Sector financial performance:

This company has been grouped in Coffee (green bean wholes) /Tea sector of food industry.

It seems that the growth in demand for roasted coffee and thus unroasted green bean has been accelerating in 2018 after a few years of moderate growth (average unit sales growth of 12-17% in 2018 VS 3-4% between 2016 and 2017).

Green bean price presented huge volatility in the past several years. The large fluctuations in price of green coffee in the past three years (around +/- 80%) not only makes huge uncertainties in the price of those companies’ products and also direct impact on their margins and profitability.

We think that the organic demands for coffees will be consistent or even beyond the average growth of food and non-alcoholic beverages. Since the demand is strongly related with sales price and thus with commodity price of green coffee we expect the pace for growth in this sector may be accelerating as global commodity’s price move down.  However, individual company’s profitability may depend on their abilities to effectively make the fluctuation in green coffee’s price passed on to roast coffee products. It seems, as reflected by the margin and profitability, many companies’ operation has been stocked in previously contracts of green bean when green bean price was high. The typical gross margins are 34% for roasted coffee companies and 16% for unroasted coffee companies.

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Company performance:

After a large decrease in its green bean wholesale of 2016 as a result of decrease from its largest customer, its wholesale seems to stop declining in 2017 and bounce back in 2018 with increase form other whole customers. Its private label coffee sales seem to have been increasing.

For the first nine months of fiscal 2018 compared with 2017(ended 20180731)

Organic sales (exclude acquisition) increased about 17% due to increase in coffee and green bean wholesales.

For fiscal 2017 compared with 2016(ended 20171031)

Net sales decreased 2.3% due to decrease in wholesales to one customer.

Sales decreased by 33% in 2016 caused by the decreased sales from its largest customer of wholesale. The reduction of sales in fiscal 2016 continued but at a slower pace in the first 6 months of fiscal 2017, which presented 15% down compared with the same period of time of 2016.

The 5% gross margin in fiscal 2015, which is very low compared with its average, is a reflection of loss in future contract operation that this company made for that period of time. Obviously, this company mistakenly purchased future contracts for commodity coffee at high price with an expectation that the price will stay or go up but encountered a significant drop of coffee bean price in 2015. The dropping market price of green coffee squeezed its margin of whole sale by about 10% as previous year.

It seems its gross margin back to normal (above 16%) after 2017. With an about 14% SG&A%, it generates an about 2.5 operating margin in 2018.

Stock price

Our valuation methods and analysis indicate that this stock is relatively undervalued with an enterprise price/EBI of 23 and enterprise price/sales of 0.36 considering increasing demand.

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