Sweet & Sour Equity Review

by | Aug 25, 2008 | Multi Currency Investing

This lesson examines the individual nature of selecting investments using my review of shares in PureCircle as a case study.

The world is so full of opportunity that we each need to refine our search process so the investments we choose suit our individual wants, needs, desires, philosophies and beliefs.  This process makes investing more fulfilling.  Human nature being what it is makes fulfilling processes more successful than those that are not.

All investors need a value determination system.  Mine seven step system is shown below.   Beyond the value check, we also need a way to zero in on specific opportunities that uniquely fit our individuality…playing to our strengths and avoiding our weaknesses.

This lesson focuses on an investment in stevia because stevia is of interest to me as a natural, healthy food.   One particular concern I see as an investor and business person is the unhealthy lifestyle of the Western culture.   This, to me, is a huge global problem.  Poor health leads to a need for increased health care which leads to excessive national health expenditure (a better expenditure is on infrastructure and education) which leads to excessive government spending which leads to excessive national debt which leads to currency instability which leads to economic instability which leads to stress which enhances poor health and the loop spirals down.

One root of this unhealthy lifestyle is poor nutrition.  One part of this poor nutrition is the over consumption of fast burning carbohydrates which leads to blood sugar problems such as impaired fasting glucose (pre diabetes) and diabetes.

According to Diabetes Statistics “In 2003 to 2006, 25.9 percent of U.S. adults aged 20 years or older had IFG — 35.4 percent of adults aged 60 years or older. Applying this percentage to the entire U.S. population in 2007 yields an estimated 57 million American adults aged 20 years or older with IFG, suggesting that at least 57 million American adults had pre-diabetes in 2007.

This is a huge problem.

Problems create opportunity.

Finding ways to eat less sugar can help solve this problem so I zeroed right in when my stockbroker told me about PureCircle,  a Malaysian company traded on the London Stock Exchange that manufactures a stevia extract.

Our last update looked at PureCircle.

That update showed how I came across the idea and why I like the idea of investing in Stevia…personally.

Here we study PureCircle further…not to decide whether to invest or not but to study the process of choosing investments in shares.

If after this review, PureCircle is interesting to you, then discuss this with your banker or stockbroker.

Stevia is a powerful good tasting natural sweetener that also helps regulate blood sugar.  The widespread use of stevia could provide a natural way to reduce blood sugar problems and diabetes.

After sharing our last message, I researched the company to see if it offers good value.

This lesson helps us learn from the exercise.

The good value filters we use, asks seven questions about a share we are considering.   So we begin:

#1: Is PureCircle a well managed company?

This would appear so…but I have some questions.  The managing director is a young (age 33) Russian, Magomet Malsagov.

According to PureCircle’s web site Magomet is a Russian national who has held the position of Managing Director since co-founding the business in Malaysia in 2002. He has a Business Administration degree from Washington International University.  The site says: “he is primarily responsible for leading the successful establishment of the group’s entire supply chain from the plantations and extraction facilities to the multi-functional plant in Malaysia. As Managing Director, he further establishes the Group’s business direction and strategies along with his management team and is responsible for managing the growth and development of the group’s business.”

He sounds young, aggressive and smart..plus he has built a credible board of directors.  See PureCircle’s entire board.

This is a global experienced and apparently substantial board with enormous experience in  PureCircle’s food production and marketing sector.  There is a lot of financial and trading experience on the board as well.  I’ll explain my misgivings about this later.

#2: Is the company in a growth industry?

Here the opportunity looks terrific.  This is a food processing company focused in the natural health arena selling a totally unique product (Reb A – a derivative of Stevia).  This product can help solve one of the Western world’s huge problems (IFG and diabetes) to some of the biggest and best marketing companies in the world (Cargill, Coca Cola and Pepsico).

First, let’s review the history of Stevia.

The scientific name of the plant is Stevia Rebaudiana Bertoni.  Stevia is a native perennial plant originally found at the border regions of Paraguay and Brazil and is part of the same plant family as the Chrysanthemum.   The plant has been South American indigenous as a sweetener for hundreds of years.  It has also been used for more than two centuries in Japan and China as a preservative for pickles and soy sauce.

