Please Don't Go Away Blue Monster

KUALA LUMPUR: Datuk Pang Chin Hin and his sons are proposing to take Mamee-Double Decker (M) Bhd to go private. Pang, the executive chairman of Mamee, and his sons Datuk Pang Tee Chew and Datuk Pang Tee Nam collectively own more than 45 per cent of the company. The trio, and other shareholders who in total own 71.9 per cent of Mamee collectively are offering the remaining stakeholders in the company RM4.39 a share.

Last Friday, the major shareholders of Mamee-Double Decker, who own 72% of the company, proposed a privatisation of the company via Section 64 of the Companies Act, 1965, which entails a capital reduction and repayment. Such a proposal will require the approval of 75% of the minority shareholders of Mamee-Double Decker. In other words, the Pang family, which controls 72% of Mamee-Double Decker, will not be able to vote on this proposal.

All analysts have placed their views that the capital repayment offer of RM4.39 is indeed a fair deal. The fair value put by other research houses including mine:

Aboi's House: RM3.45 http://aboiwealthpot.blogspot.com/2010/11/time-4-revaluation.html
Kenanga Research: RM3.65
OSK Research: RM3.44
The Others: RM3.30 to RM3.70 range http://mamee.investor.net.my/analyst-reports

The company also noted that its shares had been thinly traded. In its announcement on Friday, Mamee-Double Decker pointed out that the daily average trading volume of its shares over the past one year was approximately a mere 0.22% of its total free float.

It said that given the “challenging environment and low trading liquidity” of its shares, the selective capital repayment represents “an opportunity for entitled shareholders to realise their investments in Mamee-Double Decker at an attractive premium above the historical trading prices.”

 
In Malaysia, most of the time many good companies choose to go private because of illiquid trading, for the case of Maxis and also Astro. The market does not really reflect the value of the company. BUT for Mamee's case it does not seemed to be it, the market value is properly putting a value on it in my opinion (based on DCF computation). Then why? Is the Pang family trying to make a profit by realizing premiums from a take-private transaction? Maybe that is half the reason. Nothing wrong but it is not good for the overall market if this trend continues on for good listed companies in Bursa, making our market look unattractive to investors.

An offer of RM4.39 is a very good deal and I would gladly take it too as a minority shareholder. If the deals go through it looks like we are missing another good company from the market, a company who just got their profit rolling in nicely. Sad to say there is no hard line in predicting when a company will go private BUT a good filter might be looking at companies who are owned by family or individuals with big stake holding share. A few examples would be like FREIGHT, ZHULIAN, Ananda's & Vincent's related companies.

Anyway the main point of this post is to show you once again that one of the good ways to calculate the fair value of a company is thru DCF modelling. It is relatively simple once you get the hang on it. If you need the spreadsheet please email me and I will send mine as reference for your own investment use. If you had bought it at the time of my previous writing you would have pocketed a handsome gain of RM0.74 or 21.26% returns at sell price of RM4.22! Call it lucky since my initial plan was to invest in Mamee in the long run, as such my fair value for MAMEE still remains the same at RM3.45, the RM4.39 price is just an offer and is not reflective of the fair value by the major shareholders.

Consumer: Mamee-Double Decker (M) Bhd

Introduction

Everyone probably ate Mamee Monster in their childhood days from sundry shops or from the 'Roti Man'. It was a family business started by Datuk Pang Tee Chew and his father Pang Chin Hin with the concept of eating noodles as it is without boiling it, interesting. Incorporated in 1971 and is now listed as a public listed company.

Datuk Pang Chin Hin is still alive at the age of 78, God bless him and is the Executive Chairman but his sons Pang Tee Chew and Pang Tee Nam are the real ones running the show as Executive Directors. They all have a combined substantial stake in the company ~40%.

Their champion products include Mamee Monster, Mamee Noodles, Mister Potato, Double Decker and Nicolet Swiss Herb Candy. The instant noodles account for 25% market share and have a leading position in chips and snacks, capturing some 30% of the market share. Exports account for 30% of their revenue across 70 countries worldwide.

Fundamental

1. Does the company have an identifiable durable competitive advantage?

Well YES, they are the only company selling noodle snack. When you think of chips, you first think of Mister Potato too and when you do that you will also think of buying Double Decker, well sometimes. My point is, these are products hold a certain oomph when you think of snacks.

