Food price increase, 2022

40% increase in wheat prices in 2022? (World Bank). You may have noticed, food prices have been increasing over the past few months. CNBC reported that food-at-home prices are expected to increase by 3-4% before 2023, and grocery prices have increased 7.9% in February 2022. The price increase is a general figure, and actual increase varies depending on the type of food. For example, meat and fish are up 13%, whereas vegetables are up at a much lower 4.3%. 

(note that these numbers are specific to the US, and different countries experience different levels of price variations)

Reasons for the price increase:

1) Covid-19. Business shutdowns and country lockdowns strained supply chains, shortage of labour, concerns of food security which caused some countries to limit supply to the global market.

2) Ukraine crisis. Russia and Ukraine account for almost 1/3 of the global wheat and barley market, and majority of the world's export of sunflower oil (cooking oil). Some knock-on effects include other exporting countries to ban their own exports to maintain food security in their countries.

Countries have begun to be more protectionist and reduced reliance on foreign countries during the pandemic. This issue of food shortage will likely spur further protectionism (as already seen in the case of Indonesia banning palm oil exports), and countries already facing a food crisis will likely bear the brunt of the food shortage. Such countries include Somalia, which obtained most of its wheat from Russia and Ukraine in 2021. 

As individuals, we can reduce food waste, help one another out, or even plant some foods of our own. Let's hope things get better ASAP.

Edit: why did the price of meat and fish increase more than vegetables? This is dependent on how the supply chains have been affected. Meat and fish are said to have more labour involved along the value chain as compared to vegetables, which could be a reason for this. Aside from labour shortages, food for livestock are also more expensive now, further driving up the cost.

18th July - Nestle and The Bountiful Company

(Test run)

Nestle announced on 30th April that it has entered into an agreement with PE firm KKR to buy The Bountiful Company (TBCo). TBCo will come under Nestle's Health Science (NHSc) division, and synergies between the firms will be fully established by 2024.

Background: Nestle is multi-national F&B conglomerate that deals with many types of food. Its NHSc division is a leader in the nutritional science space, and sells nutritional products for various purposes, from food allergies to constipation. On the other hand, TBCo is also in the nutrition and supplement industry, and is a pure play branded leader. TBCo blends science and nature to manufacture, market and sell their products to improve people's health and wellness. 

Why: TBCo seems to be strategically in line with NHSc's vision and angle, which is to integrate science to improve health and wellness. TBCo has several high-growth brands that will be crucial to improved and sustained growth for NHSc, including Nature's Bounty and Solgar. This is especially the case when TBCo's brands complement NHSc's brands. Ultimately, this establishes NHSc as the industry leader, with increased growth especially with their synergies in play. 

Details: The deal is valued at US$5.75b, on a cash-free debt-free basis with multiples of 3.1x net sales and 16.8x EBITDA. Net sales of acquired brands LTM 31 March 2021 were US$1.87b, EBITDA 18.3%. 

Thoughts: This acquisition benefits NHSc as stated above. For TBCo, joining NHSc also has its benefits. TBCo is vertically integrated and manufactures, markets and sells its own products. Nestle's global outreach and e2e supply chain will increase TBCo's production output and outreach to global markets, increasing sales and profit growth. Overall, NHSc will be the key player in this industry with increased sales and profit growth. The key to the success of this acquisition would be to manage the integration well by ensuring synergies between the companies are maximised.

19th June 2021

1) How China is targeting Big Tech - FT

Content: China's State Administration of Market Regulation (SAMR) has recently spurred into action against Big Tech in the country. For instance, chat records from Alibaba's own communication platform was taken, and the regulators also interviewed the staff. These had rippling implications, impeding company operations and ultimately led to a fall in share prices by 18%. Other Big Tech firms were also affected,  such as Meituan, whose share price dipped 5 per cent less than 8 weeks ago.

