Berjaya 5196.KL should spin off Starbucks and liquidate the remaining assets. The result could be a consistently profitable company with a larger market cap.
Interesting opportunity. Seems like the valuation / upside depends on re-rerating to 25-30x earnings. But do the other branded retail "comps" trade there because there is a long growth pathway to open new units + high SSS% under those brands? And as you admit, the growth opportunity at Innature is much more limited? Without growth, 15x pre-Covid earnings isn't cheap. Asked another way, if the market was closed and you didn't have comps to value this against, what do you think underlying value is and how do you get there?
Well, the same could have been said about Innature when I bought it at 10x PE in the depths of the lockdowns last year. In an efficient market, there is always risk present in undervaluation. If the rerating catalyst were clear, Innature wouldn't be trading at these levels.
The strategy is really Monish Pabrai's "heads I win, tails I don't lose much". I think it'd be hard to find a stock with a story that wasn't trading at nosebleed/fair levels. Viewed in isolation, yes Innature may not seem very attractive today. But when viewed through the lens of risk:reward compared to the universe of stocks out there, this coin flip is relatively better.
The other two branded retail stocks I mentioned have 25x+ PE without any growth catalysts either. They just happen to be Starbucks and 7-11, instead of Body Shop. I would imagine the bulk of their valuations can be attributed to their high ROEs (rather than growth), which Innature also sports.
As for the what-if question in the absence of a market, think about it this way. If you could buy the latest iPhone for 50% off and weren't sure if you could resell it later, would you still consider buying it? I'm willing to take my chances. When covid is over and the consumer sector upcycle returns, I'm willing to take the chance that this stock will return to long-run branded retail PE multiples. And if the risk materializes and I don't earn anything, the outcome will still likely be better than if the risk of buying a different stock materializes.
As I mentioned above, risk cannot be eliminated from any stock investment, only managed. And when the possibility of being wrong cannot be eliminated, the question becomes "which stock has the lower downside". Stock investing is never a risk-free game, and this is as good as risk-free as I think we're going to get.
Thx for the writeup, solid and detailed analysis. I do have some concerns nonetheless:
(1) Are there any near-term catalysts for the stock, given that 15x FY 19 earnings are not exactly cigar-butt cheap, and the Covid-19 situation in Malaysia doesn't seem to be improving, the earnings for 2021 are likely to be affected as well. A pessimistic scenario would be that the price is going to remain stagnant for the next 1~2 years, possibly even longer.
(2) Does the Body Shop have a strong presence online? The products they sell are used daily by customers, consequently, are there any indications that the customers are shifting away from their products (given that The Body Shop stores are closed and customers might have bought other stuff?) A Branded Retail product notwithstanding, there are a myriad range of similar products available on the market.
(3) Referring to your point regarding the market thinking Innature has zero earnings growth visibility in Malaysia, has the management given any indication to analysts (I don't have access to analysts reports/interviews) of their growth strategy. The company has been here for 37 years (first shop in 1984), if the earnings do not grow, just waiting for the stock to rerate seems a little risky. Personally, I think the multiples 7-11 and Berjaya are preposterous, given that 7-11 is an obviously declining business and Berjaya is at best a mediocre business (no idea of the potential of Starbucks).
(4) What are the terms and conditions which The Body Shop is being licensed to Innature? By which I mean are there any payments/royalties etc to be paid to the UK brand? I was unsure about this as the annual reports do not make this clear.
Side note: Similarly, having read your point about MCD's (big fan of the company and the food), Do you know of the licensing agreement/business model of the Sendirian Berhad owning McDonald's Malaysia. Is it akin to the standard licensing agreement given by McDonalds Corporation to US MCD operators (owner/operator pays a the majority of Maintenance CAPEX, certain percentage of revenues have to be given to McDonald's Corporation etc)?
It was a refreshing experience to read your blog, written in clear prose with incisive analysis. You just earned another subscriber! :)
1) There is no catalyst for a rerating. If I had to guess, that's partly why the share price is depressed currently. But such reratings cannot be anticipated without the benefit of hindsight anyway, so the question becomes do you want to suffer upside risk or downside risk. Regardless, as a value investor my intention is to make money from the intrinsic value of the underlying business, rather than be beholden to the timing of the share price. It will happen eventually.
2) The premise behind the investment thesis is that historical earnings alone will justify the current share price. As long as earnings remain flat, no further growth is necessary to justify the thesis. To answer your question more directly, as long as the Body Shop brand is not impaired, I wouldn't worry too much about growth, as that's not where the value lies.
3) Management has guided that their next chapter of growth is in Vietnam, however I am not wagering on the share price performance based on that. As mentioned above, as long as historical earnings maintain it will justify the thesis. You can try reaching out to their investor relations team for more clarity on this, they're quite accommodating.
4) I'd recommend searching their Prospectus for the term 'royalties' or similar to find the answer to this. It should be a standard % of revenue sharing agreement. Regardless, it's not central to the thesis.
Glad to know I put a smile on your face. I can be rather busy sometimes, but stay tuned for more.