Stevia is commercially cultivated in over 20 countries including Brazil, China, Japan, Korea, and Thailand.

Stevia in its natural state has about 10% of stevia-glycosides (sweet tasting components) in its leaves and is approximately 10 to 15 times sweeter than regular sugar.

Stevia has six glycoside chemicals that taste sweet.  The two sweetest are Stevioside and Rebaudioside A (RebA).  Refined Stevioside is 150-250 times sweeter than sugar but has bitter aftertaste.

RebA extract is 300-350 times sweeter than sugar and does not generate an aftertaste.  (This is important to me because Merri has been “trying” me on Stevia for years…if it has that bitter smell, then I am not so happy…not even counting the bitter after taste!)

An article in the Wall Street Journal outlined that Coca-Cola and Cargill, were teaming up to turn stevia into a brand new, calorie-free, low glycaemic index, all-natural, high-intensity sweetener.

Not only is it more than 200 times sweeter than sugar, but it had a taste profile like real sugar where the sweetness comes in early and then has a swift tail-off, unlike some artificial sweeteners on the market.

A food and beverage web site says that this looks like “the perfect answer to the fattening, tooth-rotting sugars and high-fructose corn syrups used in soft drinks and yoghurts. More importantly, it seemed to be a food and beverage marketing dream, an all-natural alternative to laboratory-derived ‘chemical’ artificial sweeteners.”

The article goes on to say:

“And the interest in stevia is still mounting. But the excitement is not about stevia itself. You can grow it, harvest it, mash up the leaves and get an extract. But that doesn’t taste very sweet or, in fact, very nice. The real excitement is because, out of the 10 molecules that make up the active ingredients in stevia, the sweetest one, Rebaudioside A (Reb-A) has been extracted to 97% purity. Also, the only company currently producing the Reb-A extract in any quantity is now putting a supply chain in place to produce it in commercial quantities.

“The company concerned is PureCircle, a UK-listed holding company headquartered in Bermuda with a purification plant and offices in Kuala Lumpur in Malaysia.”

PureCircle’s web site says:  “The company is a developer and producer of natural food extracts, flavourings and additives for the global food and beverage industry. PureCircle’s products are based only on natural ingredients and are strictly controlled in terms of quality and purity control and ownership of its supply chain, from cultivation through to distribution.

“No genetically modified plants have been used in the production of PureCircle’s range of sweeteners. We insist that farmers do not use pesticides in the cultivation and care of the Stevia plants. The extraction and purification of the sweetest part of the plant does not in any way, change or alter that product that nature has provided.

“The company’s mission statement is to encourage healthier diets through the supply of natural ingredients to the food and beverage industry.

“Major contracts with Pepsico and Whole Earth to supply Rebaudioside-A (Reb-A) and exclusive license to market Reb-A under the PureVia™ brand and Pepsico and Whole Earth introduce all natural, zero calorie sweetener with PureCircle sourced Reb-A.”

#3: Are the shares available at a good value?

The current market cap is 328 million pounds but it is too soon to tell if this represents a good value.  As a new growth company, there is no track record to really use as a basis to value the shares.  The shares are selling at 125 times earnings (2.45 pounds per share on .02 pence earned per share) according to the the latest financial breakdown http://tinyurl.com/5h6bdq

This has to be treated as a venture investment.  See my further personal misgivings about this below.

#4: Are the shares traded in a good value equity market?

This is a Malaysian company listed on the London Stock Exchange. This is also interesting.  According to the Keppler Asset Analysis, the Top Value Emerging markets are Hungary, Korea, Malaysia, Poland, Taiwan, Thailand and Turkey at equal weights.  The Top Value Major Markets are Belgium, France, Germany, Italy, the Netherlands, Spain and the United Kingdom at equal weights.

So PureCircle is a share in good value markets everywhere.

#5: Does the company have rising earnings?

The company has seen growth of earnings since its beginning in 2002.   This would be expected in a small start up. Much of the growth however as come through acquisition of other companies.

