Stock Review: Calbee, Inc.

Kevin Smith, of Delft Partners and portfolio manager of the TAMIM Asia Small Companies Fund, highlights one of the stocks in the Asia Small Companies portfolio. 

​Calbee, Inc. is a Japan-based company mainly engaged in the manufacture and sale of snack confectionary, bakery and cereal food products.  Calbee Inc. was established in 1949 as Matsuo Food Processing. The Calbee name was adopted in 1955 as a portmanteau of “calcium” and “vitamin B1”.  In 2009 Calbee entered into a business alliance with PepsiCo Inc. with PepsiCo taking a 20% equity stake in the Calbee business.  Calbee has number one market share in each of their business segments in Japan, the market share for potato based snacks is 76%, flour based snacks 57%, corn based snacks 24% and cereal products 38%.

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Accounting, Strategy and Governance Comments

Accounting

1. The Audit & Supervisory Board has three members, all are external to the business. The Audit & Supervisory Board meets fourteen times per annum and members serve a term of four years.
2. Calbee pays a full corporate tax rate in excess of 30%.
3. Calbee publishes earnings on a quarterly basis, updating full year earnings per share and dividend per share forecasts with each set of results.  Calbee publishes a medium term business plan which sets out strategic objectives for the business.  The Calbee accounts are compliant with relevant local and international accounting standards.

Strategy

1. Calbee has three key strategic goals; expanding their international footprint, developing new products and improving production efficiency.  Calbee has number one market share in all areas of their domestic business which limits opportunities to grow in Japan. Calbee has key international target markets as follows: United States, Greater China, United Kingdom and Indonesia.  The current ratio of international sales is 16.3% and that is expected to increase to 25% by the year 2024 in the medium term business plan. The longer term target is 40% international sales by the year 2030.
2. Calbee has indicated that in the period 2020 to 2024, JPY 60 billion will be invested in the existing business and JPY 80 billion in new business areas and acquisitions.  New investments are required to beat the cost of capital.  Calbee has executed two small acquisitions in the past six months, Warnock Food Products in the United States and Potato Kaitsuka Co. in Japan.  Warnock is a bean based snack foods business established in 1986, while Potato Kaitsuko specializes in products based on sweet potatoes as a main ingredient.  Calbee expects to be able to access the Warnock supply chain in the United States for their potato based products.  Calbee is the largest buyer of potatoes in Japan, more than 300,000 tons annually and the logistics expertise they have developed in that area can be applied to Kaitsuko’s purchases of sweet potatoes.
3. The business alliance with PepsiCo Inc. hasn't been developed to the optimal level that Calbee believe can be achieved.  In particular the management of Calbee believe there is scope to utilize the PepsiCo sales platform in the key target growth markets of the United States, United Kingdom, Greater China and Indonesia.
4. Calbee has a target to reduce greenhouse gases by 30% and food losses by 20% in the long term business plan to 2030.  Calbee is reducing salt and increasing the nutritional content of their snacks to comply with customer demand for healthier products.

Source:  Calbee Inc. Annual Report 2019

Governance
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1. Calbee has five independent directors on the Board comprising eight directors.  Directors are appointed for a term of one year (reduced from four years) and the Board meets thirteen times per annum.  The Board conducts an annual survey of director effectiveness.  Calbee has two female directors on the Board and a target of 30% female managers in the business as a whole by 2022.
2. Calbee is fully compliant with the governance regulations in Japan.  In February 2020 Calbee joined the task force on climate related financial disclosures.  In January 2020 Calbee joined the roundtable on sustainable palm oil. At the 2019 AGM 87% of total votes were exercised which is well above the average level of 70% typically recorded in Japan.
3. The dividend payout ratio has increased during the past decade from 23% to the current level of 33%.  There is scope for further increases in the dividend payout ratio.  The long term business plan indicates a target payout ratio of 40%.

Value, Momentum and Quality Comments

1. In the period since 2015, revenue growth in the mature domestic snacks business has been 2.3% per annum, much stronger growth has been achieved in the cereals business at 9.9% per annum and the international segment has achieved growth of 15.9% per annum.  In the most recent results covering nine months to 31st December 2019, revenue increased 2.7%, operating profit increased 7.0% and the dividend forecast was raised from JPY 48 to 50 per share.
2. Return on equity of 11% has scope to improve in the next few years.  The company has a relatively modest target level of 12% for return on equity which will underpin future improvements in our score for quality.  
3. There are just nine analysts covering the stock with target upside of as much as 35% for the shares. Earnings forecasts for 2021 have remained broadly flat in the past twelve months at JPY 144 per share an increase of 7.4% over the 2020 level.

Source: Market Screener