One of the largest Warren Buffett’s investments to date is Coca-Cola, which is one of the world’s largest F&B companies. Buffett’s affinity to Coca-Cola dated way back to his childhood when he started his entrepreneurship journey selling cokes. Years later, he would become a major shareholder of Coca-Cola. It is a well-known fact that what attracted Warren Buffett to Coca-Cola was its simple and understandable business model – selling soft drinks to consumers, supermarkets and restaurants. This trait of Coca-Cola turned out to be one of its investment moats.
Even though Warren Buffett has built his fortune from his investments in Coca-Cola, does it means that the Food & Beverage (F&B) industry should be in your investment menu? Let’s delve into some of the common myths and check out whether it’s worthwhile to invest in Singapore F&B stocks.
Myth 1: F&B stocks are simple and easy to understand
While Warren Buffett may have struck gold with Coca-Cola, it would be a sweeping statement to say that investing in an F&B stock is straightforward and simple. This is because no two F&B companies are created alike.
For example, an F&B brand that does well in Singapore may not be palatable at the global stage. Consumer’s culture and preferences play a large part in determining a company’s market share, so business owners must be able to understand consumers’ pattern in order to stand out from the rest of their competitors. More so, consumers’ taste buds also evolved over time.
A classic case study would be Dairy Farm and Sheng Siong. The former owns the Cold Storage supermarket chains which imports specialty items from countries like Australia, United States and Europe. Cold Storage targets mainly the affluent market with their stores usually located at shopping malls and private housing estates; the prices of their items are also slightly more expensive. On the other hand, Sheng Siong caters mainly to the heart-landers and the no-frill items they sell being more competitive in term of prices.
Myth 2: There are very few F&B stocks in Singapore
The general misconception among investors is that there are very few F&B listed companies in Singapore. Actually this is not true. There are about 49 F&B counters listed on the SGX board. Among the more notable ones are Sheng Siong, Breadtalk, Old Chang Kee, Frasers and Neave and Thai Beverage.
One of the reasons for this misconception could be due to the fact that supermarket operators, restaurants or food retailers who are at the downstream of the food chain have more visibility with consumers because they interact with the consumer.
However, it is important to note that these consumer facing restaurants, food brands and supermarkets are merely one part of the entire value chain of the F&B sector. The F&B sector also consists of raw materials, wholesaler, processors and then (finally) food retailers.
Source: Voyage Research
The F&B cluster has total market capitalisation of more than US$21 billion, and trades at a strong PE of close to 30x. Thus, if investors broaden their perspectives, there may be many hidden gems among the F&B sector for investment opportunities.
Myth 3: Investing in F&B stocks are boring
Most investors deem that F&B stocks are defensive but this may not be true, especially in Singapore market’s context. Data from an SGX commissioned report reveals an interesting volatility trend for the ROE between the F&B industry and the MSCI Singapore equity Index (MXSG) from 2000 to 2014. The results show that the F&B industry has a higher standard deviation of 6.5% as compared to MSCI. The dividend volatility is also higher at 1.7%. Having volatility is a good thing because investors can then sniff out value during misprices in market valuation. You don’t want to invest in stock clusters with stagnant prices or low daily trading volumes. This is because lack of investment interests can affect liquidity and therefore you might not be able to sell off your stocks even in bull runs.
Take for example, Super Group, one of Singapore’s leading instant beverage companies. At its peak in August 2013, the stock reached a mouth-watering price of $2.45. Investors who bought the counter before 2013 would have made a lot of profits as the counter surged to unprecedented price level. However, the former stock darling is now trading at a dismal $0.820, a result of a losing battle with its giant competitor, Nestle SA. Super Group is unable to catch up with the market leader and come up with major new products that can retain consumers. Thus, it is losing market share and its revenue continued to decline.
If you want to find out more about the valuation of F&B stocks in Singapore, you may want to watch this video presentation from Voyage Research at an SGX Investor Education Seminar.
Myth 4: It is better to invest in restaurants and F&B outlets businesses
Investors may be tempted into thinking that it is better to invest in restaurants and food chain businesses (F&B Services). After all, if you have tried their food, then it must be a good company to invest in. However, data from the SGX commissioned report reveals that between 2000 and 2014, the average ROE for F&B Services are lower at 12.2% compared to the broader F&B sector of 15.2%. The former stock price returns are also lower than the latter on average. Nevertheless, this sub-sector seems to be able to pay a slightly higher dividend as compared to the broad F&B sector, providing yield of about 5.2% compared to 4.7% by the broad F&B sector.
F&B Services is a very challenging sector. To succeed, the company must be able to cater to the evolution of the consumer preference. The company must be nibble enough to understand the changing preferences of customers and adjust their menus to retain consumer interests and loyalty.
Through this article, you may realize that investing in companies within the F&B sector is definitely not as simple as ordering a meal in one of these restaurants. If you want to find out more about the sector before investing in it, it will be worth watching this playlist on Youtube that covers a recent investor education seminar organized by SGX.
You can also stay up to date with the latest news from SGX by “liking” the SGX My Gateway Facebook Page.
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SG Wealth Builder
This article was written in collaboration with SGX
Written By: SG Wealth Builder