PureCircle bought Ganzhou Julong High-Tech Food Industry Ltd (‘GJF’) for 20 million dollars.  GJF is principally involved in the manufacturing and sale of crude stevia extract with operations in China and is currently recognized as the largest supplier of crude extract in the world.

This acquisition gave PureCircle a new 2,000 metric tonne stevia extraction plant, stronger supply chain;

Plus GJF recorded a profit after tax of US$1.7 million for the year ended 31 December 2007 and had net assets of US$29.9 million as at 31 December 2007.

#6: Has the company captured the attention of the market (ie price is already on the rise)?

Yes, the shares were launched on London’s AIM market.  The LSE code is PURE.  AIM is the London Stock Exchange’s international market for smaller growing companies. On AIM you will find a wide range of businesses ranging from young, venture capital-backed start-ups to well-established, mature organisations looking to expand.

The share price at launch, December 11, 2007 was 183 pence. The price has risen steadily to 247 pence.  However you can see further misgivings below.

#7:  Is the currency denomination of the share strong?

No, the pound has been falling versus the US dollar and England like the US has debt to add to trade imbalances.


If this were a matured company in a mature sector of business, my system would conclude that this is a god value share.  PureCircle is not mature company nor is the stevia market in the US mature either.

This is a venture capital share in its second phase in an industry I do not know well.

I would personally pass on this share for no other reason.  I am a venture investor but this is why I am not a start up venture investor.  I invest in my own small ventures which is why I tend to shy away from shares like PureCircle.   I have enough risk in my own ventures so I usually look for longer term more developed share opportunities.

Remember this lesson is looking at my process so you can understand your own better.  Some venture shares may be good for you.  If so PureCircle may be worth consideration for your portfolio.

There are other reasons why I will not invest…but they may be reasons why you may want to invest.

First, there appears to be some very successful businesses involved and the company appears to have secured its market and its supply chain.

Some points regarding a strong market are seen in a January 7, article by Jess Halliday at  Food Navigator that says:

“PureCircle secures sweet new deal for stevia.  PureCircle has secured an extension to its agreement with Cargill to supply its stevia-derived Reb-A until mid-2010, helping to ensure availability for what is tipped to be the next big thing in sweeteners.”

Regarding its supply a July 3, 2008  article at Food Navigator says:

“Olam and Wilmar have entered a joint venture to acquire a 20 per cent stake in PureCircle in a partnership aimed at strengthening the supply chain and increasing sales of natural high-intensity stevia sweeteners.

“The two Singapore-based companies, working together under the joint name Olam Wilmar Investment Holdings (OWIH), have invested a total of $106.2m (€66.9m) in the business move.

“They have also reached an understanding with Malaysian company PureCircle, which listed on AIM in London in December, for the development of a strategic partnership for future stevia development.

“This will focus on managing commercial scale stevia plantations and outgrower plantations, assisting in the development of crude extraction facilities to support the plantation activities, and developing a sales and marketing strategy.

“We see tremendous growth potential for high-intensity natural sweeteners based on stevia,” said Kuok Khoon Hong, chairman and CEO of Wilmar.

“The successful development of plantations and marketing of high-intensity natural sweeteners would be key to exploiting this opportunity.

“PureCircle and stevia

“The global high-intensity sweetener (HIS) market is estimated to be worth $1bn, with an annual growth rate of about 4 per cent. However, artificial non-caloric sweeteners that currently dominate the HIS sector are losing popularity as consumers place increasing importance on natural alternatives for a healthier diet.

“Stevia sweeteners are seen by some as the ideal alternative because they are natural as well has having zero-calorie and low glycaemic index attributes.”

Here are some of my other misgivings.

The people involved appear to be successful but I do not like the large portion of the shares held by the insiders.

This is healthy in some ways but these people probably did not accumulate all their wealth by building up small companies, pushing the share price up, so that small investors can make all the profit.

I mentioned earlier that the financial acumen and large shareholding on the board worried me a bit.

The 63 year old British Non-executive Chairman Paul Selway-Swift with many years of experience within the financial services and banking industry including 30 years with the HSBC Group, where he was an Executive Director of HSBC Hong Kong until 1996 and Deputy Chairman of HSBC Investment Bank in London until 1998 looks like an investor.