Why the sudden rise in regulations? Chinese tech companies have grown and benefitted from the coronavirus pandemic, because they provided essential services such as food delivery and online grocery platforms for the masses during lockdown. However, it was said that they didn't share their earnings with the delivery drivers, who were "overworked". The government also seems to be getting these companies to grow not just in terms of profits or customers, but also to "decouple" from the US and serve the society. However, the limitation is that the SAMR only has about 50 employees, so the process may be slow. However, it still acts as a good deterrence for the companies. Currently, company leaders are assuring investors about their growth potential and position with respect to the tighter regulations.

So what: With Jack Ma's case causing his company to lose billions, we can see that the Chinese government has significant power over companies. This is due to a strong culture of collectivism and the way business is done in the country - companies must work well with the government. 

2) US stocks endure worst week in nearly four months  - FT

Content: With the rate of vaccination picking up and other positive events like borders easing up, the likelihood of market recovery is becoming more probable - and with that, an expectation of future inflation. The Federal Reserve chair Jay Powell mentioned how the Fed expects interest rates to be raised in 2023, a year earlier than what was expected. Simply put, by raising interest rates, cost of borrowing is higher which depresses consumer and corporate spending, thereby lowering inflation levels as prices increase by a lower extent. So with this increase in interest rates earlier than expected, companies' earnings are then adversely affected, ultimately leading to a fall in stock prices. 

Because of the expected increase in rates, investors are flocking to bonds as the Fed seem's to be willing to control inflation levels. Bond yields thus decreased with the increase in bond price, and the dollar appreciated. On the other hand, gold prices have fallen.

So what: The US market will probably improve in the near future, and this will ripple down to the individuals in terms of lower unemployment and higher per capita income.

Important Dates for Investors

As an investor in the stock market, there are many dates to take note of. First and foremost, we need to know the dates relating to the stock we hold. Next, we also need to take note of periodic market updates such as the Consumer Price Index, an indication of inflation.

Stock-related dates:

This is mainly for dividend stocks. Each stock/company has their own dates for dividends, and for each stock, there are 4 important dates every investor must know.

1) Dividend declaration date

This is the date which the board announces and approves a dividend payout to shareholders. This will include the size/amount of each dividend to be issued, and the record and payment date.

2) Ex-dividend date

This is the first day a stock trades without the dividend. This date is set by the stock exchanges on which the stock is traded.

3) Record date

This is the day that the company records which investors are to be paid a dividend. Those that hold shares of the company on this day will receive a dividend.

4) Payment date

This is the date which dividends are paid out to shareholders.

Market updates:

1) Consumer Price Index

The CPI is an indicator of inflation and is important in making key financial decisions, such as interest rate policy and hedging decisions. Inflation affects stock markets, even though in theory, companies' revenues and earnings should grow at the same rate as inflation. The most straightforward way to understand how inflation affects stock markets is through companies' financial statements. With inflation, prices are higher, leading to overstated financials. If you invest in bonds, your fixed income each year will thus have a lower value with increased inflation, vice versa. 

2) Purchasing Managers' Index

Note that this is for the US economy. The PMI is generally taken to be an accurate and timely indicator of business conditions. The PMI is based on monthly surveys from supply chain managers in the manufacturing sector. 

3) Producer Price Index

The PPI is an indicator of changes in price of goods manufactured. It is used as an indicator of inflation, like the CPI, but from the sellers' point of view. For example, when the PPI is increasing, chances are that there will be inflation, because of the increase in price of goods manufactured. This is not used as much as the CPI.

Overall, there are many key dates to know, this list is non-exhaustive. For more information, do read up more on the financial markets and key events to look out for.

Equity valuation process

Usually, there are 5 stages to equity valuation. 

1) Understanding the business. This includes understanding the competitive industry the firm is inane company financial performance.

2) Forecast company performance, based on the financials as in part 1. There are 2 types of forecast. First is top-down, which looks at the macro-economic situation and forecast, industry forecast and finally company and asset forecast. The second is bottom-up, which is based on company financials.

