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BAYANZURKH 14-KH AKHMADIIN KH. BEHARRY
LYNDON MARTIN W.
253 NARNI ZAM, 45 CPO BOX-1509
BEHARRY ULAANBAATAR
MOBILE: 976-997-957-62
ULAANBAATAR 15160
MONGOLIA
LMBEHARRY@YAHOO.COM LAT/LON: N47 54.52788 E106 57.50622 LAND: 976-773-336-69

Quick Take
Suu Joint Stock Company Buy / Hold June 09, 2017
Current Market Price 124.77
From the herders farm to your home Target Price 150

Operating continuously since 1958, Suu JSC (Joint Stock Company) is Growth Expectation >15.00%
Mongolias dominant processor of raw milk to finished dairy products Investment Period Long-term
including: milk varieties by fat grade, powdered milk, ice cream and premium
quality gelato products, cheeses, yogurts, and aaruul (a traditional item).
The Firm claims a sales market share of nearly 50 percent. It faces vigorous STOCK INFO June 09, 2017
rivalry in Mongolia. Within the past decade, APU, one of the nations dominant Sector Dairy
brewers/distillers, engaged struggle against Suu in dairy. Vitafit Group, Teso
ii
Groups Milko, and Monfresh are Suus other major rivals. Suu JSC would also Market Cap MNT 42.921 Billion
face cannibalization within its own product lines; with new introductions Net Debt (12/2016) MNT 16.4891 Billion
potentially filching customers away from its existing brands. The Firm is
Beta iii 0.262
actively seeking export market opportunities to sustain and grow revenue. Suu
commands loyalty, status, and excellent brand equity. These traits, in tandem 52 Wk High/Low MNT 154 / 122
with its dominance in Mongolia, present excellent potential for sales abroad. Avg Daily Volume 1,935
Max Group, a holding company with interests in supermarkets, logistics,
food/beverage, and mining/engineering, controls over 93 percent of Suu JSC Book Value (per share) 70.016

common equity, leaving just over 6 percent of 344 million shares to float on Ticker SUU
the exchange. Because of this, share trade volume trends low, and the stock ISIN MN00SUU01355
has exhibited price consistency, with a Beta of only 0.262. If Max Group dilutes
float with future splits, the market would energize trade volume.
KEY FINANCIALS INVESTOR CLASSES
1,000 MNT (Except Per Share Values) 2014 2015 2016
Net Sales 38,770,645 39,442,562 41,842,641 INSTITUTION INVESTORS:
% Change 15.70% 1.73% 6.08%
Net profit 2,828,699 557,169 502,727 Max Group Holdings 93.605%
% Change 21.52% -80.30% -9.77% OTHERS IN THE MARKET:
Depreciation / Amortization 1,641,687 2,241,892 2,898,210
EBIT Margin 5,304,880 2,593,280 2,363,407 Free Float 6.395%
EBIT Margin % Revenue 13.68% 6.57% 5.65%
EBITDA Margin 6,946,567 4,835,173 5,261,617 Index Trend 2014 2015 2016
EBITDA Margin % Revenue 17.92% 12.26% 12.57%
Interest Expense 1,814,275 1,827,705 1,750,065 CAGR (2004-Year) 38.1% 32.3% 28.9%
Interest % Revenue 4.68% 4.63% 4.18%
Times Interest Earned (EBIT:Interest) 2.92 1.42 1.35 Y-o-Y Growth -7.7% -13.8% -2.7%
Shares Outstanding 344 344 344,000
EPS 8222.96 1619.68 1.46 1-Yr Chart
Avg Share Price (Undiluted Common) i 102877.50 99195.15 133.57
Avg Share Price (Dilution Adj) 102.88 99.20 133.57
P/E 12.51 61.24 91.40
Book Value Per Share (Dilution Adj) 59.93 76.92 70.09
P/BV (Diluted) 1.72 1.29 1.91
RoE 13.69% 2.10% 2.08%
RoA 6.06% 0.98% 0.99%
Market Capitalization 35,389,860 34,123,132 45,948,886
Total Debt 26,032,772 30,330,694 26,536,634
Cash and Equivalents 8,621,035 7,852,241 2,954,012
Enterprise Value 52,801,596 56,601,585 69,531,509
EV/Sales 1.36 1.44 1.66
EV/EBITDA 7.60 11.71 13.21
Current Ratio 1.79 1.46 0.77
Acid Test Ratio 0.01 0.01 0.01
Debt:Debt+Equity 0.56 0.53 0.52

