I described how I liquidated my infrastructure-related stocks and REITs in earlier posts this year. I bought several companies in the consumer staples sector to replace these holdings. In the post about my L'Occitane buy, I clarified that I consider brand-based consumer staples stocks as inflation hedges. I let Warren Buffett present the reasoning through one of his quotes. Soon after buying L'Occitane, I also added Creightons to my cosmetics holdings. After these two, I bought several other consumer staples stocks, which I didn't describe yet. Time for an overview.
Bought: Italmobiliare SpA (ITM.IT)
Starting with yet another cosmetics company, at least partly. Italmobiliare is the majority owner of the oldest cosmetics brand in the world: Santa Maria Novella. It also owns the Italian coffee brand Borbonne. Both Santa Maria Novella and Borbonne are snowballing and developing their international expansion. Italmobiliare itself is the holding company for the Pesenti family, which has a long entrepreneurial history in the cement business, among other activities. The family runs Italmobiliare as an investment holding with a wide range of activities, where Borbonne and Santa Maria Novella are now by far the largest holdings.
The idea was presented in the blog Value and Opportunity. This is the best European equity investment blog, in my opinion. I have been reading it for years, although I never had an investment in common with blogger memyselfandi007. Italmobiliare is the first. Another German blogger, Jonathan Neuscheler, followed up with his own analysis of Italmobiliare. Overall, Jonathan agreed with the findings of Value and Opportunity, and he bought the stock too.
Bought: Compagnie Du Bois Sauvage (COMB.BE)
Another family holding in Europe. This time in Belgium with the Paquot family in charge. The company makes and sells luxury chocolates under several brands: Neuhaus, Jeff de Bruges, Corné Port Royal en Artista Chocolates. Besides the chocolate business, the holding has minority investments in Umicore (batteries, recycling), Noël Group (extrusion of synthetic and bio-based materials), Berenberg Bank (German corporate banking), Ÿnsect (mealworms as alternative food), real estate in Europa and the US. Two smaller industrial holdings, Futerro and Galactic, are also involved in sustainability-related engineering.
There is not much public information about Compagnie Du Bois Sauvage, but I was still able to dig up some facts and draw conclusions from those. I will most likely share these soon in a separate blog posting.
Bought: Agronomics Ltd (LSE:ANIC)
This buy also deserves a separate blog post. Let me give a brief introduction for now. Agronomics is a venture capitalist investing in cellular agriculture. This means that Agronomics invests in companies that cultivate meat, but not by breeding, raising, and slaughtering animals in the traditional way. Instead, stem cell tissue is taken unobtrusively from an animal, transferred to a bioreactor and supplied with nutrients to grow it. Under the right conditions, the cells will grow into steaks and other meat products, sometimes within days. Note that the result is the same as a 'real' steak up to the molecular level. We are not talking about meat alternatives, where the experience of eating meat is simulated with plant-based ingredients such as soy, peas and gluten. (I find these disgusting, by the way.) Agronomics has a few older investments in such plant-based meat alternatives, but management decided to go all-in on cellular agriculture at some point.
Biotech companies are already producing edible, cultivated meat products, albeit in laboratories on a small scale and at very high costs per kilogram of food. Similar methods can also produce dairy, egg whites, seafood, chocolate, pet food, human breast milk, cotton, leather, and palm oil. Agronomics is involved in some of these initiatives too. Similar to cultivated meat production, the production is still at a small scale and has a very high cost per unit of end product. We are only in the beginning phase of this food revolution. Biotech startups are working on the consumer staples of the future. I found it suitable to include a company from this new food industry in my consumer staples portfolio.
Top-up: InNature Berhad (5295.KL)
InNature holds the rights to sell The Body Shop cosmetics in Malaysia (except Sarawak), Vietnam, and Cambodia. These rights are exclusive and apply to real-life shops as well as online stores. The bulk of sales is in Malaysia, where it is going well: high margins, high ROIC, and hardly any debt. I bought this family-owned company a year ago and have been following it ever since. The company's engagement with its target audience seems excellent. Over 70% of the group’s transactions come from its loyalty program members.
There are definitely challenges to the business. Tourist visits to Malaysia have disappointed ever since the COVID-19 pandemic, and consumer sentiment is subdued among local shoppers. In response, the stock price dropped quite a bit during the last few months. However, I am optimistic about The Body Shop for the long term. If that optimism is warranted, the stock is cheap at 0.40 RM. I decided to take this opportunity to top-up my initial InNature Berhad holding and take it to a full 4% position.
Bought: DKSH Holdings Malaysia Berhad (5908.KL)
I bought another Malaysian company, albeit a subsidiary of DKSH Holding Ltd Switzerland. The company connects consumer brands such as BOH Tea, Kalbe Farma, and Horlicks with retail outlets, primarily supermarkets and convenience stores. Similarly, it distributes medicines from drug manufacturers to pharmacies and clinics.
Can these manufacturers not organize their own distribution? Sometimes, they do, but specific skills, a good reputation and a network of business connections are essential. A supermarket operator is usually not interested in offering new, unproven products on its limited shelf space. It needs to be convinced that enough advertisement and promotion will be done. On a more practical level, some types of food and medicine need a cold supply chain and reliable transportation. I believe DKSH enjoys a competitive advantage, even a moat, with its position between these parties. Just like in the case of InNature, my attention was drawn to the falling share price. DKSH Malaysia's share price looked cheap when I pulled the trigger.
