Description

Farcent Enterprise: Cleaning Products for a Pandemic at Yesterday’s Price

“In business heaven we shall all have businesses making simple products like WD-40, or bottled water that we could sell for two to four times as much as gasoline.” – Yvonne Chouinard

Latest IR slides: https://mops.twse.com.tw/nas/STR/173020200922E001.pdf

Short pitch:

Farcent Enterprise (“Farcent”), Taiwan’s top fast-moving consumer goods company in certain categories (i.e. a competitor to SC Johnson or Kobayashi Pharmaceutical), is now selling for lower EV multiples (i.e. 8-9x EV/EBIT) than it was in 2018 even though a) the core branded FMCG business has grown significantly, especially in cleaning products thanks to COVID-19, and b) non-core segments and assets have been minimized/disposed, demonstrating a commitment to shareholder-friendly ROE% by focusing on asset-light marketing/distribution of their own brands.[1]

Above: Farcent’s Taiwan market share as presented in September 2020 (left) and December 2016 (right), respectively.  Market share has increased for most categories in which Farcent is the incumbent #1 competitor.

General business description (see: https://www.linkedin.com/company/farcent-enterprise-co-ltd )

Farcent Enterprise Co. Ltd is a Fast Moving Consumer Goods (FMCG) company listed on the Taiwan Stock Exchange. The company was established in 1983 with the vision of “bringing convenience through breakthrough innovations; improving lives through high quality products”. Farcent’s head office is located in Taipei, Taiwan with business operations spanning across China, Vietnam, Thailand, Malaysia and the Philippines.   

Our entire product line consists of 10 different brands and covers air care products, dehumidifiers, household detergents and cleaning tools. We are currently the market leader in 7 household categories: Air freshener, dehumidifier, lint remover, dry/wet wipes & mop, spin mop, toilet in-tank blocks and toilet detergents.

In addition to our FMCG business, our Agency Business focuses on representing international brands wishing to expand into the Taiwan homecare market. Over the past 30 years, we have worked with reputable international brands such as, Sara Lee, Mayer Corporation, Heme, and Corelle Brands.

Farcent Enterprise’s competitive advantage lies in its R&D capabilities, manufacturing efficiencies and extensive distribution networks.

(Note: aside from a very small factory in Suzhou, PRC, Farcent as a listed company owns no production facilities – so this is basically a pure branded marketing/distribution company).

Why invest now?

An investor with a long record of success in Asia once mentioned that a key sell signal for a specific stock is when it becomes obvious that “you are getting tomorrow’s price today.”  Conversely, does that mean when you are presented with yesterday’s price today you should buy?  In the case of branded fast-moving consumer goods firm Farcent Enterprise, we feel the answer is yes.

It is not likely that many investors have followed Farcent over the last decade-plus.  If there were any following closely, they may have come away with an impression like “since the founder (father) died in 2012 the successor (daughter) has delivered nice profit / dividend growth thanks to category-leading products, but we are concerned about a) the company’s seemingly unrelated agency distribution business and b) the strange 2018 decision to invest a large chunk of shareholder equity into a plot of land.”

            Thankfully, the above concerns have now been addressed.  First, Farcent shrunk its previously large third-party “agency” distribution business, which obscured the performance of the higher-margin own-brand business.  Second, and most importantly, in May 2020 Farcent finally agreed to sell the vacant industrial land they acquired on a whim in 2018 to focus on brand-building for the core FMCG business – a shrewd decision in a COVID-19 world.[2]  Cash proceeds from this property disposal alone equaled almost 20% of Farcent’s market capitalization as of 31 July 2020.  This means Farcent’s total proforma cash on hand stands at roughly 1/3 of the entire market cap, taking the enterprise value down to where it was over two years ago (see below).

Bizarrely, Farcent’s 18 May 2020 announcement of the sale of the vacant land for cash has not led to any appreciation in the company’s stock price.  That makes little sense to us for a few reasons.  First, the realized profit on the sale (a few hundred million TWD) is going to provide a nice bump to 2H2020 overall profits and possibly lead to special cash dividends (on top of the trailing dividend yield of 5%) based on the management’s past record of generous dividend payout ratios.[3]  Second, history is full of examples of companies that, once they “got religion” about shedding low-return assets and focusing on higher-returns – and we are optimistic that’s happening at Farcent today – subsequently delivered eye-popping shareholder returns on the back of EV multiple expansion.  In Asian fast-moving consumer goods, there are at least two much larger examples of firms like this that, for years, used to trade at similar EV multiples as Farcent today before later re-rating to much fancier multiples: Kao (remember when they produced floppy disks?!) and Kobayashi Pharmaceutical (which used to have low-return wholesale and medical device segments).

            Another reason to invest in Farcent now is the fact that the cleaning products division – which sells detergents, soaps, wipes, mops, etc. – has now become the majority (i.e. approaching 60%) of the branded business revenues thanks to above-average sales growth.  Now that personal hygiene is at the forefront of consumer minds, even in Taiwan where COVID-19 has caused only 7 deaths, it is crystal clear from the January-July 2020 monthly sales breakdowns that Farcent’s cleaning products sales are performing even better (see below).  That’s important because, in our opinion, the more Farcent becomes recognized as a defensive cleaning products company, the more likely it will re-rate beyond just single digit EV/EBIT multiples.

Interestingly, the brands within Farcent’s cleaning products division were mostly a) acquired from third parties, and b) acquired at very cheap valuations.[4]   In the first major acquisition, which took place in 2003 during the SARS crisis, Farcent acquired 7 cleaning products brands (潔霜、潔霜S、藍藍香、小通、潔潔、強特、潔生) for only TWD 95 million when they were already generating over TWD 200 million annually.[5]  The next major acquisition, which took place in two phases, was the 2014-2015 purchase of 60.2% of Dikai Corporation, a leader in household floor mops and mops consumables which, due to a nasty shareholder dispute, created the chance for Farcent to buy-in.[6]  As you can see from the table below, 42% of the Dikai purchase price has already been taken out in cash dividends! 

Above: in six years, Dikai has already paid out 42% of Farcent’s purchase price in cash dividends, and profit continues to grow nicely, especially in 2020 year to date.

            We don’t know if Farcent will ever re-rate to Kao or Kobayashi-like valuation multiples, but as long as the current dividend payout ratio is maintained (yielding 5% now), we don’t need a nosebleed multiple to achieve a very worthwhile return for the risk we are taking at current prices.[7]  It is very hard to find any publicly traded leading Asian FMCG company where a) the business model is purely about branding/distribution with near-zero manufacturing, b) where cleaning products are the majority of revenues, and c) the company can be bought for ~3x proforma net liquid assets or a >5% dividend yield.  

Above: some of the products that comprise the cleaning products division sales (from left to right, top to bottom: toilet detergents, floor detergents, shower gel, “natural” laundry detergent, pipe cleaners, toilet flushing tablets, floor mop wipes, and spin-mops).

Catalyst

a) further growth in FMCG, espcially cleaning product, sales and b) potential special dividends from the windfall property disposal.