Berjaya 5196.KL should spin off Starbucks and liquidate the remaining assets. The result could be a consistently profitable company with a larger market cap.
Interesting opportunity. Seems like the valuation / upside depends on re-rerating to 25-30x earnings. But do the other branded retail "comps" trade there because there is a long growth pathway to open new units + high SSS% under those brands? And as you admit, the growth opportunity at Innature is much more limited? Without growth, 15x pre-Covid earnings isn't cheap. Asked another way, if the market was closed and you didn't have comps to value this against, what do you think underlying value is and how do you get there?
Hi Avi,
Well, the same could have been said about Innature when I bought it at 10x PE in the depths of the lockdowns last year. In an efficient market, there is always risk present in undervaluation. If the rerating catalyst were clear, Innature wouldn't be trading at these levels.
The strategy is really Monish Pabrai's "heads I win, tails I don't lose much". I think it'd be hard to find a stock with a story that wasn't trading at nosebleed/fair levels. Viewed in isolation, yes Innature may not seem very attractive today. But when viewed through the lens of risk:reward compared to the universe of stocks out there, this coin flip is relatively better.
The other two branded retail stocks I mentioned have 25x+ PE without any growth catalysts either. They just happen to be Starbucks and 7-11, instead of Body Shop. I would imagine the bulk of their valuations can be attributed to their high ROEs (rather than growth), which Innature also sports.
As for the what-if question in the absence of a market, think about it this way. If you could buy the latest iPhone for 50% off and weren't sure if you could resell it later, would you still consider buying it? I'm willing to take my chances. When covid is over and the consumer sector upcycle returns, I'm willing to take the chance that this stock will return to long-run branded retail PE multiples. And if the risk materializes and I don't earn anything, the outcome will still likely be better than if the risk of buying a different stock materializes.
As I mentioned above, risk cannot be eliminated from any stock investment, only managed. And when the possibility of being wrong cannot be eliminated, the question becomes "which stock has the lower downside". Stock investing is never a risk-free game, and this is as good as risk-free as I think we're going to get.
Dear Aaron,
Thx for the writeup, solid and detailed analysis. I do have some concerns nonetheless:
(1) Are there any near-term catalysts for the stock, given that 15x FY 19 earnings are not exactly cigar-butt cheap, and the Covid-19 situation in Malaysia doesn't seem to be improving, the earnings for 2021 are likely to be affected as well. A pessimistic scenario would be that the price is going to remain stagnant for the next 1~2 years, possibly even longer.
(2) Does the Body Shop have a strong presence online? The products they sell are used daily by customers, consequently, are there any indications that the customers are shifting away from their products (given that The Body Shop stores are closed and customers might have bought other stuff?) A Branded Retail product notwithstanding, there are a myriad range of similar products available on the market.
(3) Referring to your point regarding the market thinking Innature has zero earnings growth visibility in Malaysia, has the management given any indication to analysts (I don't have access to analysts reports/interviews) of their growth strategy. The company has been here for 37 years (first shop in 1984), if the earnings do not grow, just waiting for the stock to rerate seems a little risky. Personally, I think the multiples 7-11 and Berjaya are preposterous, given that 7-11 is an obviously declining business and Berjaya is at best a mediocre business (no idea of the potential of Starbucks).
(4) What are the terms and conditions which The Body Shop is being licensed to Innature? By which I mean are there any payments/royalties etc to be paid to the UK brand? I was unsure about this as the annual reports do not make this clear.
Side note: Similarly, having read your point about MCD's (big fan of the company and the food), Do you know of the licensing agreement/business model of the Sendirian Berhad owning McDonald's Malaysia. Is it akin to the standard licensing agreement given by McDonalds Corporation to US MCD operators (owner/operator pays a the majority of Maintenance CAPEX, certain percentage of revenues have to be given to McDonald's Corporation etc)?
It was a refreshing experience to read your blog, written in clear prose with incisive analysis. You just earned another subscriber! :)
Hi Kee,
1) There is no catalyst for a rerating. If I had to guess, that's partly why the share price is depressed currently. But such reratings cannot be anticipated without the benefit of hindsight anyway, so the question becomes do you want to suffer upside risk or downside risk. Regardless, as a value investor my intention is to make money from the intrinsic value of the underlying business, rather than be beholden to the timing of the share price. It will happen eventually.
2) The premise behind the investment thesis is that historical earnings alone will justify the current share price. As long as earnings remain flat, no further growth is necessary to justify the thesis. To answer your question more directly, as long as the Body Shop brand is not impaired, I wouldn't worry too much about growth, as that's not where the value lies.
3) Management has guided that their next chapter of growth is in Vietnam, however I am not wagering on the share price performance based on that. As mentioned above, as long as historical earnings maintain it will justify the thesis. You can try reaching out to their investor relations team for more clarity on this, they're quite accommodating.
4) I'd recommend searching their Prospectus for the term 'royalties' or similar to find the answer to this. It should be a standard % of revenue sharing agreement. Regardless, it's not central to the thesis.
Glad to know I put a smile on your face. I can be rather busy sometimes, but stay tuned for more.