Bought: Chlitina Holding Ltd (4137.TW)
One last cosmetics company. I promise. Chlitina (pronounced: kelitina) is a cosmetics brand that started in Taiwan but now gets the bulk of its revenue and profits from Mainland China. This family-owned and operated company is a franchisor of beauty salons. It trains franchisees in the beauty business and helps them set up their own beauty salon. Chlitina makes its money from collecting franchise fees, but more importantly, by selling Chlitina-branded skincare and beauty products to the franchisees who re-sell those to their salon visitors.
This franchise model does not require much capital for Chlitina. Hence, its ROIC is typically between 20% and 30%, except during the COVID-19 lockdown periods during which the beauty salons were forced to close. Assuming a return to the pre-pandemic profits, the stock price seems low at a P/E = 17 and a Shiller P/E (where E is the average E over the last ten years) = 13.
The Chlitina salon network is already quite extensive in China and Taiwan; about 5,000 under the Chlitina brand, and another 600 under the RnD Nail and Eyelash name. We can not expect hyper-growth here, but there are still geographical areas to expand into. Recently, the company launched its concept in Vietnam. In addition, it built an e-commerce platform to sell Chlitina products directly to end consumers. We can expect revenue growth here. However, management must avoid cannibalizing the business of its franchisee's salons too much. That would create a conflict of interest.
Bought: Mega Lifesciences PCL (MEGA.BK)
Mega Lifesciences sells branded health supplements and herbal products, mostly over-the-counter products, but some prescription pharmaceutical products as well. In 1982, it started the Mega We Care brand in Thailand. Over the years, the company introduced Mega We Care all over Southeast Asia and in several African countries.
In Myanmar, the company also has a distribution business, which markets primarily third-party pharmaceuticals. The revenues from Myanmar are 40% of Mega's total revenues. If you consider that risky, I agree. I decided to accept this risk because Mega seems an attractive investment on most other metrics: no debt load, very high ROIC, growth, and high free cash flows resulting in dividends and sensible re-investments. The relative contribution of the Myanmar-based business to Mega's total revenues is shrinking because of its fast growth in other markets. I also considered that neither the Myanmar government nor the rebellious forces would have any rational interest in destroying a pharmaceutical distribution network. Still, the different conflicts within Myanmar could seriously disrupt Mega's business. I managed this risk by allocating it just 1% of my portfolio.
Bought: PT Industri Jamu dan Farmasi Sido Muncul Tbk (SIDO.ID)
Sido Muncul provides herbal medicine, beverages, vitamins, supplements and pharmaceutical products. The business is comparable to Mega, but Sido Muncul has limited itself to Indonesia, where it has a widely-known brand name. The high margins, high ROIC, low debt burden, and growth figures are similar to Mega. We often see favorable financials with companies that provide over-the-counter personal care products, especially when their brands have been around for a long time and are trusted by consumers. People are generally quick to self-medicate with trusted products when they are in pain or feeling under the weather. It's a widespread habit, even among people who also consult a doctor when feeling bad. For that reason, I also have sector peers like Haleon, Reckitt, Haw Par, Da Ren Tang, Tong Ren Tang, Baiyunshan, PT Tempo Scan, and Kotra Industries in my portfolio.
Bought: Kotra Industries Berhad (0002.KL)
As mentioned above, I bought shares in Kotra Industries, also known as Kotra Pharma. The reasons are similar to Mega and Sido Muncul. Kotra sells health supplements under the brand name Appeton. These supplements are sold over-the-counter and based on Western science, i.e. vitamins, omega-3, prebiotics, etc. Kotra has been selling these for decades, but only in recent years sales figures are taking off. The marketing is straightforward: supplements for children show pictures of children on the packaging, and those for the elderly show the elderly. There are also products for toddlers, pregnant women, athletes and skinny people who want to gain weight. Prices are low compared to competing products. Kotra has started selling Appeton in other Southeast Asian markets, as well as in several African countries.
Kotra Industries sells about 200 other pharmaceuticals in the over-the-counter market, as well as prescription-based. These products are lesser known than Appeton, but generally yield good sales numbers too. Prescription pharmaceutical sales are almost half of Kotra's total revenue. I find the prescribed medicine category harder to analyze than the over-the-counter sales. The first depends on regulatory developments, while the latter depends on excellent marketing. Therefore, I took a small (1%) position in Kotra instead of a full (4%) position. I may top up this position as my understanding of Kotra increases.
Disclosure: At the moment of publishing this blog: Long L'Occitane, Creightons, Italmobiliare, Compagnie du Bois Sauvage, Agronomics, InNature, DKSH Holdings Malaysia, Chlitina Holding Ltd, Mega Lifesciences, Sido Muncul, Haleon, Reckitt, Haw Par, Da Ren Tang, Tong Ren Tang, Baiyunshan, PT Tempo Scan, and Kotra Industries. No positions in Interactive Brokers, DKSH Holdings Ltd Switzerland, and Kalbe Farma.
