Posted on February 5, 2009 - by La Papillion

Celestial

Photo taken from Celestial AR 2007

I’ve got another request by one of the superfriends to do a review on Celestial. I’ve covered Celestial quite some time ago, around end of 2007 I believe, so I think it’s a good time that I revisit this company again and see what had transpired between then and now.

Celestial is in the business of manufacturing soyabean protein-based food and beverage products and is selling them under its own brand name. They are also entering the biodiesel business which began a trial run last Oct 2008.

For this review, I’m only reading their 3QFY08 results, which they released back in November last year. Here’s a few statistics (based on 9MFY08 data):

Net margins: 22.8%
ROE: 25.7%
Annualised diluted EPS (assuming conversion of bonds to shares): SGD 0.14
Current assets/Current liabilities: 1.3
Total assets/Total equities : 1.73
Total liabilities/Total equities: 0.73
PE (based on today’s price of 0.340) = 2.4x

Here are a few things that I noticed and thought about:

1. Net margins are pretty high at 22.8%. However, compared to FY06, their net margins are at 31.9%. Even last year’s net margin was at 23.3%. We are definitely seeing some trends in the erosion of their net profits. I’ll say they are being held hostage by the high prices of soya bean. This can be seen in their Cost of good sold (COGS) as a percentage of their revenue. Since the last time I tracked this, their COGS (as a % of revenue) had increased from 55.7% in FY06, to 61.0% in FY07 and to the present 64.9% for the 9 months into FY08.

This is something that they have not much control on. I’m not sure if they hedge the price of soya beans purchased with something like a commodity futures contract, somewhat like what SIA did to lock in future oil price.

2. Other expenses like distribution costs had also shot up sharply. We’re talking about close to 50% rise in 3Q08. Not sure how they distribute their products, and not sure if it’s linked to oil too. But I do know that Celestial needs to do more to control their costs, which are already eating up their once very healthy net margins.

Considering that their net margins are so easily eroded within a span of 3 years, perhaps they do not have much of an economic moat. That being said, a net margin of 20 % plus is nothing shameful.

3. They have been easing down on their financial leverage since I began tracking it. Their financial leverage (defined as total assets/total equities) went from 2.17 back in FY06 to 1.99 in FY07 to the current 1.73 in FY08. The secured borrowings they had made back in FY07 had been fully paid up, leaving SGD 243 mil unsecured borrowings to be payable within one year or less (as at 30th Sept, 2008). This is from the zero coupon convertible bonds issued on 12th June, 2006, with a maturity of 5 years i.e. 12th June, 2011.

The price of the conversion of the bonds to share was adjusted to $2.47 per share. With the current crisis looming and the low share price of Celestial (last transacted at $0.340), I doubt if many shareholders will want to convert their bonds to shares, especially when the conversion price is like 7+ times more than the current share price.

They mentioned that if the bondholders held on till maturity (i.e. June, 2011), Celestial have to pay 129.263% of the principal amount (S$235 mil) by then. This means that Celestial will have to cough up nearly SGD 303 mil (RMB 1,515 mil) in 2011, assuming none of the bondholders convert to shares. That is a potential time bomb waiting to explode.

They did, however, have cash/cash equivalents of RMB 1,397 mil sitting at their company’s coffers now. It depends on how wisely they plan to use this amount of cash. Spend it foolishly and they will have to borrow more money to repay the bondholders when it approaches 2011. Would it be easier to borrow money then? I do not have the answers. Read more…

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1. Celestial, no more in heaven
2. Swiber – Reasons and Rationale for Divestment
3. LMA – A hidden asset play?