader enables Binggrae to:
a) Outspend most of its competitors on marketing, which helps maintain and enhance the image of the company's brands;
b) Outspend most of the company's competitors on product development, which helps to continuously improve product quality and fuel growth through new product introductions;
c) Have a broad array of products and an industry-leading distribution network, making the company a more attractive partner to its clients, such as convenience stores and
supermarkets. (For example, Binggrae is the only company in South Korea whose distribution combines frozen, cold, and room temperature capabilities.)
2) Superb financial condition. Binggrae's cash-rich balance sheet should enable the company to take advantage of value-creating opportunities should they emerge.
Binggrae has a highly qualified and operationally astute management team at helm. The company's US-educated CEO Kun-Young Lee has worked for the company since the early 1990s and took over the reigns in 2008 (he had served as a CFO before then). Mr. Lee was part of the team that transformed Binggrae from a debt-laden collection of disparate food businesses into a focused branded dairy company with a fortress-like balance sheet. Since taking over the CEO position, Mr. Lee has done a good job growing the company's shareholder value, as he expanded Binggrae's market share, sales, and margins despite a severe global recession of the late 2000s. While the CEO does not own any shares to speak of, Binggrae's Chairman, Ho-Yeon Kim has an approximately 33% stake in the company. While management appears to be carrying more cash on the balance sheet than seems to be warranted by the business' needs, this overly conservative cash management policy is probably not a major risk factor in terms of capital allocation. First, substantial balance sheet cash is a fairly recent phenomenon for Binggrae, as they do not have a long history of cash hoarding. Second, management hasn't done anything value-destructive with the capital in the past, and cash piling up may be indicative of how conservative they are with pursuing new growth opportunities. In addition, Binggrae is committed to returning at least 25% of profits to the shareholders each year via dividends, and it also has a history of repurchasing its shares if the prices are low enough.
At the current stock price of KRW56,700 Binggrae's market capitalization amounts to KRW497 billion - or KRW381 billion net of excess cash. The company should generate about KRW65 billion in profits next year, which results in NFY PE of 7.6X - or 5.8X net of cash. Given the high quality of the company's business, it appears that Binggrae's stock is significantly undervalued at current levels.
- Sheer cheapness of the stock that trades at a significant discount to its intrinsic value should serve as a catalyst.