2. Do you understand how the product works?

Snacking is the people's favourite past time activity, we snack while work, we snack in school, we snack while we catch a movie/series, we snack while waiting for someone or something or waiting to die.

3. What is the chance that it will become obsolete (pupus) in the next twenty years?

Are you joking! If Mamee were to become extinct it will make a lot of kids unhappy. Snack food is here to stay and will always be.

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes in F&B. Though they have also venture outside of snacks like beverage via Cheers brand and Nutrigen cultured milk, how successful it is remains to be seen. On the snack front, they have relaunched their Mister Potato and introduced the new Rice Chips & CornToz, very unique I would say. Go and taste it la!

5. What is the company's financial history and status?

• Profit Margin is on the rising trend over the past 10 years. Above 10% is always good if they can maintain it.
• Return of Equity which means much shareholders get in return of investment has also improved towards 15% -20% range over the last 5 years.
• Revenue Growth Rate has their ups and downs owing to volatile market conditions such as material costs. Nevertheless the growth rate history over 10 years is 8.52% and 5 years is 8.27% showing good management in containing volatility.

• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years. This is a signal that the company is still growing and making more profit year after year. WHY a big dip in 2007? Rising raw materials cost & exercising warrants diluted the EPS and DPS (same pie but smaller pieces so you get less share size lor, makes sense right).

6. Is the company conservatively financed?
The balance sheet is strong: ~RM45mil in cash and RM53 in quoted investments in unit trusts and money market.

7. Is the company actively buying back its shares?
Yes, in the year 2009 alone, they purchased back 596,500 shares because they think it is undervalued at that time. Total treasury shares now stands at 5,333,100. An impressive figure indeed. Treasury shares can be used to create extra cash when it is needed, seeing Mamee is now with surplus cash, don't see they need more cash.

8. Is the company free to raise prices with inflation?
Yes, it has recently done that to increase their profit margin by passing on the part of the higher cost to its whole sellers and distributors in the year 2008.

9. Are large capital expenditures required to update plant and equipment?

Mamee does spends regularly on capital expenditure particularly on investments in their subsidiaries.This is expected as they are focusing on growing their exports. Not an alarming figure, only 1%-2% of their total revenue.

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have assumed Mamee's revenue growth rate is at 8.0% averagely, with 87%-85% operating cost margin, 25% corporate tax, 1% re-investment and 15% working capital growth for the next 5 years. Having said all these in my opinion it is fair to buy..
 
Mamee at RM2.17 to RM2.66 for ~15-13% discount rate. Of course with some risk la, the higher price you pay, less returns you get but with more risk.

See how steady it has grown from 2001 to 2010. Fundamentally as mentioned earlier it shows you it is doing great and you can see it reflected in the stock price. At RM0.80 in 2001 with 15% per annum you should be at ~RM2.80 in 2010. Well, except 2009 downturn but if you knew fundamentally a company is doing great as in Mamee's case, the price will certainly bounce back to it's correct value when the sell panic subsides. And best of all, it will still keep growing provided it remains fundamentally sound. So your job after this hard initial analysis of the company is to monitor, read newspaper everyday especially business section la EASY.

What Do I Think? 

- The company has announced that they are focusing on growing their domestic:export from current ratio of 70:30 to 50:50. We can see this with the group's investment into plantation in Indonesia to complement their F&B sector and in Myanmar, Mamee has become part of the Top 3 brands of instant noodle in the country. Things look good as they are expanding across the other regions too such as Thailand, Vietnam and Australia instead of the tight domestic market. They have also finally decided to get out of China after 18 years of pretty much no success and cut losses due to high competition.

- Financial figures of the company's history has shown that they are poised for further growth prospect and with their committed dividend payout policy of 50% announced in 2010 shows how confident they can make profit in future and reward shareholders. A good choice for a defensive company with future growth.

- Company also announced that they are planning to double revenue from RM410mil in 2009 to RM1bil in the next 5 years. Historical performance shows that this might be tough to achieve with an average growth rate of 8.0%. They would need ~14% rate to achieve the RM1bil mark. I'm crossing my fingers on this goal.

- In nutshell, I could buy Mamee seeing there is potential in them if I had an extra 3k. Again it boils down to buying at the correct price. Right now it is too expensive & with the price being pushed up slightly over RM3.00 in anticipation of dividend distribution on 1st June 2010. What goes up when must come down, so just be patient.