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OVERVIEW OF THE BUSINESS STRUCTURE AND REPORTING: SUU JSC MAJOR ACCOMPLISHMENTS
Suu JSC is a joint-stock company incorporated under the commercial laws In the years since Max Group took a controlling
of Mongolias Civil Code. Max Group, a privately held trading company, interest (2005/2006), Suu JSC has made excellent
controls the majority (93.605%) of Suu JSC equity interest (344 Million gains across the board. The Entitys management
Common Shares). Suu JSC publishes its financial information to the has built strong cross-border relationships to
Mongolian Stock Exchange in PDF and Excel formats. acquire capital equipment and open doors for
future cross-border sales. In the twelve years
ASSESSMENT OF REVENUE GROWTH (C. 2011-2017) since 2005, the firm cites several commendable
results:
For a company entering middle age, Suu JSC has produced Sales growth
2005- Automated ice cream production
outpacing inflation (11.01%). From 2011 through 2016, Suu JSC achieved line to produce and package 15 flavors
a Compound Annual Growth Rate (CAGR) of 12.644%. But revenue growth within the Dream brand;
within the confines of Mongolia territory is limited by four main factors: a) 2006- Introduced the immensely popular
population; b) competition; c) regional preferences, and d) the limitations and high-volume PurePak milk line;
of the transportation sector. 2008- Introduced the TetraPak packaging
line for milk and juice;
THREATS AND CHALLENGES 2009- Installed the EuroStandard line for
Competition fruit yogurt;
In the dairy sector, Suu JSC faces robust competition from local companies: 2011- Earned SAI ISO 9001-2008 quality
award;
Apu Company, Vitafit, Teso, and MonFresh. And since Mongolias
2012- Introduced the Amore ice cream
population is so low, market saturation is an ever-present concern. and gelato brand after installing Italian
Product cannibalization is likely present; new product offerings or brands capital equipment;
may well steal customers from existing product lines. Finally, severe 2014- Introduced production of
weather may impact the viability of Mongolias cattle population. This Mongolian traditionally fermented yogurt
would diminish the Companys ability to access fresh dairy for processing. line;
2014- Imported fresh cattle stock:
Long-Term Debt Holstein cows for Max Agro subsidiary,
Suu JSC carries a 9% coupon $USD 6 Million loan facility from a 2011 IFC Mongolias first integrated dairy farm;
2015- Marked an annual milestone of
placement; principal is due in 2019. The firm has been servicing this debt
purchasing 13 million liters of milk from
as the MNT lost nearly 80% of its Foreign Exchange value over the past Mongolias herders and dairy farmers;
five years. But with Mongolias macro-economy now embracing major 2015- Suu JSC controls 70 distinct brand
improvements, the analyst expects MNT ForEx to recover. While macro- items; AND
economic resurgence alone may ease the Firms encumbrance, Suu may 2016- Focused to enter export markets
also seek a debt consolidation to restructure its liability portfolio. with the introduction of its first of a kind
UHT milk, in a square Tetra Pak package.

Brands Products Target Market


Standard milk
General consumption
Standard Plain Yogurt
Minii Mongolian Suu
Straw pack for children / young people
Got Milk?

Drinking yogurt Health-conscious; young people on the go

Health-conscious; young people on the go;


Fruit yogurt
children; family market

Organic Butter General consumption

Premium Italiano Gelato High-end consumers; Professionals

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Suu JSC Mongolia, a Country of Dairy


In 2017, Suu JSC is celebrating its 58th anniversary. During
Suu JSCs Milk Factory
the past ten years, Max Group, which owns the controlling
interest, has invested in modern capital equipment to While the Company has engaged
increase manufacturing efficiencies. Suu has also invested in some vertical integration, Suu
in brand equity across different dairy market segments to sources the majority of its dairy
secure and maintain share in Mongolias highly from a network of over 3,000
competitive dairy sector. independent family dairy farmers
Tagging onto Mongolias cultural perspective that fresh
and herders. Free-range cattle
Mongolian cow milk, free-range meat, grain seeds, wheat,
flour, and drinking water are on the list of strategic foods enjoy fresh grass loaded with
to support Mongolians physiological needs; Suu JSC sunshine energy from The Land of
embraces community ideals for quality, service, and the Blue Sky.
environment. Suu JSC boasts modern European-standard
processing technology and environmentally-friendly Milk Tea
packaging. Mongolias traditional drink: boiled
With divisions strategically placed proximate to milk, water, black tea, and salt. With
independent dairy farmers, Suu JSC secures fresh raw milk thousands of years of perfection, this
to process over 70 branded foods. In 2009, the Firm
established a curd and sour cream plant in Khentii aimag.
drink warms the body, replenishes
Engineered to produce a range of curd and sour cream vital salts and minerals, and provides
products at a daily ten ton milk throughput, the facility a medium to chat with friends and
collects raw material from 200 farmers in the eastern travelers over and bread.
region. The Companys Erdenet facility, established in
2011, supplies dairy products to the western region.
Throughout the year, this division draws supply from Some of Mongolias traditional milk
more than 600 independent farmers from ten areas in products: Milk tea, aaruul (yogurt
Orkhon, Selenge, and Bulgan aimags. Every day, Erdenet curds stiffened and sun-dried), and
Milk processes 40 tons of dairy into over 30 product lines.
urum (a rich creamy spread for
Overall, Suu commands the greatest milk resource
collecting 80% of fresh milk production from over 3,000
bread).
herders and farmers. The entity daily processes over 100
tons of fresh dairy. The company boasts the best
ingredients, expertise garnered from a half-century of Yogurt: Tarag
work and perfection in world-class processes, and a loyal The greatest courtesy: a cup of
customer base that enjoys Mongolian grass-fed milk. yogurt to refresh and revitalize.
Having earned ISO 9001:2008 certificate from SAI Global
For after your return from a hard
in 2011, the firm claims world renown for purity in
ingredients, stringent quality assurance systems, singular daily work and commute, travel
quality, and unsurpassed nutrition content. through Mongolias expansive
In mid-2017, the Company focuses on debt restructuring countryside, or just anytime.
and export potential. The Firm is eying the Japanese
market to boost revenue growth in the coming decade.

