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Suu Joint Stock Company Buy / Hold June 09, 2017
Current Market Price 124.77
From the herders farm to your home Target Price 150
Operating continuously since 1958, Suu JSC (Joint Stock Company) is Growth Expectation >15.00%
Mongolias dominant processor of raw milk to finished dairy products Investment Period Long-term
including: milk varieties by fat grade, powdered milk, ice cream and premium
quality gelato products, cheeses, yogurts, and aaruul (a traditional item).
The Firm claims a sales market share of nearly 50 percent. It faces vigorous STOCK INFO June 09, 2017
rivalry in Mongolia. Within the past decade, APU, one of the nations dominant Sector Dairy
brewers/distillers, engaged struggle against Suu in dairy. Vitafit Group, Teso
ii
Groups Milko, and Monfresh are Suus other major rivals. Suu JSC would also Market Cap MNT 42.921 Billion
face cannibalization within its own product lines; with new introductions Net Debt (12/2016) MNT 16.4891 Billion
potentially filching customers away from its existing brands. The Firm is
Beta iii 0.262
actively seeking export market opportunities to sustain and grow revenue. Suu
commands loyalty, status, and excellent brand equity. These traits, in tandem 52 Wk High/Low MNT 154 / 122
with its dominance in Mongolia, present excellent potential for sales abroad. Avg Daily Volume 1,935
Max Group, a holding company with interests in supermarkets, logistics,
food/beverage, and mining/engineering, controls over 93 percent of Suu JSC Book Value (per share) 70.016
common equity, leaving just over 6 percent of 344 million shares to float on Ticker SUU
the exchange. Because of this, share trade volume trends low, and the stock ISIN MN00SUU01355
has exhibited price consistency, with a Beta of only 0.262. If Max Group dilutes
float with future splits, the market would energize trade volume.
KEY FINANCIALS INVESTOR CLASSES
1,000 MNT (Except Per Share Values) 2014 2015 2016
Net Sales 38,770,645 39,442,562 41,842,641 INSTITUTION INVESTORS:
% Change 15.70% 1.73% 6.08%
Net profit 2,828,699 557,169 502,727 Max Group Holdings 93.605%
% Change 21.52% -80.30% -9.77% OTHERS IN THE MARKET:
Depreciation / Amortization 1,641,687 2,241,892 2,898,210
EBIT Margin 5,304,880 2,593,280 2,363,407 Free Float 6.395%
EBIT Margin % Revenue 13.68% 6.57% 5.65%
EBITDA Margin 6,946,567 4,835,173 5,261,617 Index Trend 2014 2015 2016
EBITDA Margin % Revenue 17.92% 12.26% 12.57%
Interest Expense 1,814,275 1,827,705 1,750,065 CAGR (2004-Year) 38.1% 32.3% 28.9%
Interest % Revenue 4.68% 4.63% 4.18%
Times Interest Earned (EBIT:Interest) 2.92 1.42 1.35 Y-o-Y Growth -7.7% -13.8% -2.7%
Shares Outstanding 344 344 344,000
EPS 8222.96 1619.68 1.46 1-Yr Chart
Avg Share Price (Undiluted Common) i 102877.50 99195.15 133.57
Avg Share Price (Dilution Adj) 102.88 99.20 133.57
P/E 12.51 61.24 91.40
Book Value Per Share (Dilution Adj) 59.93 76.92 70.09
P/BV (Diluted) 1.72 1.29 1.91
RoE 13.69% 2.10% 2.08%
RoA 6.06% 0.98% 0.99%
Market Capitalization 35,389,860 34,123,132 45,948,886
Total Debt 26,032,772 30,330,694 26,536,634
Cash and Equivalents 8,621,035 7,852,241 2,954,012
Enterprise Value 52,801,596 56,601,585 69,531,509
EV/Sales 1.36 1.44 1.66
EV/EBITDA 7.60 11.71 13.21
Current Ratio 1.79 1.46 0.77
Acid Test Ratio 0.01 0.01 0.01
Debt:Debt+Equity 0.56 0.53 0.52
OVERVIEW OF THE BUSINESS STRUCTURE AND REPORTING: SUU JSC MAJOR ACCOMPLISHMENTS
Suu JSC is a joint-stock company incorporated under the commercial laws In the years since Max Group took a controlling
of Mongolias Civil Code. Max Group, a privately held trading company, interest (2005/2006), Suu JSC has made excellent
controls the majority (93.605%) of Suu JSC equity interest (344 Million gains across the board. The Entitys management
Common Shares). Suu JSC publishes its financial information to the has built strong cross-border relationships to
Mongolian Stock Exchange in PDF and Excel formats. acquire capital equipment and open doors for
future cross-border sales. In the twelve years
ASSESSMENT OF REVENUE GROWTH (C. 2011-2017) since 2005, the firm cites several commendable
results:
For a company entering middle age, Suu JSC has produced Sales growth
2005- Automated ice cream production
outpacing inflation (11.01%). From 2011 through 2016, Suu JSC achieved line to produce and package 15 flavors
a Compound Annual Growth Rate (CAGR) of 12.644%. But revenue growth within the Dream brand;