An article in www.followthedirectors.com.uk a study of directors share dealings entitled: “PureCircle up 20% in a week since non exec bought £162k worth” gives us a clue.   It says:

“I suggested in my note of July 25th that maybe the non exec purchase of £162,000 worth of shares in PureCircle (PURE, 241p) was a positive signal ahead of forthcomong Interim results in mid September.  It seems that the news came sooner than that, in the form of a major deal with Pepsico and Whole Earth for PureCircles artificial sweetener Reb-A (news announcement on PureCircle website here).  I might also suggest that the news was well known before it had been announced, as reflected by the 20% rise in PureCircle shares over the preceding 5 days.”

Three golden rules of investing are:

1. Invest in what you like.

I like stevia, use it myself (and am extremely interested in a non bitter tasting stevia like this) and like the idea and the large opportunity.

2. Work only with people you trust.

I rarely invest in start up ventures. When I do, it is generally because I like or especially trust the people…not the deal.

I do not know these people so tend to be cautious.  I see too much potential for insider manipulation. These people may be totally honorable. They may never take advantage of insider information.  But since I do not know them, they would have to be investigated in much greater detail  to suit my purposes.

3.  Invest only in what you understand.

I am no chemist or food expert so I have concerns here as well.  Stevia is not the problem.  I like and believe in stevia. I question Reb A.

PureCircle’s website says:  “No genetically modified plants have been used in the production of PureCircle’s range of sweeteners. We insist that farmers do not use pesticides in the cultivation and care of the Stevia plants. The extraction and purification of the sweetest part of the plant does not in any way, change or alter that product that nature has provided.”

Yet another article describes Sweta the final co-product of Reb-A, as being “from molecules from stevia leaves that are left over from Reb-A production. It is treated further to produce a much sweeter taste.”

This sounds suspiciously like the manufacturing description of how sucralose, the chemical sold under the brand name Splenda.

The Spanda website says:

“How is SPLENDA® Brand Sweetener made?

SPLENDA® is the brand name for the ingredient sucralose. It is made through a patented, multi-step process that starts with sugar and converts it to a no calorie, non-carbohydrate sweetener. The process selectively replaces three hydrogen-oxygen groups on the sugar molecule with three chlorine atoms.”

Many people believe that splenda is safe…but there are many people offering advice about better nutrition who believe that there are splenda risks.

To see this, Google the phrase ‘Splenda risks”

I do not know if Reb A or Sweta have any health risk or face similar health risk perceptions as Splenda.

I do believe that refining of any product tends to increase the risk of health imbalances.  Sugar cane is not all that bad a food. White, refined sugar is less healthy.

I also  believe that if Coca Cola, Cargill and Pepsi are involved, the health industry will look at the product with some skepticism.  Yet these marketing giants are likely to sell this product well.

Finally, I am not over enthused about this because an estimated 1 billion dollar market  is not large. Plus soft drinks tend to rise in and out of popularity very quickly.  Many investors in the Clearly Canadian shares are aware of this as the Clearly Canadian stock chart below shows.

water chart
This same sudden rise may fit other investors perfectly

To conclude this lesson, I like stevia and use it as my sweetener of choice.  I would love it to become a great health food throughout the Western world. Yet it is not proven as a product that will be used in this way.

Reb A has the potential to be a profitable short term gimmick to entice poorly educated consumers to consume a carbonated soft drink that is not especially healthy and one that may even create other health risks.

I hope not and wish stevia all the luck in the world.

I however will pass on the investment opportunity.  I see many others that are more me…maybe less profitable…but perhaps more predictable and with a better potential of feeling good (based on my beliefs) if the investment does well.

This lesson ends with a reminder that its purpose was to examine my peculiar wants, needs, desires and how I consider a potential equity investment.

This may be a good investment for anyone who is a venture investor looking for a fast profit. You should review the risk, rewards and how they fit your circumstances with your investment advisor.

Until next lesson, may all your investments be sweet!

Do you have question or suggestions?  Please email them to gary@garyascott.com

Add BL in the subsject line. We will share them when we can in lessons here.

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