Monday, February 15, 2010

Cerebos Pacific Ltd Part 2

This is part 2 of my write up on Cerebos Pacific. Part 1 is here.

Marketing Strategy
I shall comment mainly on the marketing strategy of Cerebos Pacific in Singapore.

Since young, I have been bombarded by advertisements from their flagship Brands Essence of Chicken that drinking it will lead to better results. This preys heavily on the 'kiasu' nature of Singaporeans in the academic arena. For the non-Singlish lingo trained readers, 'kiasu' literally means afraid to lose.

Fact is, to me, their essence of chicken does work. It does make me more awake and makes me concentrate better in exams. {Not advertisements hor}

As for the other brands in Singapore, I have to admit I didn't really see any adverts on them. Perhaps there are, but none had a lasting impression on me I suppose. However, Woh Hup sauces, being in a rather defensive area, would perhaps not need as much adverts. As mentioned in their report, the recession actually boosted their sale of sauces because people tend to eat more at home during recessions.

Brands also came up with 'specials' like hampers. It has become almost like a great gift for any occasion.

Finally, Brands also have a nationwide High Achiever Award, where students who achieved outstanding results are recognized by Brands. This creates further awareness among students.

Future Prospects
In my opinion, the future prospects of Cerebos looks bright, especially for their flagship Brands Supplements. Let's talk about Brands first.

Firstly, the foray into China with Brands Essence of Chicken is interesting, especially when the same marketing tactic (that worked in Singapore) is used again in China... that is, that it helps in studies. Competitiveness in China is great, and if they could afford it, I would believe that the take-up rate of Brands would be great!

It's also my belief that as Singaporeans get more affluent and health conscious, they would look to eating more healthily, and would likely include more health products into their daily lifestyle. Brands is well positioned to take advantage of this trend, being a trusted brand in Singapore. In addition, their foray into tablets essence of chicken and tablets of berries, etc, makes them stand out among most supplements, which deals mostly with mainstream supplementation like multivitamins, fish oil, etc. To further build upon this unique combination, new variants like Essence of Chicken with Gingko Biloba and added Panax Ginseng was launched. Interesting I would say. Another interesting product which caught my eyes in Brands Innershine Berries, which is choked full of antioxidants.

Enough for Brands. The other areas, although doesn't really interest me much as of yet, are also commendable.

Cerebos also sells Coffee, Asian Sauces and Western Sauces. However, none at the moment can beat the revenue contribution from Brands' liquid.

Nevertheless, they are still worth a mention here. The reasons for the lower revenue contribution is because of two reasons in my opinion. Firstly, these are newer forays as compared to Brands' liquid. Time is needed for them to build up their branding and increase their market share and penetration.

Secondly, Brands' Liquid has much less competitors, of which in Singapore are New Moon and Eu Yan Sang's essence of chicken. However, the competitors' products are to me not as tasty as Brands. Nothing beats the original indeed. Coffee on the other hand, is an attempt to break into a more established market in Australia. Hence the lower revenue contribution. Sauces has quite a number of high quality competitors, hence the lower revenue contributions as well.

Calculations of Intrinsic Value
With my limited understanding of Discounted Cash Flow Valuations, the following is what I came up with... simplified calculations:

In summary, the estimated intrinsic value of Cerebos is $3.58. At a margin of safety of say 20%, it would be $2.86. However, to me, $3 sounds more reasonable, which is still a cool 16% margin of safety.

At the current price of about $3.70, it appears that it is fairly valued. Not a time to buy yet... we should be patient and wait for it to come down... Given the uncertain market conditions now, hopefully $3 could be reached.

This sums up my part 2. I guess I might have to write a part 3 too, which will focus on dividend yield and sustainability, as well as look a bit deeper into their debts and gearing, their parent company, etc. Stay tune.


  1. Hi JW,

    Thanks for the DCF analysis and your computation of fair value. I always frown upon DCF because the assumptions are rather optimistic. For example the growth rate of 8% per annum for the next X years, just because the company has achieved 8.73% growth for the last X years. Earnings are notoriously tough to predict and I'd say there will most likely be down years as well as up years; plus inflation rate will probably fluctuate too but it's OK to use an average of 3%. Also, assuming you use DCF, are you discounting earnings into perpetuity? This assumes the company will be a going concern literally forever!

    I was hoping to see the numbers as in financial analysis for revenues, gross margins, expenses, net margins, ROE, gearing etc. Those are what determines if a company is sound and worth purchasing, besides the qualitative factors you've put up. Great job on the analysis so far! But I am still waiting for some numbers hehe...


  2. Hi MW,

    the company did mention that they do not need to look into new markets because the potential in current markets is still very high.

    DCF is just an estimation. So far, it has served me well as it gives a good estimation of value. The key word is estimation. And with that estimation comes the margin of safety, which will allow us a rather safe haven. I will attempt to research into what you mentioned as well in part 3.

    Afterall, I'm still learning :)


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