within the confines of Mongolia territory is limited by four main factors: a) 2006- Introduced the immensely popular
population; b) competition; c) regional preferences, and d) the limitations and high-volume PurePak milk line;
of the transportation sector. 2008- Introduced the TetraPak packaging
line for milk and juice;
THREATS AND CHALLENGES 2009- Installed the EuroStandard line for
Competition fruit yogurt;
In the dairy sector, Suu JSC faces robust competition from local companies: 2011- Earned SAI ISO 9001-2008 quality
award;
Apu Company, Vitafit, Teso, and MonFresh. And since Mongolias
2012- Introduced the Amore ice cream
population is so low, market saturation is an ever-present concern. and gelato brand after installing Italian
Product cannibalization is likely present; new product offerings or brands capital equipment;
may well steal customers from existing product lines. Finally, severe 2014- Introduced production of
weather may impact the viability of Mongolias cattle population. This Mongolian traditionally fermented yogurt
would diminish the Companys ability to access fresh dairy for processing. line;
2014- Imported fresh cattle stock:
Long-Term Debt Holstein cows for Max Agro subsidiary,
Suu JSC carries a 9% coupon $USD 6 Million loan facility from a 2011 IFC Mongolias first integrated dairy farm;
2015- Marked an annual milestone of
placement; principal is due in 2019. The firm has been servicing this debt
purchasing 13 million liters of milk from
as the MNT lost nearly 80% of its Foreign Exchange value over the past Mongolias herders and dairy farmers;
five years. But with Mongolias macro-economy now embracing major 2015- Suu JSC controls 70 distinct brand
improvements, the analyst expects MNT ForEx to recover. While macro- items; AND
economic resurgence alone may ease the Firms encumbrance, Suu may 2016- Focused to enter export markets
also seek a debt consolidation to restructure its liability portfolio. with the introduction of its first of a kind
UHT milk, in a square Tetra Pak package.
Mongolia
Suu JSC (MSE: SUU)
Apu Company (MSE: APU)
China
Mengniu Dairy (SEHK-2319)
Synutra (Nasdaq: SYUT)
United States
Lifeway (Nasdaq: LWAY)
The analyst reviewed a range of dairy companies to compare Suu dominates Mongolian dairy, commanding 48% of
financial performance. These companies: Suu, Apu, Mengniu, Mongolias 2016 Dairy products sales. Apu was the closest
Synutra, and Lifeway describe performance across a range of competitor at 23% followed by Vitafit and Teso Group. Notably,
geographical distribution and across a variety of capitalization since 2015, Teso lost 50% of its market presence to the leaders.
schemes.
Lifeway foods, based in Illinois in the USA, grew its fortune
producing and selling kefir (a fermented milk drink from Caucasus
in Eastern Europe). Synutra produces condensed-dehydrated dairy
and baby food formula. Mengniu is a leading China dairy producer
in Inner Mongolia. Suu and Apu are based in Ulaanbaatar Mongolia.
Notably, in 2016, most of these producers exhibited low Returns
on Equity. Because its Debt:Debt+Equity is so high, Synutra
returned 15% on Equity. But one suspects Synutra may have
problems servicing such onerous debt.
In the case of the Mongolian entities: Suu JSC and Apu Company,
both companies exhibit stressed cash-flow with similar RoE (
2.0%)and RoA ( 1.0%). But at the close of FY2016, Suu JSC
displayed extremely low liquidity ratio (Acid Test: 0.0125), Within liquid milk sales, Suu JSC stands leagues ahead of the
substantially lower than all of the other entities within this competition with over 83% of total milk sales. While the
comparison matrix. The American company, Lifeway, boasted the followers may nibble into Suus position, Apu, the closest
most liquid balance sheet. competitor, could hardly erode this dominance especially as
Suu and Apu each reflect a capitalization balance of about 50% debt Suu continues to market new brands and packaging, and novel
to 50% equity. Though Suu booked its foreign denominated debt to offerings for consumers in the region.
MNT in 2011/2012 at a stronger MNT ForEx rate. The debt
loading would be somewhat higher if adjusted to MNT at todays
foreign exchange regime.
Notwithstanding these companies wide range of financial
performance, the American Lifeway most certainly displays the
strongest financial ratios. The U.S. domiciled Synutra is highly
leveraged; presumably using debt to finance its production capital.
And among these five entities, the China domiciled Mengniu
posted negative earnings in FY2016.
