Dairy Compounders Ignore Macro Noises: Bega Cheese +130%, PT Ultrajaya Milk +230% YTD (Bamboo Innovator Insight)

The following article is extracted from the Bamboo Innovator Insight weekly column blog related to the context and thought leadership behind the stock idea generation process of Asian wide-moat businesses that are featured in the monthly entitled The Moat Report Asia. Fellow value investors get to go behind the scene to learn thought-provoking timely insights on key macro and industry trends in Asia, as well as benefit from the occasional discussion of potential red flags, misgovernance or fraud-detection trails ahead of time to enhance the critical-thinking skill about the myriad pitfalls of investing in Asia at the microstructure- and firm-level.

The weekly Bamboo Innovator Insight series brings to you:

Cheese

Dear Friends and All,

Dairy Compounders Ignore Macro QE Noises: Bega Cheese +130%, PT Ultrajaya Milk +230% YTD

At the Singapore Cricket Club last Thursday, the Bamboo Innovator had lunch with one of our subscribers, Mr Hemant Amin, a highly accomplished and astute Indian value investor who runs a global industrial raw material procurement house and his own multi-million family office with concentrated bets in stocks such as Infosys which delivered over 60 times in handsome returns. Hemant also heads a value investor group called BRKets (www.brkets.com) with 11 other members. The name BRKets (pronounced as ‘brickets’) is a fusion of Berkshire Hathaway’s ticker code BRK and the Cricket Club where they meet. 6 of the BRKets members joined us for an interesting lunch discussion on value investing in Asia where we share our investment outlook, wide-moat business model analysis and stock ideas.

When Hemant ordered cheese platter for his desert, it triggered me to think about the inspiring stories of another outstanding Indian entrepreneur Devendra Shah and Barry Irvin of Bega Cheese. Shah turned the smallish Pune-based Parag Milk Foods into a high value dairy powerhouse with his bold decision in early 2008 to invest in the untapped opportunity in processed cheese in India, doubling by end 2008 the entire country’s cheese-making capacity from 40 tonnes to 80 tonnes. Interestingly, while the world is fixated on the QE tapering macro challenges, Warrnambool Cheese & Butter Factory (ASX: WCB AU, MV A$467m) is up 90% in less than three months since Sept. This was despite WCB posting its lowest profit since 2009 with FY13 (year end Jun) net profit down over 50% as it was the subject of a three-way bidding war by Canadian giant Saputo (TSX: SAP, MV C$9.6bn), Japan’s Kirin, and Bega Cheese (ASX: BGA AU, MV A$704m). Bega is a wide-moat company in our Bamboo Innovator Index since its listing in Aug 2011 with a market value of A$240m. NZ dairy giant Fonterra (FCG NZ, MV NZ$10.9bn), after its own contamination scare in Aug, joined in the industry consolidation battle by acquiring a 6% stake in Bega on Nov 2, adding on to Bega’s spectacular share price returns of 130% year-to-date. Ongoing competition in the raw milk market with supply affected by droughts in NZ and Australia and unseasonably cold weather conditions in Europe has kept upward pressure in prices paid to milk suppliers; the surge in the GDT (global dairy trade) price index from 800 to over 1,400 in the last year-and-a-half has hurt the profitability of processor such as WCB. Yet, despite both WCB and Bega being cheese processor companies, Bega has been able to achieve FY13 EBITDA and net profit growth of 13% and 25% respectively as compared to the FY13 decline of 28% and 51% for WCB. Meanwhile, the share price performance of dairy giants Saputo and Fonterra are flat YTD.

So why are Parag and Bega outperforming Bamboo Innovators in a cyclical commodity industry, especially when they are supposedly price-taking minnows in the midst of oligopolistic giants Fonterra, Murray Goulburn, Saputo, Amul (India), Royal Friesland Campina, Arla etc? What are the lessons for value investors when investing in companies related to the volatile commodities cycle? I admit that I was also surprised by the sharp jump in share price of well-managed boring consumer food companies such as Bega. But it once again proves the wisdom of one of our subscribers, Mr K, an intelligent value investor who has nearly doubled his returns from his investment since Mar this year in DKSH Malaysia (DKSH MK) after it was highlighted as a Bamboo Innovator; his thoughtful comments:

“I’d love money making ideas, but I also very excited about education, and understanding/ navigating Asian markets. If I can avoid stupid (frauds) mistakes, I think the upside will work out.”