While the Mongolian nation presents a


vast and impressive land mass, sixty or
more percent of Mongolias sparse three
million population lives in Ulaanbaatar,
Tov (the central province), and the other
two major cities: Darkhan and Erdenet.
The countrys livestock is diversely
distributed, but still the majority of the
herd inhabits the Northern and Eastern
regions.
Paved road construction in the recent
decade has drastically improved
transportation times, but it still takes
several days to traverse the nation from
east to west.

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FINANCIAL ANALYSIS RISKS AND POTENTIAL DOWNSIDE


Historical Growth Rate: CAGR 12.644% 5-Yr ending 2016 Competition
For a mature entity, Suu JSC enjoyed excellent growth from Three principal dairy processors compete for Mongolias
2011 through 2016. The Company hit over 12.6% CAGR in dairy consumers: Suu JSC, Apu Company, and Vitafit.
revenue, while Costs of Sales rose by just under 11% Perhaps Apu Company is the most surprising competitor.
(approximating inflation) during the period. Apus long-standing trade had been in alcohol brewing and
distilling, but since 2006 it has aggressively pushed into the
dairy sector achieving sales market share of 19-20% by 2016.
This graphic displays DCF|NPV of Free-cash-flow to Equity, Vitafit, sharing the Ulaanbaatar operations base with Suu
sensitive to change in Weighted Average Cost of Capital. and Apu, commands 16% of Mongolias dairy sales. This
These projections return a share price in line with current stringent competition among the principal players stresses
market price. But as discussed below, the stock is poised for Suu JSC to simply maintain domestic market share; and long-
a run once the Company engages export sales in earnest. term growth in shareholder value must obtain from exports.
Weather / Climate
Parts of Central Asias landmass periodically suffer from
dry/drought conditions. To describe this phenomenon,
Mongolia uses the term: dzud. Dzud may arise during any
season; but it is particularly condemning in winter when
livestock herds are perpetually harassed by Mongolias sub-
Arctic-Siberian temperatures.
Mongolia suffered dzud conditions during the slaying
winters of 1999-2003. The weather culled over 11 million
animals from the national treasure; and dairy cattle were
among the worst affected. Herders labored years to
replenish the herds. Dzud conditions are particularly
Projected Performance debilitating to dairy because cows require three to four years
before entering their prime milk production. Compounding
This analysis uses a projected revenue growth rate of this issue is the typically low yield from Mongolias dairy
12.50%. To sustain shareholder value and meet expectations cows. While European animals produce from 24 to 28 liters
for RoE, the Firm must meet or exceed Mongolias historical of raw milk per animal-day, Mongolias national breed
inflation rate. To achieve this growth, Suu must innovate generates only four to eight liters per day. Mongolias free-
with attractive products and take share from its rivals. range cattle produce excellent quality product, but good
Once Suu JSC achieves its potential and gains export things come in small amounts.
markets, revenue growth would logically spark. Mongolias
brand equity for dairy is a natural draw for sales abroad. As
Mongolia solidifies trade deals with Asian and European
buyers, logistics through China, and regulatory hurdles, Suu
JSC should rapidly improve sales.
Though rational business strategy avoids linking success and
failure with luck, Suu has experienced misfortune since
Mongolias economy began its four-year slump in 2013. Suu
has endured a cash drain from unfavorable (80% worse)
ForEx translation to pay $US Dollar denominated debt. But
once the Company conquers this onerous debt burden in
2019 (or refinances in MNT at a more favorable ForEx rate),
Suu will experience a jolt in cash assets, priming it for
investment toward lucrative value-added product lines for
Note the drastic decline in milk production starting in year 2000. The
other export markets.
ten-year moving average only started to show improvement in
Because of these factors, the current share valuation of 2013-2014.
MNT 125-130 range owns considerable upside potential;
and this is an investment opportunity one ought not miss.

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SIMILAR ENTITIES IN THE DAIRY SECTOR

Mongolia
Suu JSC (MSE: SUU)
Apu Company (MSE: APU)

China
Mengniu Dairy (SEHK-2319)
Synutra (Nasdaq: SYUT)

United States
Lifeway (Nasdaq: LWAY)