With regard to the Mongolian dairy producers; Suu and Apu
struggle with foreign-denominated debt. This stresses their
cashflow and earnings potential. But appreciating MNT will
alleviate this problem, and likely within the coming twelve to
eighteen months. And market ingress to Japan will stimulate
excellent growth for Suus near-term.
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Discussion Discussion
In-country, Mongolian firms suffer exorbitant interest rates;
The analyst produced three distinct prospective models of loans cost 1.7% per month and more. From the perspective
FCFE: 1) Static model varying WACC; 2) Static model varying of a Mongolian entity, Suu JSC enjoys a sympathetic cost of
Revenue Growth Rate; and 3) Dynamic multi-iterative Monte capital. But to compete with international publicly traded
Carlo model oscillating all variables within a tolerance of 10% dairy firms, Suu should pursue more lenient debt rates in the
coefficient of variability. These models suggest a range of international markets provided the Firm is able to earn
Equity valuation for SUU JSC. The results page discusses the hard currency to service debt.
outcomes of these Equity valuation simulations.
STATIC MODEL: PROSPECTIVE VIEW MONTE CARLO FINANCIAL MODEL: PROSPECTIVE VIEW
Results of the Variable Revenue Growth Rate Discussion
This display reflects per share valuations from a 7.50% Monte Carlo is a statistics-mathematics process. It mimics real-
world volatility to probabilistically predict a range of outcomes. The
annual growth rate of revenue (per share 117.05) through
analyst employed the identical variable structure for both the static
17.50% annual revenue growth (173.04). The Prospective and Monte Carlo equity valuation models. BUT, the Monte Carlo
cash-flow analysis returned an expected per share valuation process dynamically alters the factors within defined constraints.
of 139.68 at a 12.50% growth rate, with WACC of 14.684%. In this instance, Monte Carlo uses the variables as the statistical
mean (arithmetic average), and fluctuated each factor 250,000
times at a standard deviation of 10% of the mean value.
Discussion
As discussed elsewhere in this paper, the analyst expects the
Firm must maintain revenue growth at a minimum of SUU MONTE CARLO12.50%: Results
Mongolias inflation rate: 6.50% with some true upside VALUATION PER SHARE This chart illustrates a potential
potential. Suu JSC earned a 5-year CAGR above 12.6%, and CURVE SHAPE Weibull range of valuation for SUU JSC
the analyst believes the Firm should sustain this measure of TRIALS 250,000 common equity per share at a
growth into the future. But when the firm succeeds in MEAN 155.71 paltry 12.50% growth rate. Using
opening one or more export markets, the analyst expects MEDIAN 154.08 this variable structure, the model
growth to hit the low 20% range. MODE 0.00 delivers the following statistics: a)
ST DEV 84.414 an expected median per share price
MINIMUM 0.00 of 154.08; with a b) projected
Results of the Variable WACC Growth Rate MAXIMUM 569.74 maximum to 570. At a base 12.5%
This chart plots Suu JSC valuations at different rates of capital VALUE >130 61.00% revenue growth rate, the
costs. The expected value per share is 139.68 at the VALUE >200 29.94% simulation returned a 61.00%
calculated WACC: 14.684%. Higher WACC returns lower per VALUE >250 13.62% probability of a fair valuation of
share valuations. VALUE >500 0.006% over 130 per share.
Discussion
The analyst sculpts scenarios with cautious estimates, aiming to err
on the side of restraint. This Monte Carlo prospective model uses
conservative estimates for growth and cost/expense factors:
growth rate approximating Mongolias historical inflation; costs
following historical mean percentages, tempered against industry
norms.
But when SUU JSC connects with export distribution channels,
revenue growth rates may well rise to over 20% for a half-decade
or greater. Though this potential is captured within the Monte
Carlo model, the conservative parameters pull valuation potentials
back toward the mean. And while this particular model only returns
a 13.62% probability of per share equity warranting values greater
Discussion than 250, the region of 25% growth is well within the realm of
possibility when Suu begins export. The static model sensitivity
The analyst expects Suu JSCs weighted average cost of analysis predicts a per share value of over 200 at 20% Revenue
capital to be no less than 14.5%, but it may be higher. Thus, growth. And one must also consider how a strengthening MNT,
the Firm would produce true value only through increased debt restructuring, and new product lines will buttress Suu cash
growth in revenue, and through cost reduction. position and increase shareholder value.
