Mamee-Double Decker (M) Bhd surprised the market by proposing a selective capital repayment exercise late last week.
Under the proposal, the company will distribute some RM179.8 million or RM4.39 per share to all minority shareholders, after which their shares will be cancelled. This would leave its current controlling shareholders, the Pang family, with a 100% stake in the company. Mamee will then be delisted from the local bourse.
For the privatisation exercise to be successful, the company requires 75% approval from minority shareholders at the extraordinary general meeting to be held soon. If all goes to plan, the entire exercise is targeted for completion by mid-2011.
Offer price at about 14 and 13 times estimated 2011/12 earnings
The offer price of RM4.39 was fixed at a 21.9% premium over Mamee’s last traded price of RM3.60. It is also at the high-end of the stock’s trading range of RM2.80 to RM4.48 in the past one year.
The offer prices Mamee shares at roughly 14.2 and 12.9 times our forecast earnings for 2011/12 respectively.
Prior to the privatisation announcement, the stock was trading at just about 11.7 to 10.6 times our estimated earnings for the two years. Given that this is well below the prevailing average valuations for the broader market — estimated at about 15 times earnings — it may have been a key motivation behind the privatisation move.
One of the benchmarks for consumer-related stocks, Nestle Malaysia Sdn Bhd, currently trades at about 28 times our forward earnings estimates. To be sure, Mamee’s operations and product range are substantially smaller by comparison. Nevertheless, its products are among the best-selling brand names in their respective market segments. For instance, Mister Potato is estimated to hold a 54% share of the domestic potato crisps market, while the Mamee brand of instant noodles has the second largest share of the market behind Maggi (by Nestle). The Mamee Monster Noodle Snack is one of the most enduring brands in the country.
Mamee also has a strong balance sheet. Net cash and short-term investments totalled RM73.1 million as at end-2010. This and the expected cash flow from operations would allow it to comfortably fund the planned expansion and maintain a 50% profit payout. Indeed, we forecast the company will stay in a net cash position, albeit marginally so, after paying for its planned capital expenditure this year. We estimate single-tier dividends totalling 15 sen per share, which translate into a net yield of 4.2% based on its pre-announcement price of RM3.60.
Mamee’s latest privatisation proposal appears to highlight the fact that the market does, at times, fail to fairly value stocks for their underlying fundamentals. This has been one of the factors prompting controlling shareholders to take their companies private in recent years.
Should shareholders accept the offer?
Shareholders should weigh the options of taking profit from the privatisation offer today or betting on the company’s prospects over the longer term.
It should be noted that while the offer represents a smart premium over the pre-announcement price, investors in the stock have fared very well. Its share price has risen steadily from about RM1.10 in April 2008 and may well continue to do so.
Mamee expects its operating environment to remain challenging in the current year, against the backdrop of rising raw material and packaging prices. The industry is also very competitive, which makes it difficult to unilaterally raise selling prices.
Nonetheless, the company is pushing ahead with its multi-pronged approach to drive top line growth. Some of the measures being undertaken include increasing production capacity, the introduction of new products and the strengthening of its distribution network. The company is also working on raising the number of overseas distributors to boost export sales. The targeted increase in volume sales would in turn enhance economies of scale and help offset rising costs.
Double-digit sales growth sustainable
The company’s sales grew 17.3% last year to RM482.5 million, bolstered in part by good demand for its new products. The Mamee Mie Goreng Indonesia and Mister Potato Rice Crisps have been well received by the market since their launches in April 2010, while the Rio Fiesta apple and orange fruit juices were introduced in 4Q10.
Mamee also expanded its distribution network to 73% coverage nationwide — up from 70% in the previous year — including the deployment of its fleet of vans to cater for smaller outlets in suburban areas. Currently, the company is working with about 150 distributors and wholesalers, which account for some 60% of domestic sales. The remaining 40% of sales are channelled directly to major supermarkets, hypermarkets and convenience stores.
The company is banking on the same formula to keep sales growing at a double-digit pace over the next few years. It targets RM1 billion in sales by 2014 with a nationwide distribution network coverage reaching 95%.
More new products in the pipeline
More new products are in the pipeline for the current year. This includes the Mamee Mie Goreng Indonesia Cup, a more convenient packaging variation from the existing packet, and quite possibly an expansion of its noodle range into the premium market segment. Currently, its biggest competitors are the Maggi and Mie Sedaap brands of instant noodles targeted at the mass market.
Capacity expansion to support future growth
The company is planning to spend RM100 million for a new production facility-warehouse in Melaka. Once completed, scheduled for 4Q11, the plant will boost total capacity by 46%. The additional production lines will support expected demand growth for the next few years.
For a start, Mamee estimates there is unmet demand of up to 20% for its instant noodle sales due to existing production constraints. The increased capacity will also boost the production of Mister Potato Rice Crisps for the export market.
Exports to drive growth over the longer term
Export is key area of growth for Mamee, given the limitations of our relatively small population. In this respect, the company has had fairly good success. Export sales, to over 80 countries, rose an outsized 21% last year and contributed to 32% of total sales.
At the moment, some of its biggest overseas markets are Australia, Singapore, Russia, The Netherlands and Maldives. Going forward, Mamee intends to focus on strengthening its distribution network in neighbouring countries such as Thailand and Indonesia. It is also planning increased advertising and promotional activities to support sales in these countries.
Rising costs will weigh on margins in near term
Rising prices for raw materials is the primary challenge. The costs of flour, potatoes and palm oil collectively account for well over one-third of the company’s operating costs (including depreciation) while packaging accounts for another one-third. Both the raw materials and packaging costs are expected to trend higher in the current year.
Raising selling prices is sticky given the intense competition. To maintain market share, Mamee typically moves in lockstep with other key players in the market. It has had to absorb part of the higher costs last year, which resulted in lower profit margins.
In addition, the company was affected by the weakening of the US dollar. It is a net seller of the foreign currency, derived primarily from export sales after netting out payments for imported raw materials, mainly for potatoes.
To partially hedge against future currency fluctuations, Mamee is taking up a US dollar denominated loan to part-finance its expansion plans. The greenback has weakened further in the year-to-date from last year’s average rate, but the trend may start to reverse later in the year if the US economy continues to gain traction.
Mamee has also invested in an oil palm plantation to hedge against crude palm oil price movements over the longer term. Some US$6 million (RM18 million) is allocated to plant up to 2,000ha of land in Central Kalimantan, Indonesia. The transfer of plants from the nursery is expected to commence in May.
If all goes well, the company will expand its planting by up to another 3,000ha and 5,000ha in the second and third stages, after the initial planted acreage matures and starts generating income.