The analyst reviewed a range of dairy companies to compare Suu dominates Mongolian dairy, commanding 48% of
financial performance. These companies: Suu, Apu, Mengniu, Mongolias 2016 Dairy products sales. Apu was the closest
Synutra, and Lifeway describe performance across a range of competitor at 23% followed by Vitafit and Teso Group. Notably,
geographical distribution and across a variety of capitalization since 2015, Teso lost 50% of its market presence to the leaders.
schemes.
Lifeway foods, based in Illinois in the USA, grew its fortune
producing and selling kefir (a fermented milk drink from Caucasus
in Eastern Europe). Synutra produces condensed-dehydrated dairy
and baby food formula. Mengniu is a leading China dairy producer
in Inner Mongolia. Suu and Apu are based in Ulaanbaatar Mongolia.
Notably, in 2016, most of these producers exhibited low Returns
on Equity. Because its Debt:Debt+Equity is so high, Synutra
returned 15% on Equity. But one suspects Synutra may have
problems servicing such onerous debt.
In the case of the Mongolian entities: Suu JSC and Apu Company,
both companies exhibit stressed cash-flow with similar RoE (
2.0%)and RoA ( 1.0%). But at the close of FY2016, Suu JSC
displayed extremely low liquidity ratio (Acid Test: 0.0125), Within liquid milk sales, Suu JSC stands leagues ahead of the
substantially lower than all of the other entities within this competition with over 83% of total milk sales. While the
comparison matrix. The American company, Lifeway, boasted the followers may nibble into Suus position, Apu, the closest
most liquid balance sheet. competitor, could hardly erode this dominance especially as
Suu and Apu each reflect a capitalization balance of about 50% debt Suu continues to market new brands and packaging, and novel
to 50% equity. Though Suu booked its foreign denominated debt to offerings for consumers in the region.
MNT in 2011/2012 at a stronger MNT ForEx rate. The debt
loading would be somewhat higher if adjusted to MNT at todays
foreign exchange regime.
Notwithstanding these companies wide range of financial
performance, the American Lifeway most certainly displays the
strongest financial ratios. The U.S. domiciled Synutra is highly
leveraged; presumably using debt to finance its production capital.
And among these five entities, the China domiciled Mengniu
posted negative earnings in FY2016.
With regard to the Mongolian dairy producers; Suu and Apu
struggle with foreign-denominated debt. This stresses their
cashflow and earnings potential. But appreciating MNT will
alleviate this problem, and likely within the coming twelve to
eighteen months. And market ingress to Japan will stimulate
excellent growth for Suus near-term.
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PORTER ANALYSIS IN BRIEF Competitive Rivalry


Mongolias dairy processors engage competitive rivalry to grow and
Suu JSC Porter Analysis: Suppliers Power and Threats maintain market share. Suu JSC has been the largest and most
Central Asia climate and Mongolias weather patterns pose the entrenched dairy processor (48% in all dairy; 83% in liquid milk). APU
greatest supply threat to Suu JSC. The terrible winter dzud Company achieved over 20% market presence within the past five
conditions of 1999-2002 decimated the nations livestock herds, years, eroding Tesos sales share. Vitifit is active in this struggle holding
and nearly destroyed Mongolias dairy cow population. When such customers in the yogurt trade. MonFresh and the others struggle to
an event happens in the future, Mongolias dairy processors will maintain the remaining 7%. Since all dairy processors rightly claim milk
face a rigorous test, potentially requiring import of raw milk from sourced from organic origins, product differentiation falls upon
Russia and China to simply maintain production and retain market packaging and consumer perception of quality and elegance.
share. This particular threat would force processors to increase With regard to recent capital investment, the market leaders have each
operating costs, and require government subsidies to dairy farmers procured modern packaging and laboratory equipment within the past
of all sizes. But such events would also interrupt dairy processors 5-7 years. Significantly, Suu, Apu, and Vitafit continue to acquire the
growth plans for export potential, and may eradicate any foreign newest technology to grow efficiencies and quality of process. The
market share. companies also seek European expertise to create additional value
including refined cheeses and other quality items.
Perhaps a prudent risk management approach could include: a)
Marketing, packaging for portion size and elegance, and advertising
backward vertical integration where the processor owns some
are significant factors toward gaining and maintaining sales share.
portion of livestock spread geographically with capital
Other tools to differentiate the product: a) height level of the product
infrastructure to house and protect livestock in inclement weather; in the shop (i.e. childrens size milk/juice at child eye level); b)
b) some type of insurance association among the firms competing European branding (i.e. Italiano-Gelato, etc.); c) products
in the dairy business from which to draw down for such differentiated on fat quantity (i.e. low-fat ice cream, frozen yogurt
catastrophic potential; c) purchase of livestock assets abroad in desserts); d) affordable capital financing arrangements (the past five
China and Russia to be kept abroad, reserved for import if/when years of Tugrik depreciation has wreaked havoc on entities who had
such weather events occur; d) maintain genetic diversity within taken loans denominated in foreign hard currency); and e) niche
frozen stores for artificial insemination to restore genetic vitality marketing catering to age groupings and social classes.
after such weather events While MARKET SATURATION poses a small threat among the rivals, 2015
Suu JSC claims to control 80% of fresh liquid milk production and data show that Mongolias per capita milk consumption topped out at
sales through relationships with over 3000 herders and farmers. 23 liters per person; compared to a world average of nearly 57 liters
Such bounteous connections suggest little danger of any individual per annum, and an Asian average of 28 liters per person-year.
supplier posing any threat to the Company. Furthermore, Suu has Nevertheless, population dynamics impose an ultimate ceiling to
engaged vertical integration through subsidiary Max Agro. Suu has growth in-country. Each person is able to consume only so much dairy
stocked this wholly-owned milk source with Holstein dairy cattle. per annum. The best likely short-term focus is toward export of milk
powder and UHT dairy, and then export value-added product: cheese,
yogurt products, and other product lines.

