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After investing for close to a decade now, I am starting to realize that when it comes to investing, “Less is more”. Sorry for sounding too philosophical but what I mean is this: Sometimes, it’s better to invest in companies with a simple-to-understand business model rather than digging deep into a complicated business like Noble Group Limited (SGX: CGP), hoping it might be an undervalued stock.
I used to be an investor who liked the challenge of looking at complicated businesses and possibly finding hidden value I could take advantage of. However, over the years, I see myself looking at simpler and simpler businesses as investment targets.
Finding hidden value in a complicated business can be great fun, however it can make your portfolio more volatile than normal. This is because a complicated business or turnaround situation often has a binary outcome. This means that either the company thrives spectacularly or fails spectacularly after a few years.
On the other hand, some of the advantages of investing in a simple-to-understand business are:
That might be why a consumer company like Carlsberg Brewery Malaysia Berhad (Bursa: 2836) caught my attention. Carlsberg Brewery Malaysia is a listed subsidiary of Carlsberg A/S, the global brewery listed in Denmark.
Carlsberg Malaysia has a long history in Malaysia and is now one of only two licensed breweries in the country (the other being Heineken Malaysia Berhad). Carlsberg Malaysia produces and distributes popular alcoholic drinks like Carlsberg, Corona, and Asahi.
Interestingly, the company is also responsible for the sale of its products in markets like Singapore and Brunei. In fact, 33% of its operating profit came from Singapore in 2016. I first came to know about Carlsberg Malaysia when I first started investing in 2006. However, at that time, I had this misconception that large blue-chip companies like Carlsberg Brewery Malaysia would no longer give me an attractive return. I thought market-beating returns could only come from small, unheard-of companies.
Only after years of investing in the market and using different investment strategies did I realize that good returns can also come from high-quality large companies like Carlsberg Malaysia. When I started researching Carlsberg Malaysia in 2013, its share price had already more than tripled from when I first noticed the stock back in 2006 (how wrong I was).
However, although I was attracted to the business at the time, I was unable to swallow its high valuation. Luckily for me, its share price corrected itself over the next two years and I was able to invest in Carlsberg Malaysia in early 2015 when it was trading around 16 times earnings while giving me a 6% dividend yield.
Sure, I understand that a company like Carlsberg Malaysia will not double up my investment in one year, but here are…
1. Carlsberg Malaysia is just one of the two breweries that are licensed to operate in Malaysia. This means that it is operating in a duopolistic environment. Over the past few decades, the company has used that advantage to build the scale necessary to maintain a very profitable business, thus creating a strong economic moat.
In fact, in the past decade, the Malaysia government did issue a third license for a brewery. However, without the scale needed to compete successfully with the two incumbents, the newcomer end up throwing in the towel after a few years of operation.
This highlighted the huge barrier to entry Carlsberg Malaysia (and Heineken Malaysia) has built around its business. The moat comes from the economies of scale it has already achieved in the market, rather than just relying government licensing protection.
2. Exposure to international markets — Singapore, Brunei, and Sri Lanka. On top of that Carlsberg Malaysia is not a purely domestic company. It has huge exposure to the Singapore and Brunei market. And through its associate, Lion Brewery, it is also exposed to the beer market in Sri Lanka. Although the company faced some setbacks in Sri Lanka due to the recent flood there, its diversification gives it stable revenue streams overall. This is due to the fact that the company is not overly reliant on just one market.
3. Huge portfolio expansion potential. In addition, Carlsberg Malaysia currently distributes about 10 products in its portfolio. However, its parent company, Carlsberg A/S is a global alcoholic beverage powerhouse with more than 400 products in its portfolio.
This means that Carlsberg Malaysia can still grow by introducing a more products to the markets it serves. With a wider product range, it can attract a bigger group of customers, potentially boosting its revenue in the future. This is extremely important for Carlsberg Malaysia for its Singapore market. This is because the Singapore market has matured and its population is moving toward more exotic choices such as craft beers for a different experience. Thus, Carlsberg Malaysia needs to increase its portfolio to address this segment of the market.
4. Long history of growth. The expectation I have in its growth potential is not based on pure hope as well — Carlsberg Malaysia has demonstrated a long history of growth in the past. Over the past 10 years, its revenue has close to doubled what it was in 2008 and its earnings per share has increased 175% over the same period. Its dividend per share has grown at an even more impressive rate of 19% a year on average from 2008 to 2016.
This shows that the management has the ability to grow the company even though it is already a market leader.
5. Strong free cash flow and dividend. Going back to my point of investing in a simple-to-understand business; Carlsberg Malaysia definitely fits the bill. It basically manufactures alcoholic beverages and distributes them to key markets in the region. Compared to, maybe, a more complicated business, this simplicity means that Carlsberg has been able to rapidly create a large-scale business model with strong free cash flow. In turn, the management has always decided to pay a good level of dividend from this cash flow to investors.
However, I understand that a stock like Carlsberg Brewery Malaysia is not for everyone. There are still risks associated with investing in this company. One of the key risks is currency. We have seen how the Malaysian ringgit has depreciated sharply over the past few years. For a foreign investor, this would mean that some of the gains might be lost to foreign exchange.
Moreover, Carlsberg Malaysia is operating in a highly-regulated industry. And the trend from the government is to push for more regulation in the industry. Carlsberg Malaysia and its investors can’t decide how the Malaysian or Singapore governments regulate this industry in the future, and it could potentially hurt the company’s profitability if the governments introduce rules that are restrictive for the company.
Lastly, remember that I invested in Carlsberg Malaysia back in 2015 when its valuation was quite attractive to me. Since then, the share price of the company has moved up quite significantly and it is now trading around 21.5 times earnings with a dividend yield of 4.8%. That is quite a wide spread from the time I invested at 16 P/E with a 6% dividend yield. Investors need to take note of its valuation as well.
There is no right or wrong way to invest. Some people prefer the challenge of researching complicated businesses to unearth hidden value. While others prefer to look for simple-to-understand businesses that are well-managed and growing steadily. I started investing like the former group. However, over the years, I see myself leaning closer and closer toward the latter group of investors.
I have found that investing in more of these simple-to-understand businesses gives me a peace of mind and frees up my time to work on other things. The key for you is find a strategy you are comfortable with and is the ideal strategy for you.
(Photo: Niklas Morberg)