By avoiding the “set-up” fraudulent companies which are promoted with that alluring sexy growth theme by a whole gamut of syndicates, insiders and brokers/dealmakers, and by staying long-term in undervalued wide-moat businesses – even if they are boring like cheese! – the short-term returns may be unexciting or even frustrating but the longer-term upside will eventually work out for the value investor.

How did Barry Irvin grow Bega Cheese from a single-site regional dairy processor in southern New South Wales (NSW) town of Bega, with 80 employees and selling only into the domestic market, to its position today as the southern hemisphere’s largest cheese-packing and processing business, with sales nudging to over A$1 billion a year, exporting to more than 40 countries and employing over 1,600 people? What caught the Bamboo Innovator’s attention in Bega before its Aug 2011 listing was an article in May 2011 in Sydney Morning Herald about how Irvin was the parent and caregiver of his autistic child Matthew, now 22. For two decades, the 51-year-old Irvin has juggled the responsibilities of caring for a disabled child, running the family farm and steering the ambitious former dairy co-operative through deregulation, acquisition, a public float..

helpLead-420x0Barry Irvin pictured with his son Matthew.

The role of a caregiver is special: they need to have that intangible quality of inner courage at its “core” to give strength to its “periphery”, much like the empty hollow center of a bamboo in which the nutrients and moisture that would have been exhausted making and maintaining this empty center can be utilized for growth of the periphery bamboo culm/stem. The architecture of the bamboo culm presents a powerful configuration: fibers of greatest strength occur in increasing concentration toward the periphery of the plant. With Irvin helming Bega, it is likely that the company will invest in the intangibles, in people and building long-term relationships..

Also, what are the lessons for value investors from the story of Indonesia’s PT Ultrajaya Milk (+230% YTD), controlled by the family of the late Ahmad Prawirawidjaja who established the business in 1958 from his house in Bandung? What are the 4 key Bamboo Innovator takeaways?

Google Has Designed A Throat Tattoo That Is Also A Lie Detector

Google Has Designed A Throat Tattoo That Is Also A Lie Detector

JIM EDWARDS 58 MINUTES AGO 994 1

Google has filed a patent for an electronic skin tattoo that connects to a mobile device, and can be used as a lie detector. The tattoo isn’t permanent — it’s applied to a sticky substance on the skin. The intent of the device is to allow someone to wear a communications device on their throat, keeping a mobile phone or similar device in their pocket. The tattoo communicates with the device, transmitting conversation. Such a device might make things easier for someone who wants to transmit a conversation but cannot use their hands. Google’s application suggests it might be used by security personnel, perhaps working undercover in noisy environments like sports stadiums or at political demonstrations: Mobile communication devices are often operated in noisy environments. For example, large stadiums, busy streets, restaurants, and emergency situations can be extremely loud and include varying frequencies of acoustic noise. Communication can reasonably be improved and even enhanced with a method and system for reducing the acoustic noise in such environments and contexts. The tattoo has a darker side too, according to the application. It can be hooked up to a lie detector: Optionally, the electronic skin tattoo 200 can further include a galvanic skin response detector to detect skin resistance of a user. It is contemplated that a user that may be nervous or engaging in speaking falsehoods may exhibit different galvanic skin response than a more confident, truth telling individual. It’s not clear from the application why someone might want to operate a lie detector at a remote distance from the person they were testing. But again, undercover operations — in which authorities send in stooges to deal with bad guys — spring to mind. Or perhaps Google envisions a situation in which the person wearing the tattoo doesn’t know they have one? We first saw this on The Register. Here’s a closeup of the Google neck tattoo:

screen_shot_2013-11-11_at_8.33.02_am 2

Why Focusing Too Narrowly in College Could Backfire; Students are told learn the subjects that will best land them a job when they graduate. But that could be the worst thing they could do

Why Focusing Too Narrowly in College Could Backfire

Students are told learn the subjects that will best land them a job when they graduate. But that could be the worst thing they could do.