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Suu JSC Porter


Analysis: Buyers
Power and Threats
Two levels of buyers:
Distributers and
Consumer.
Suu JSC, through Max
Group, presumably
has preferred access
to Max Group
Supermarket chains.
But the company likely
negotiates its
wholesale pricing with
other supermarket
chains. Each dairy
processor competes at
this wholesale pricing
level, so the larger
grocery chains tend to
have buyer power aiming to decrease the price at the Suu JSC Porter Analysis: Threat of Substitutes
wholesale level. There are no satisfactory substitutes for true dairy. Vegetarians
argue that soya products are acceptable stand-ins for milk, butter,
Suu JSC would also compete with other processors for shelf
and potentially yogurt. But the vast majority of consumers would
positioning, and the larger supermarket chains would also not move away from true dairy products.
influence this arrangement. Supermarkets typically assess
additional charge for shelf placement and other
Suu JSC Porter Analysis: Barriers to Entry and Exit
advertisement within the supermarket itself. These
considerations could influence annual sales, particularly on The five significant barriers to entry: 1) Government Regulation;
the higher-end product lines. 2) Capital Investment; 3) Size/Growth of Market; 4) Access to
Dairy Farmers; 5) Access to Distribution Network.
Smaller Mom and Pop shops would not pose any significant
Governments impose stringent regulation upon the food
buyer power to dictate wholesale price. But the consumer processing business, with dairy pasteurization and processing
also retains buyer power under a perception that one liter of among the most highly regulated. This analysis has reviewed Suu
milk is as good as any other. Hence, many consumers may JSC competitors: notably Apu Company, Vitafit, Teso, MonFresh,
shop for the lowest price milk (reverting to the wholesale and Darkhan Khuns. Suu JSC in operation since 1958, MonFresh
price offered to the supermarket chain). since 1998, and Darkhan Khuns since early 1970s. Though Apu only
recently entered dairy in 2006, it had already gained institutional
knowledge in hygiene and preparation through its beer and vodka
Lactose Intolerance business. Tesos metric suggest the entity is losing share primarily
Finally, there is medical evidence that adult Asian to Suu; but also to Apu and Vitafit.
populations exhibit a vastly higher frequency of lactose Dairy processing requires hefty (by Mongolian standards) capital
intolerance than Europeans. This biochemical difference investment in PPE to achieve economies of scale. Firms in the
underscores the question of potential growth in per capita sector must also build institutional knowledge in hygiene and
consumption among Asian dairy consumers. While individual preparation. Finally, firms also seek to purchase intellectual
buyers may not command overt power over Suu JSC by property, expertise, or proprietary organic matter (bacteria, etc.)
for specialty lines (cheeses, etc.) Prospective entres must also
switching to a competitor; the data suggest a bona fide issue
consider growing relationships both with independent dairy
of market saturation. farmers and herders; and also with distributers to the ultimate
Scientific evidence shows that 95% of ethnic Asian (and consumer.
African) people decrease lactase (the enzyme which breaks These principal players: Suu JSC, Apu, Vitafit, Teso Group,
down lactose into simpler compounds to digest) as they age. MonFresh, and Darkhan Khuns will likely dominate Mongolias
And as the leading chart shows, Asian dairy consumption is dairy market with little chance of another player entering. But
far lower than in EU countries and in Australia-New Zealand. because of Mongolias small population, it is possible that two from
But even still, Mongolias reported consumption of dairy lags among these players may find it prudent to consolidate. Ultimately,
18 percent behind the Asian average. the larger producers from among this group must seek export
potential to achieve sustained revenue growth.

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FINANCIAL MODEL: PROSPECTIVE VIEW Costs of Capital


Variables KE
Mongolia Stock Exchange Top 20 Index posted a recent
CRITERIA annual return (2016-2017) of 15.45%; v with long-term
CoGS: F(Rev) 73.000% (12-year) CAGR of 25%. Valuing Suu, this analyst favors an
Depreciation/Amortization (CoGS): F(Rev) 4.000% equity return of 18.733% following the Capital Asset
SGA (Only) : F(Rev) 6.650% Pricing Model. vi
R&D: F(Rev) 0.000% E(ri) = rf + [E(rm)-rf]
Depreciation/Amortization (SGA): F(Rev) 0.000% = 15.870% + 0.26234 X (26.784%-15.870%)
Other Expense (Income)/Overhead: F(Rev) 4.500% = 15.870% + 2.8632%
Interest Expense (Income) : F(Rev) 4.000% = 18.733%
Tax Rate: F(EBT) 20.000% KB
Capital Expenditures: F(Rev) 5.000% CALCULATIONS TO ISOLATE KB 000s
Working Capital: F(Rev) 2.000% 9% INTEREST ON $USD 6 MILLION LONG-TERM LOAN
2143.73
Average 2016 ForEx Rate vii
eta 0.26234 $1 USD
Shares Outstanding 344,000 Estimate of Annual 9.00% Coupon on $6 Million $540,000
Inflation Rate 6.500% Estimate of Coupon at 2016 ForEx 1,157,614
FINANCIAL STATEMENT INFORMATION:
RF (Mongolia Bond) Rate 15.870%
2016 Financing Costs from Q4 Income Statement 1,750,065
CAPM KE Calculation iv 18.733% Current Due on Long-Term Debt on Balance Sheet 264,960
KB Result 14.649% Est. Total Financing Costs 2,015,025
KB Result With Tax Shield 11.719% Est. Coupon for $USD IFC Debt at ForEx 1,157,614
WACC 14.648% Between Financing Costs Less IFC USD Debt Cost 2,015,025
Market Historical Returns 26.784% (The analyst believes this amount inures for MNT loans: Long- 1,157,614
term: 2,249,496 and short-term 7,692,003 (6 or fewer mos.).) = 857,411

