Mamee committed to long-term growth

Mamee-Double Decker (RM3.40) is committed to the longer-term growth of its food and beverage (F&B) business. The company is sticking to its multi-pronged strategy, with the aim of doubling revenue within the next five years.

 

With prevailing valuations at roughly 10.6 and 9.4 times our estimated earnings for 2010-2011, respectively, we believe there are good prospects for the stock in the long run. Plus, shareholders will earn fairly attractive net yields of 4.7% and 5.3% for the two years, based on the company’s minimum 50% profit payout policy.

 

Focus on expanding local market share

Mamee believes that new products and a wider reach will expand its domestic market share and underpin growth over the next few years.

 

The company has a good track record in creating and building some of the most enduring brands over the past four decades, including Mamee instant noodles, Mamee Monster, Double Decker and Mister Potato.

 

The two new products launched in April 2010 — Mister Potato Rice Crisps and Mie Goreng Indonesia — were very well received, with sales exceeding the company’s original targets. That helped boost sales, which rose 17% year-on-year (y-o-y) in 2Q10. For the first six months of the year, sales were up 21% y-o-y to RM235.6 million.

With the recent commercial operation of a new production line for Mister Potato, the company now has the extra capacity to export its Rice Crisps — touted as a healthier alternative snack with no added MSG and less fat. More new products are in the pipeline, including a beverage — under the Cheers brand name — before end-2010.

 

At the same time, it has expanded its sales force by some 10% — in addition to stepping up incentives for its 150 distributors and wholesalers. Currently, Mamee estimates that its sales and distribution network only covers about 60% of the country. To tap the underserved suburban and rural areas, it has also turned to a more direct channel — buying a fleet of vans for its sales team.

 

Industry statistics estimate Mamee’s share of the snacks market at over 31%. The segment accounted for about 58% of total sales in 1H10. The second-largest revenue contributor is instant noodles, which made up some 23% of sales in the first half of the year. The company believes that it could expand its share of this market, estimated to be worth some RM1 billion annually, further.

 

Thus, we expect renewed focus, which could include new products, in this market segment next year. Currently, Mamee is estimated to have roughly 14% market share, behind market leader Maggi, manufactured by Nestle.

 

Exports to support longer-term growth

To support longer-term growth, Mamee is investing greater efforts in widening the export markets.

 

It has done well, to date, exporting to over 80 countries and accounting for more than 32% of total sales in 1H10. Some of its biggest export markets now include Australia, Singapore, Russia, Hong Kong and the Netherlands.

 

Going forward, the company plans to focus on neighbouring countries like Thailand, Indonesia, Singapore, Vietnam and the Philippines — where the collective population base offers significant growth prospects. It may form strategic alliances with local F&B companies for greater effectiveness, especially with respect to distribution. The target is for exports to contribute at least 50% of sales.

 

Its strong balance sheet is well able to support future expansion plans with net cash and equivalent totalling just under RM90 million at end-June 2010. Capex is estimated at around RM30 million per annum. Indeed, we expect Mamee will have no trouble maintaining its fairly generous dividend payout.

 

Fairly attractive valuations and yields

Mamee is on track to achieving double-digit topline growth this year. Nevertheless, earnings have fallen a little short in 1H10, affected by a confluence of factors. These include higher advertising and promotional expenses during the Fifa World Cup, marketing for its new products as well as the strengthening ringgit. The company intends to adjust selling prices for exports early next year, which should help boost margins.

 

Net profit dipped to RM10.6 million in 2Q10 from RM12 million in 1Q10. Nevertheless, earnings in 1H10 were still 6.3% higher than a year ago.

 

We forecast net profit to grow by about 7% and 12% to RM46.8 million and RM52.5 million in 2010 and 2011, respectively. That implies its shares are now trading at relatively attractive forward P/E of about 10.6 and 9.4 times.

Plus, shareholders are expected to earn net yields of 4.7% and 5.3% based on Mamee’s minimum dividend payout policy of 50% of annual earnings for the two years. Net tangible assets stood at RM1.57 per share at end-June 2010.