Cerebos consistently maintained profitability and dividends even worst of economic downturns.

Background:
Cerebos Pacific is a consumer branded food product company that is best known for its BRAND’s Essence of Chicken and Bird’s Nest tonic drinks in Asia. These health supplements, sold in both liquid and convenient tablet form, accounted for 60% of revenue in 2011. The other 40% came from other types of food products, primarily processed cooking ingredients such as sauces, gravies, coffee and condiments such as salt, but these are sold mainly in Australia and New Zealand.

Some of its other renowned product names are Woh Hup, Horleys, Gregg's and Yakult. In 1982, it was acquired by Ranks Hovis McDougall PLC, one of the largest British-based food manufacturer and distributor. In 1990, Suntory Ltd of Japan acquired a majority shareholding in the Company at $8.25 a share. Its ultimate holding company is Kotobuki Realty Co Ltd, a company incorporated in Japan.

A unique Asian product invented in the West: Many Asians know BRAND’s, having consumed them as children. Women in particular take BRAND’S during pregnancy. Purportedly, it boosts mental alertness and the product is commonly given as gifts. Unknown to many, however, BRAND’s was originally invented in the UK in the 1820s and only arrived in Asia in 1920.

Our view
Resilience under pressure. Unlike many other firms, Cerebos has consistently maintained its
track record of profitability and dividends even during the worst of economic downturns. In Australasia, it sells recession-proof staples such as sauces and gravies. In Asia, the company does not just sell plain liquid BRAND’s tonics but over the years, has added many other variants incorporating healthy herbal ingredients as well as a tablet range of health supplements. As a result, health supplement revenue has been growing steadily, lifting its contribution from 45% of total sales in 2004 to over 60% in 2011.

FY11 results epitomised this resilience. Despite a 20% fall in 4Q11 net profit, Cerebos declared a generous first and final dividend of 6 cents a share plus a bonus dividend of 19 cents a share, totalling 25 cents, which would yield 4.6% at the current share price. While this was lower than FY10’s dividend of 32 cents a share and full-year net profit was 31% lower than FY10, we note that FY10 and FY11 are not comparable. FY10 was for a 15-month period following the company’s change of year-end from September to December.

Things are bouncing back. Cerebos’s poor performance in the final quarter was mainly due to the flooding in Thailand and a stronger Singapore dollar. In addition, there was a food scare in Taiwan that put pressure on margins. But the situation is improving with sales in Thailand expected to bounce back by March as stores are restocked and consumption kicks in again. Historically, Cerebos has paid in excess of earnings and while upcoming capex may mean a lower payout, management said that the company is still committed to paying generous dividends.