Book Value of Short-Term Loans: 2016 Q2 5,693,013


Revenue Growth Rate 12.50%
Book Value of Short-Term Loans: 2016 Q4 9,690,993
Perpetuity Growth Rate 6.500%
Average of Short-Term Loans Q2-Q4 7,692,003
Book Value of Long-Term Debt 9,792,339
The analyst created prospective models and sensitivity COST OF LONG-TERM AND SHORT-TERM DEBT:
1,502,848
analyses to objectively determine Suu JSC valuations from Estimated KB Long-Term Debt = 15.347%
9,792,339
Free CashFlow to Equity (FCFE). By rigorously analyzing Estimate KB Short-Term Debt viii
the firms historical efficient financial performance, the Annualized compound rate assuming semi-annual 13.760%
512,177 2
analyst derived costs and expense components as period = 1 + 1
7,692,003
objective functions of Revenue F(Rev), or in the case of
Taxation, F(EBT). WEIGHTED AVERAGE COST OF DEBT AT Q4 2016 14.649%
ADJUSTED TO MONGOLIA 20% TAX SHIELD 11.719%
This table recounts the summary of variables used in the
Discounted Cash Flow analysis to isolate: 1) valuation of Weighted Average Cost of Capital
the Firms Free CashFlow to Equity; and 2) valuation per + [11.719%X0.572]+[18.733%X0.423]
ix = =
common equity share. B+E 1.000
[0.06765] + [0.07919]
=
1.000
= 0.1468 = 14.684%

Discussion Discussion
In-country, Mongolian firms suffer exorbitant interest rates;
The analyst produced three distinct prospective models of loans cost 1.7% per month and more. From the perspective
FCFE: 1) Static model varying WACC; 2) Static model varying of a Mongolian entity, Suu JSC enjoys a sympathetic cost of
Revenue Growth Rate; and 3) Dynamic multi-iterative Monte capital. But to compete with international publicly traded
Carlo model oscillating all variables within a tolerance of 10% dairy firms, Suu should pursue more lenient debt rates in the
coefficient of variability. These models suggest a range of international markets provided the Firm is able to earn
Equity valuation for SUU JSC. The results page discusses the hard currency to service debt.
outcomes of these Equity valuation simulations.

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STATIC MODEL: PROSPECTIVE VIEW MONTE CARLO FINANCIAL MODEL: PROSPECTIVE VIEW
Results of the Variable Revenue Growth Rate Discussion
This display reflects per share valuations from a 7.50% Monte Carlo is a statistics-mathematics process. It mimics real-
world volatility to probabilistically predict a range of outcomes. The
annual growth rate of revenue (per share 117.05) through
analyst employed the identical variable structure for both the static
17.50% annual revenue growth (173.04). The Prospective and Monte Carlo equity valuation models. BUT, the Monte Carlo
cash-flow analysis returned an expected per share valuation process dynamically alters the factors within defined constraints.
of 139.68 at a 12.50% growth rate, with WACC of 14.684%. In this instance, Monte Carlo uses the variables as the statistical
mean (arithmetic average), and fluctuated each factor 250,000
times at a standard deviation of 10% of the mean value.

Discussion
As discussed elsewhere in this paper, the analyst expects the
Firm must maintain revenue growth at a minimum of SUU MONTE CARLO12.50%: Results
Mongolias inflation rate: 6.50% with some true upside VALUATION PER SHARE This chart illustrates a potential
potential. Suu JSC earned a 5-year CAGR above 12.6%, and CURVE SHAPE Weibull range of valuation for SUU JSC
the analyst believes the Firm should sustain this measure of TRIALS 250,000 common equity per share at a
growth into the future. But when the firm succeeds in MEAN 155.71 paltry 12.50% growth rate. Using
opening one or more export markets, the analyst expects MEDIAN 154.08 this variable structure, the model
growth to hit the low 20% range. MODE 0.00 delivers the following statistics: a)
ST DEV 84.414 an expected median per share price
MINIMUM 0.00 of 154.08; with a b) projected
Results of the Variable WACC Growth Rate MAXIMUM 569.74 maximum to 570. At a base 12.5%
This chart plots Suu JSC valuations at different rates of capital VALUE >130 61.00% revenue growth rate, the
costs. The expected value per share is 139.68 at the VALUE >200 29.94% simulation returned a 61.00%
calculated WACC: 14.684%. Higher WACC returns lower per VALUE >250 13.62% probability of a fair valuation of
share valuations. VALUE >500 0.006% over 130 per share.
Discussion
The analyst sculpts scenarios with cautious estimates, aiming to err
on the side of restraint. This Monte Carlo prospective model uses
conservative estimates for growth and cost/expense factors:
growth rate approximating Mongolias historical inflation; costs
following historical mean percentages, tempered against industry
norms.
But when SUU JSC connects with export distribution channels,
revenue growth rates may well rise to over 20% for a half-decade
or greater. Though this potential is captured within the Monte
Carlo model, the conservative parameters pull valuation potentials
back toward the mean. And while this particular model only returns
a 13.62% probability of per share equity warranting values greater
Discussion than 250, the region of 25% growth is well within the realm of
possibility when Suu begins export. The static model sensitivity
The analyst expects Suu JSCs weighted average cost of analysis predicts a per share value of over 200 at 20% Revenue
capital to be no less than 14.5%, but it may be higher. Thus, growth. And one must also consider how a strengthening MNT,
the Firm would produce true value only through increased debt restructuring, and new product lines will buttress Suu cash
growth in revenue, and through cost reduction. position and increase shareholder value.