3) Selection of appropriate valuation model. As mentioned in an earlier post, there are multiple ways to value companies. In general, valuation methods are split into absolute and relative valuation. Absolute valuation looks at the estimated intrinsic value of the stock itself, and relative valuation looks at the estimated value relative to that of other stocks/assets.

4) Convert forecast into valuation. Analyse the results of your valuation by using sensitivity analysis and situational adjustments.

5) Apply valuation conclusions based on the purpose of the valuation.

Raising capital

 I was fortunate enough to have guest speakers in my university seminar, who went through the types and considerations of listing on the capital markets. This is especially interesting and useful if you're keen to enter private equity (PE) or venture capital (VC). Luckily for me, I am interested in these fields.

There are several types of equity markets products - private placements, IPO, SPAC, post-listing and equity-linked convertible note. Private placements include early stage funding for start-ups and Pre-IPO placements are where investors long the equity. SPAC is an interesting one because we have read several news about the boom in special purpose acquisition companies (SPACs), including that of the EV company Lucid-CCIV merger.

IPO is probably one of the most heard-of exit strategies for private equity investments. It basically means the firm will list their stocks onto an exchange for the first time in order to raise large amounts of capital to further expand their business, or pay off debt etc. An IPO takes months to complete, and some of the high-profile IPOs include Bumble at $2.2 billion which made the CEO Whitney Wolfe the youngest self-made female billionaire in the world. This process involves back-and-forth engagements between the firm and analysts and underwriters, and ultimately come up with a deal on the valuation of the company, education on the firm etc.

There are several places where equities can be listed, such as Singapore Exchange (SGX) and New York Stock Exchange (NYSE). Noticeably, HKEX has an extremely large amount of IPO in volumes at $67,711 billion as compared to SGX's $833 billion. Different exchanges also have varying IPO sector breakdowns. For example, the Technology, Media and Telecomm (TMT) sector is 35% on the NYSE/NASDAQ, but only 11% in SGX, which gives us something to think about when deciding on where best to list the firm.

Key valuation methodologies include DCF, DDM, comparables which I have written about in my previous post.

Overall, there are several ways companies can raise capital, either through private placements of IPO listings. In general, firms that have a solid business plan, fundamentals, forecast and lower risk are more attractive and will be valued at a higher price.

Valuation Methods

There are many different ways we can value a company, each with their own benefits and limitations. Which method should we use when valuing a start-up like Nio? Or a mature firm like Coca Cola? Different types of companies require different valuation methods, so this post will be a brief outline of the valuation methods of companies.

To start off, the basic and one of the most important concepts in finance is the time value of money (TVM). $1 today will, in general, be worth more next year, because of inflation. So moving forward in time, we compound the value of money, and moving backward, we discount it. Broadly speaking, the value of a company is the present value of the sum of all future earnings or cash flows of the company. 

1) Dividend Discount Model (DDM) looks at a firm's dividends. What we want to find out is, if the firm pays out a dividend each year forever, what would the sum of all those dividends be worth today? 

2) Discounted Cashflow Method (DCF) looks at a firm's cashflow. There are 2 types of cashflows we can use to estimate the value of the stock - either FCF to Equity (FCFE) or FCF to Firm (FCFF). 

3) Relative valuation method looks at comparing the firm to other firms in the industry. This method uses multiples to estimate the values, such as the Price/Earnings (P/E) ratio and EV/EBITDA.

4) Residual Income method. Residual income is the income that the firm has after deducting the costs from earnings.

There are definitely more ways to value a company, especially once we dive deeper into private equity (PE) or startups (VC space). From there, we will encounter more interesting valuation methods such as triangulation and metrics valuation. One example I've heard of is if you're trying to value a social media start-up, how would you go about it? You could possibly estimate the value per user of the industry and impose that onto the estimated number of users of the start-up to find the value. Modelling and valuation is an extremely versatile tool that one can use to estimate the worth of a company, we just need to know which to use and how to use it according to the type of business model the company has.