THE exclusive distributorship of Red Bull clinched by Yee Lee Corp Bhd, which edged out beverage giant Fraser & Neave Holdings Bhd (F&N), looks set to lift the earnings of the mid-cap Ipoh-based company in its financial year ending Dec 31, 2016 (FY2016).
The distribution right from principal Allexcel Trading Sdn Bhd provides Yee Lee (fundamental: 1; valuation: 0.8) with the sole right to distribute three main Red Bull energy drinks, namely Red Bull Less Sugar, Red Bull Gold in cans and Red Bull Bottle, for a five-year period beginning Aug 1.
Yee Lee will be responsible for marketing, distributing and selling the three types of Red Bull energy drinks, taking over F&N’s (fundamental: 2.1; valuation: 1.1) previous role. F&N could not agree on the commercial terms with Allexcel and decided to forgo the exclusive distributorship.
It is noteworthy that Yee Lee had been a distributor of the imported Red Bull International energy drinks under Red Bull Asia FZE since 2010, which are sold in tall and slim blue cans, but the parties agreed to terminate the contract prior to the announcement of Yee Lee’s exclusive distributorship from Allexcel.
The termination of the Red Bull Asia FZE contract is not expected to have any material impact on the company’s earnings for FY2015, Yee Lee says in a recent announcement.
Currently, more than four million cartons of Red Bull energy drinks are sold yearly in Malaysia, Allexcel says in an email reply to The Edge. This is twice the amount — two million cartons — sold in 2010 when F&N first signed on as the exclusive distributor for Allexcel.
“Based on the latest AC Nielsen retail audit in March 2015, Red Bull has a dominant market share of over 50% in the energy drinks category in Pan Malaysia,” says Allexcel. The bulk of the Red Bull energy drinks sold is Red Bull Gold in cans.
To give some insight into how this exclusive distributorship could enhance Yee Lee’s revenue, F&N CEO Lim Yew Hoe told reporters during F&N’s first half financial result briefing last week that the Red Bull business had brought in annual revenue of between RM200 million and RM250 million for the company.
This would make up about 30% of Yee Lee’s full-year revenue of RM690.45 million for FY2014. Yee Lee declined to comment on the potential returns from the distribution right when contacted by The Edge.
In a report by CIMB Research on F&N dated March 29, the research house says the Red Bull business could contribute to more than 5% of F&N’s net profits given its good margins.
While a 5% net profit contribution for heavyweight F&N may be insignificant, its impact on Yee Lee could prove more meaningful.
F&N’s annualised full-year profit for its financial year ending Sept 30, 2015, works out to RM280.85 million, calculated based on its cumulative six-months net profit of RM140.4 million.
Assuming that the Red Bull business contributed 5% to F&N’s net profits, it means that Yee Lee could stand to gain about RM14 million from the exclusive distributorship, making up half of Yee Lee’s net profits of RM27.01 million for FY2014.
This exclusive distributorship could be timely for the integrated manufacturer and distributor, which saw its net profits dip 19.5% year on year to RM27.01 million in FY2014. The slide in net profits came despite the higher revenue it achieved for the year.
Net profits were hit by the weaker performance of its manufacturing division, which saw lower sales for its aerosol cans and palm kernels, while its trading division incurred advertising expenses that offset the increase in revenue which the division achieved during the year. In FY2014, the company shifted its aerosol can factory to Vietnam, which also impacted the manufacturing division’s profits.
Yee Lee started off as an edible oil repacker but has now diversified into manufacturing aerosol cans as well as operating oil palm and tea plantations, and palm oil refineries that manufacture edible oils. It also markets and distributes fast-moving consumer goods. In addition, it owns Sabah Tea Resort.
As at Dec 31, 2014, the company had a net gearing of 0.18 times with total borrowings of RM113.48 million and cash balance of RM49.95 million. It is worth noting that Yee Lee has a 32.76% stake in Spritzer Bhd, which contributed RM7.58 million to its profits in FY2014.
Since late December 2014, Yee Lee’s share price has been on an upward trend. It climbed to a record high of RM2.24 on April 13 before losing its upward momentum. At last Thursday’s close of RM2, the counter was trading at a forward price-earnings ratio of 14 times, according to Bloomberg data.
Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.
This article first appeared in The Edge Malaysia Weekly, on May 11 - 17, 2015.