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Sensitivity Analysis
The Monte Carlo FCFE DISCOUNTED CASH FLOW PROJECTION is sensitive to particular conditions: 1) Because the perpetuity CashFlow dwarfs
estimated cash-
flow in any given
annum, the
terminal year COST
OF GOODS SOLD
typically asserts
dominance over
the Firm and its
weighted Equity
valuation; 2) 2017
SGA (i.e. Monte
Carlo advocates
frugality for back
office salaries and
bonuses:); 3) 2017
CAPITAL
EXPENDITURES (the
firm must be
efficient in its
capital
expenditures); 4)
2017 WORKING
CAPITAL (reign in liabilities as a function of current assets); and 5) OTHER EXPENSE and 6) INTEREST EXPENSE (Suu is in the Mongolia dairy
processing business; it ought not frequently go trouncing around in unfavorable foreign exchange financing until it gains export
market share where it is able to earn hard currency to finance hard currency capital costs. Debilitating ForEx rates underline the major
problems within these two cost drivers: 5) and 6)). -Mongolian business has learned a valuable lesson regarding high finance and
hard currency.
appear today if the Entity had been able to float a
1) Cost of Sales dominates ultimate production of
debenture at 5% instead of 9% for $6 Million USD.
Shareholder Value and Returns on Equity.
-Bad Luck on the timing, securing a 9% cross-
Businesses have recognized this truth since
currency loan precisely just before Mongolias
humanitys early ancestors debated whether to
macro-economic collapse and the relative collapse
hunt every day (including unhealthy hot days), or to
of the nations currency in ForEx.
gather on some days and expense hunting assets
(experience, training, and energy) only within
profitable conditions.
<><><><>
2) In ART OF WAR, Sun Tsu ordered the army to gain its
sustenance off the enemys land. In other words,
neither the troops nor the generals should reap any
excessive rewards unless and until the Firm gains
Tugrik Appreciation
authority over Revenue in the target market. In the
At present and into the near-term, Mongolian
case of Suu JSC, the firm should manage its back-
Tugrik appreciation presents an opportunity as
office payroll and executive bonus structures until
MNT is set for a firm recovery with a new optimism
the firm earns success in export earnings.
of Mongolias golden potential. The analyst expects
3) Certainly, Suu JSC must invest in capital
MNT to appreciate vis--vis $USD. And by 2019 this
infrastructure and with foresight. Suu must tightly
eventuality presents re-finance and debt/liability
control its investment in capital infrastructure, and
consolidation opportunities for Suu JSC.
safely squeeze additional years from equipment. In
addition, the firm may wish to create an internal
The Firm may well find itself easing into
R&D department. While R&D is a cost center that
extraordinarily favorable financing terms as the
bills expense to production; over years, R&D may
Tugrik appreciates, with the Mongolian nation
well engender significant shareholder value in new
gaining ascendancy as the go-to locus for economic
product lines.
growth and returns on capital investment in Central
4) Suu suffers from exorbitant interest payments. But
Asia.
for comparison, reckon how the financials would

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FRAUD ANALYSIS METHODOLOGY OF FORENSIC ANALYSIS TO DETECT FRAUD


Statistics Testing for Anomalous Financial Reporting Twenty-first century forensic analysis of financial
Benfords Test records encourages mathematics and statistics to
test anomalies in financial reporting. The analyst
favors two forensic tests: Benfords Test, and
Beneishs M-Score. Note: Forensic Accounting
analysis cannot prove fraud; it simply suggests
instances of potential anomalies in reporting.

Benfords (First Digits) Law


Benfords law (First Digits Law) predicts that the
first digits in random sets of numbers which span
across several orders of magnitude (i.e. ones, tens,
Beneish M-Score hundreds, thousands, etc.) will conform to a set
distribution (the chart red line). Because of
compounding over time intervals, the First Digits
rule affirms that there are more instances of
numbers beginning with 1, then 2, then 3, and so
on.
This analysis tested Suu JSC Balance Sheet numbers
against Benfords Law. The first digits of the
Balance Sheet numbers fall very close to expected
outcomes; and the analyst believes this indicates
fair and honest reporting.

The Beneish M-Score calculations


Since Max Group took its majority shareholder
position, Suu JSC has been vibrantly restructuring
its capital equipment, its biological assets, its
branded lines, and its vertical integration. The
Beneish score reveals an anomalous Asset Quality
Index FY2013-FY2014. While AQI may suggest a
cost deferral, in this particular instance the values
are skewed due to a large MNT6 Billion
investment in PPE in 2014, coupled with a
MNT2.2 Billion Asset booked as Valuation
Allowance. By 2016, Suu booked a MNT20.2
Billion investment in livestock for JSC subsidiary,
Max Agro Group. These capital expenditures seem
to account for the extraordinarily high index scores
in 2014 (AQI: 53.19) and 2016 (AQI: 4.57) during
these time intervals.

