Apollo Foods - have you missed the new dawn?

For many years prior to Covid-19, Apollo Food was boring company with declining returns. All that changed post Covid-19 with profits shooting up.

Then came the change in controlling shareholders in Dec 2023. The new controlling party are the people behind the Baskin-Robbins franchise in Malaysia and Singapore.



The market price today at RM 6.70 per share is much higher than the RM 5.80 the new controlling shareholder paid for Apollo.

My valuation of Apollo based on the past 12 years performance came to about RM 5.11 per share. The confectionary business is not a high growth one and to drive 30% business improvements (implied by comparing market price with my business value) would be challenging.

Unless of course there is some plan to inject other profitable business into the company. Why would anyone pay a premium for a company unless they have plans to do magic with it?

For more insights visit Is Apollo Food an investment opportunity?

(20-07-2024, 10:38 AM)i4value Wrote: Unless of course there is some plan to inject other profitable business into the company. Why would anyone pay a premium for a company unless they have plans to do magic with it?

For more insights visit Is Apollo Food an investment opportunity?

hi i4value,

In general after a takeover attempt, the new SSH have to pay back the bridging loans they took to buy over from the previous owner. So it is already demonstrated in the >100% dividend payout ratio for FY24 (ending April2024). There is plenty of cash/liquid investments on the BS (~45% of equity).

Of course, the other way to take the cash out would be to inject new businesses as you mentioned. The potential new business is asset light and so probably doesn't require a lot of future CAPEX on an on-going basis.

From FY22-24 (3 years), the company recognized ~9mil of annual depreciation but only ~2mil of annual CAPEX. In your blog, you pointed out negative reinvestment over the last decade. So the big question is, is the Capital Cycle going to change any time soon? In general, outsiders like us have to get nervous when we haven't seen CAPEX for some time.

I think the previous Apollo is more like a marketing company than a manufacturing one. So I am not surprised by the low CAPEX since it is just maintaining the current production. I think the bet is the injection of Baskin-Robbins as I don't see any benefit for the new shareholders to takeover just to improve the existing busieness.

(25-07-2024, 08:40 AM)i4value Wrote: I think the previous Apollo is more like a marketing company than a manufacturing one. So I am not surprised by the low CAPEX since it is just maintaining the current production. I think the bet is the injection of Baskin-Robbins as I don't see any benefit for the new shareholders to takeover just to improve the existing busieness.

When one look at the annual report, only the 1st and last page show its products, abeit displayed in a very uninspiring manner. A quick google search does not show much "marketing" too. I am not sure if getting your products displayed on more prominent spaces in the retail outlets during festive season, count as marketing.

Since i am just 1 of those keyboard warriors that are obsessed with annual reports, I will just refer you to its Indonesian competitor (listed on SGX)'s annual reports which shows "plenty of marketing" to me.

https://links.sgx.com/FileOpen/Delfi%20L...eID=753076

The new SSH Datuk Cheah bought over the controlling stake at rm5.80, with book value~rm3.00 per share when it launched the offer (FY23 end). But since the company has zero debt and ~45% of equity in cash/liquid assets, the enterprise value per share would have been 5.80 - (0.45*3) ~ rm4.45.

So we could break down the rm3.00 as below:
(A) rm1.35: cash/liquid inv (45% of equity)
(B) rm1.65: hard assets and others (55% of equity)

In essence, Datuk Cheah is paying rm4.45 for (B) which is stated as rm1.65 as accounting value - a 170% premium.

A listing shell (for Baskin Robbins Msia/Spore) is not going to cost this much. I am not familiar with Bursa Msia companies but I suspect there are readily available companies for Datuk Cheah to choose for RTO (reverse take over).

Datuk Cheah will not pay 170% premium on book value (on its hard and intangible assets) unless they is plenty of hidden value (distribution network, depreciated machinery that still have long useful lives) OR he believes they can "turnaround" it to fulfill its potential. I think Mr Bursa Market is paying for that?