Sensitivity Analysis
The Monte Carlo FCFE DISCOUNTED CASH FLOW PROJECTION is sensitive to particular conditions: 1) Because the perpetuity CashFlow dwarfs
estimated cash-
flow in any given
annum, the
terminal year COST
OF GOODS SOLD
typically asserts
dominance over
the Firm and its
weighted Equity
valuation; 2) 2017
SGA (i.e. Monte
Carlo advocates
frugality for back
office salaries and
bonuses:); 3) 2017
CAPITAL
EXPENDITURES (the
firm must be
efficient in its
capital
expenditures); 4)
2017 WORKING
CAPITAL (reign in liabilities as a function of current assets); and 5) OTHER EXPENSE and 6) INTEREST EXPENSE (Suu is in the Mongolia dairy
processing business; it ought not frequently go trouncing around in unfavorable foreign exchange financing until it gains export
market share where it is able to earn hard currency to finance hard currency capital costs. Debilitating ForEx rates underline the major
problems within these two cost drivers: 5) and 6)). -Mongolian business has learned a valuable lesson regarding high finance and
hard currency.
appear today if the Entity had been able to float a
1) Cost of Sales dominates ultimate production of
debenture at 5% instead of 9% for $6 Million USD.
Shareholder Value and Returns on Equity.
-Bad Luck on the timing, securing a 9% cross-
Businesses have recognized this truth since
currency loan precisely just before Mongolias
humanitys early ancestors debated whether to
macro-economic collapse and the relative collapse
hunt every day (including unhealthy hot days), or to
of the nations currency in ForEx.
gather on some days and expense hunting assets
(experience, training, and energy) only within
profitable conditions.
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2) In ART OF WAR, Sun Tsu ordered the army to gain its
sustenance off the enemys land. In other words,
neither the troops nor the generals should reap any
excessive rewards unless and until the Firm gains
Tugrik Appreciation
authority over Revenue in the target market. In the
At present and into the near-term, Mongolian
case of Suu JSC, the firm should manage its back-
Tugrik appreciation presents an opportunity as
office payroll and executive bonus structures until
MNT is set for a firm recovery with a new optimism
the firm earns success in export earnings.
of Mongolias golden potential. The analyst expects
3) Certainly, Suu JSC must invest in capital
MNT to appreciate vis--vis $USD. And by 2019 this
infrastructure and with foresight. Suu must tightly
eventuality presents re-finance and debt/liability
control its investment in capital infrastructure, and
consolidation opportunities for Suu JSC.
safely squeeze additional years from equipment. In
addition, the firm may wish to create an internal
The Firm may well find itself easing into
R&D department. While R&D is a cost center that
extraordinarily favorable financing terms as the
bills expense to production; over years, R&D may
Tugrik appreciates, with the Mongolian nation
well engender significant shareholder value in new
gaining ascendancy as the go-to locus for economic
product lines.
growth and returns on capital investment in Central
4) Suu suffers from exorbitant interest payments. But
Asia.
for comparison, reckon how the financials would
FINANCIAL INDICES
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i
Suu JSC split its stock 1000:1 in late 2016. These prices are not adjusted for dilution.
ii
The analyst adjusted capitalization to account for Treasury Stock.
iii
The analyst calculated the beta (May 5, 2016 May 5, 2017): [Covariance of the past 365-days daily change in returns of stock price to the MSE-20 Index
change in daily returns] [Variance of the past 365-days daily change in returns of the stock price]
iv
The analyst performed CAGR analysis on the Mongolian Stock Exchange annual returns (Top 20) from January 2005 through May 2017 and determined that the
Compound Annual Growth Rate has been roughly 25%. (Mongolian Stock Exchange, 2017)
v
Bloomberg Markets hosts the data: https://www.bloomberg.com/quote/MSETOP:IND (Bloomberg Markets, 2017) The CAPM Model: E(ri) = rf + [E(rm)-rf]
vi
The analyst performed CAGR analysis on the Mongolian Stock Exchange annual returns (Top 20) from January 2005 through May 2017 and determined that the
Compound Annual Growth Rate has been roughly 25%. (Mongolian Stock Exchange, 2017)
vii
QuandL ForEx Data (QuandL.com, 2017):
12/31/15 01/31/16 02/29/16 03/31/16 04/30/16 05/31/16 06/30/16 07/31/16 08/31/16 09/30/16 10/31/16 11/30/16 12/31/16
1989.95 1998.94 2026.1 2045 2012 1993.5 1973 2060 2197 2278 2359 2455 2481
viii
This assumes a semi-annual term to cover short-term loans.
ix
Capitalization Weights:
000s 2016
Long-Term Debt 9,792,339
2011 $USD IFC Loan 6,000
Est. 2011 ForEx Rate [2011-Apr - 2011-Dec] 1,257
Est. MNT Value of 2011 Loan in 2011 7,542,843
Book Value of Other Long-term 2,249,496
Avg. ForEx Rate 2016-Jun - 2017-Jun 2,322
Est. MNT Value of 2011 Loan at 2016-2017 13,931,687
Long-Term Debt Capital (Adj. for ForEx) 16,181,183
KB Component 0.067648065
KE Component 0.079195722
Weighted Average Cost of Capital 0.146843787