JB Foods: Should I Invest?
JB Foods (SGX: BEW) is a company that cultivates cocoa plantations, process cocoa into various ingredients and sells them to large producers of confectionery such as Mars, Hershey, Nestle, Mondelez etc. JB Foods has a market cap of 170 million so this stock is not really for the blue chip fans.
Before I continue, just want to point out that I'm currently invested in this stock so everything I mentioned here is strictly my opinion and not to be taken as any form of investment advice. Please do your own due diligence.
One year after its IPO in 2012, the share price of JB Foods fell by a whopping 80% and remained at low valuation since then. It was only in recent years that it started getting some attention so the price began to slowly go up.
At the point of writing, JB Foods has a PE ratio that is slightly below 5 and dividend yield of 4.11%.
Looking at past performance, JB Foods posted net loss which quickly lost investors' confidence hence the crash in 2013.
What attributed to negative profits was the oversupply of cocoa and weak demand in the market which subsequently led to a crash of cocoa price by 50%.
It was during late 2014 that the price of cocoa started to pick up again which became JB Foods' turnaround point. The business finally became profitable in 2015 and revenue has been increasing YOY.
So, what caused the spike in cocoa price in 2014? At that time, there was an Ebola outbreak in West Africa where 65% of the world's supply originates from as shared by JB Foods' chairman in their AR2014. As a result, market feared that the supply of cocoa would be affected which proceeded to drive up the price. In a nutshell, it was someone else's ill fortune that solidified JB Foods' standing in the cocoa world.
With a current ratio of 1.26, JB Foods would have no problem paying off short term liabilities. Long term debt is really low with D/E ratio at 0.02. Overall, a healthy balance sheet.
Evidently, JB Foods placed huge focus on increasing their production based on the yearly increase.
JB Foods is another straightforward business. Grow cacao trees > harvest > process the beans > sell... but investors need to be aware of the risks such as:
Profitability is closely tied to the price of cocoa: Cocoa price is very volatile which JB Foods can somewhat manage it is by controlling the supply.
Numerous factors that can affect the crops yield (weather, environment, fire etc.): I remembered my ex-colleague liked to term this as "靠天吃饭". Well, no one would be able to do anything about a series of bad weather other than praying. Unless, cocoa trees can be grown in clean rooms.
A change in consumption trend: If you are hungry and only have $3 in your pocket. Would you buy chicken rice or a chocolate bar? Pretty sure most would choose the former. Hence, the demand for cocoa products is likely to fall during an economy downturn especially now with COVID-19.
Capital intensive: A lot of money is needed to buy land plots plus a minimum of 5 years is needed for cacao trees to bear fruits equates to a slow ROI.
Although JB Foods is an undervalued stock that provides a decent dividend yield, my biggest concern is the lack of trading volume on top of being a small cap. Investopedia has an article on the various risks with illiquid stocks here.
What are my plans?
I really like the fact that the business wasn't severely impacted despite the drop in cocoa prices and COVID-19 disrupting the chocolate industry. Compared to a lot of the local blue chip stocks, JB Foods is actually in a much stronger position. However, its share price has been range bound due to low liquidity. Insiders buying didn't garner much of a reaction from the market as well.
After seeing my ETH doubled recently, I believe that my money would achieve a better ROI if invested in other assets. Hence, I might look to divest away my position in the near future.
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