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March 6, 2012 11:28 am
Who can resist? Everyone knows that snacks are not good for the figure, but the desire is universal. Which is why Want Want, China’s answer to Kraft or Nestlé, got another boost on Tuesday on yet more strong earnings. A run of good results has almost doubled Want Want’s market capitalisation in two years to $13bn, which elevated it into the Hang Seng index in November. Its shares have been trading on a multiple of 24 times 2012 earnings – half as much again as Nestlé and Kraft, the world giants of the business. Is that justified?
Although Want Want’s sales of $3bn are barely 4 per cent those of Nestlé, the former is exposed to one of the fastest-growing snack markets. Its earnings before interest, tax, depreciation and amortisation grew an average 20 per cent over the past five years. Comparing Nestlé when it last traded on a multiple of 24 in 2006, Want Want’s earnings have grown an average three times faster in the five-year build-up to that multiple. With operating margins of 18 per cent – one-third greater than Nestlé’s in 2006 – Want Want can afford to spend more on marketing to keep China snacking.
There are limits to the Nestlé/Kraft comparison, of course. Want Want has fewer goodies in its basket. Rice crackers and flavoured milk drinks still make up three-quarters of its sales. If tastes change, therefore, it could struggle. And in spite of its delectable operating margins, even before raw material costs surged, its low gross margins – two-fifths less than Nestlé five years ago – suggest Want Want either suffers from higher production costs, or has less power to raise prices.
Want Want’s share price has risen 165 per cent since it listed almost four years ago. Even in a growth market as strong as China, this looks pricey. That is the trouble with snacks – their energy boost is all too often a short-term one.
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