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OUTLOOK AND RECOMMENDATION


This analyst proposes an optimistic view for Suu JSC This analyst posts a strong BUY recommendation for
growth prospects. Max Group, the Firms dominant the Company. Suu JSC is the long-standing leader of
shareholder, his exhibited leadership, and has typically Mongolias dairy industry. It boasts a breadth of
seized first mover advantage. Faced with rigorous branded products, a well-honed family values image,
competition in the domestic market, Suu is positioning and growth potential through one or more export
itself for export.
markets. Furthermore, as MNT gains vis--vis
Success in export produces two significant windfalls for foreign currency, the Firm will achieve greater ease
the company: 1) Greenfield territory to grow Mongolian servicing its debts costs, and improve its free-cash-
brand equity to increase overall revenue; and 2) a source flow.
of hard currency to balance against future foreign debt
facilities. Whenever the firm again engages foreign- Will the stock run-up? If the investor watches the
denominated debt, Suu should have a foreign bank Mongolian Stock Exchange, look out for these
account from which to balance off fluctuations in MNT signals:
Foreign Exchange.
a) Suu JSC splits current float or completes a
As with all Mongolian food processors, Suu JSC must lobby shelf offering introducing new Common
and work with Mongolias government to continually shares for trade. A little extra float in the
apply international food regulatory standards to grow its market may excite trading activity.
international brand equity as a quality supplier.
b) Appreciating MNT. As Tugrik gains strength,
The firm must also work to mitigate supply risks through the Entity will enjoy greater ease purchasing
vertical integration. But this is particularly challenging. On $USD to service $US dollar denominated
the one hand, if the Firm owns and operates large dairy debt. This will tend to increase liquidity and
processing farms, it gains more control over its supply
ultimately, grow earnings per share.
source. But on the other hand, Suu would lose something
c) Press releases concerning contracts with
of a perception of quality.
foreign (particularly Japan and Korea)
Part of the mystique of Mongolia dairy is free-range dairy distributers. And potentially
cows milked by hundreds of small independent herders
d) Future growth through consolidation and
and dairy farm families. If the Firm moves away from this
reduction of redundancies in the market.
long-standing image, it stands to decrease its own brand
equity. There is a middle ground, though: contingency
plans for future dzud conditions incorporating
independent herders and their livestock. In other words,
Suu may not wish to completely control its supply chain. Enjoy your investments!
But it could partner up with independent suppliers to And remember
provide sheltering and assistance for livestock during
future potential natural weather phenomenon. -This It's not the size of the dog in the fight, it's the
requires foresight, investment into some sheltering and size of the fight in the dog. Mark Twain
water-source infrastructure, and monitoring.

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

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FINANCIAL INDICES

i
Suu JSC split its stock 1000:1 in late 2016. These prices are not adjusted for dilution.
ii
The analyst adjusted capitalization to account for Treasury Stock.
iii
The analyst calculated the beta (May 5, 2016 May 5, 2017): [Covariance of the past 365-days daily change in returns of stock price to the MSE-20 Index
change in daily returns] [Variance of the past 365-days daily change in returns of the stock price]
iv
The analyst performed CAGR analysis on the Mongolian Stock Exchange annual returns (Top 20) from January 2005 through May 2017 and determined that the
Compound Annual Growth Rate has been roughly 25%. (Mongolian Stock Exchange, 2017)
v
Bloomberg Markets hosts the data: https://www.bloomberg.com/quote/MSETOP:IND (Bloomberg Markets, 2017) The CAPM Model: E(ri) = rf + [E(rm)-rf]
vi
The analyst performed CAGR analysis on the Mongolian Stock Exchange annual returns (Top 20) from January 2005 through May 2017 and determined that the
Compound Annual Growth Rate has been roughly 25%. (Mongolian Stock Exchange, 2017)
vii
QuandL ForEx Data (QuandL.com, 2017):
12/31/15 01/31/16 02/29/16 03/31/16 04/30/16 05/31/16 06/30/16 07/31/16 08/31/16 09/30/16 10/31/16 11/30/16 12/31/16
1989.95 1998.94 2026.1 2045 2012 1993.5 1973 2060 2197 2278 2359 2455 2481
viii
This assumes a semi-annual term to cover short-term loans.
ix
Capitalization Weights:
000s 2016
Long-Term Debt 9,792,339
2011 $USD IFC Loan 6,000
Est. 2011 ForEx Rate [2011-Apr - 2011-Dec] 1,257
Est. MNT Value of 2011 Loan in 2011 7,542,843
Book Value of Other Long-term 2,249,496
Avg. ForEx Rate 2016-Jun - 2017-Jun 2,322
Est. MNT Value of 2011 Loan at 2016-2017 13,931,687
Long-Term Debt Capital (Adj. for ForEx) 16,181,183

Adjusted Debt:Debt+Equity 57.724%


Adjusted Equity:Debt+Equity 42.276%

KB Weighted Cost of Debt (Tax Shield) 0.11719139


KE CAPM 0.187332133

KB Component 0.067648065
KE Component 0.079195722
Weighted Average Cost of Capital 0.146843787

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