PETER CAPPELLI

Updated Nov. 10, 2013 4:19 p.m. ET

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A job after graduation. It’s what all parents want for their kids. So, what’s the smartest way to invest tuition dollars to make that happen? The question is more complicated, and more pressing, than ever. The economy is still shaky, and many graduating students are unable to find jobs that pay well, if they can find jobs at all. The result is that parents guiding their children through the college-application process—and college itself—have to be something like venture capitalists. They have to think through the potential returns from different paths, and pick the one that has the best chance of paying off. For many parents and students, the most-lucrative path seems obvious: be practical. The public and private sectors are urging kids to abandon the liberal arts, and study fields where the job market is hot right now. Schools, in turn, are responding with new, specialized courses that promise to teach skills that students will need on the job. A degree in hospital financing? Casino management? Pharmaceutical marketing? Little wonder that business majors outnumber liberal-arts majors in the U.S. by two-to-one, and the trend is for even more focused programs targeted to niches in the labor market.

Read more of this post

35 Years After Inventing The CD, Philips Is Doing Everything Right

35 Years After Inventing The CD, Philips Is Doing Everything Right

JAN HENNOPAGENCE FRANCE PRESSE NOV. 10, 2013, 6:02 AM 9,504 7

Back in 1978 in a boardroom near Lake Geneva, a bunch of nervous Philips inventors demonstrated a device that was to revolutionise the entertainment industry for the next three decades. Called the “Pinkeltje” after a small Dutch gnome in a children’s story, the device performed flawlessly — and so the world’s first Compact Disc (CD) player was born. Thirty-five years later the Netherlands’ Philips, once one of Europe’s best-known brands for radios and televisions, is ditching the consumer electronics business that used to be its bread and butter, and is thriving. The Philips story is a business case of how a leading global industrial group, with leading technology, went through several rocky years of restructuring, and found a successful strategy to re-invent itself in time. Read more of this post

Should a non-technical founder hedge against failure?

Should a non-technical founder hedge against failure?

BY HAYDEN WILLIAMS 
ON NOVEMBER 10, 2013

Recently I grabbed coffee with a founder whose startup is in a similar stage to mine. I reached out to him after he signed up for our networking platform. Because he had also started his career in finance I was interested to speak with him. We shared the challenges we were dealing with, our product roadmap and plans to monetize our products. Towards the end of our conversation, we veered into the personal dilemmas early-stage founders face. He asked me, “What’s your plan if, worst case scenario, Treatings fails? Would you go back to finance, start another company or join an existing startup?” Read more of this post

Why it is very clever to pretend to be stupid; Disarm others, make them forget you are scarily powerful and lull them into liking you

November 10, 2013 1:48 pm

Why it is very clever to pretend to be stupid

By Lucy Kellaway

Disarm others, make them forget you are scarily powerful and lull them into liking you

Last week I had a drink with a woman who has just landed one of the biggest jobs in her industry. Over a couple of grapefruit negronis she told me she had no idea why she had been promoted and that she was not even sure if she wanted the job. In return I told her that I was bumbling along more or less OK, though keeping the show on the road was getting increasingly tricky. Read more of this post

It’s Ryanair’s Michael O’Leary’s biggest PR gaffe – he wants us to like him

It’s Michael O’Leary’s biggest PR gaffe – he wants us to like him

The self-loathing British public respond more to companies that show them disdain than those who suck up to them

David Mitchell

The Observer, Sunday 10 November 2013

As a big fan of Ryanair‘s marketing strategy, I was shocked to hear that it’s being abandoned. The villainous airline is trying to change its image. It’s going to spend money improving its website, it’s slashing charges for not printing your boarding card, it’s even allowing people to reserve seats. As chief executive Michael O’Learyput it: “I want to be loved by my customers as much as I love them… Boy, are we listening and responding.” It was as if JR Ewing was making the case for renewable energy – I was devastated. Read more of this post

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