This article is contributed by a strong promoter of my blog. Read what he has to say about the consumer staples stocks in Malaysia.
The secret to successful investing is to figure out the value of
something and then-pay a lot less.
Joel Greenblatt
Whether it is
economic boom or bust, people are unable or unwilling to cut out of their
budgets on essential foods regardless of their financial situation. The demand
of consumer staples are relatively constant, regardless of their price. Hence
consumer staples stocks offer an attractive investment for investors seeking
slow and steady growth.
Past growth in
revenue and profitability
Table 1 at the
appendix shows some of the mid and small capitalized consumer staples stocks
listed in Bursa. Their past year growth, profitability and efficiencies as well
as their market valuations are tabulated as shown.
Figure 1 below summaries
their growth in revenue and net profit in 2012.
Figure 1: Growth in revenue and net profit
Zhulian has the
fastest growth last year with revenue growing at 26%, followed by YSPSAH (15%),
Haio (12%) and Apollo (11%). Yee Lee and
London Biscuits, however encountered contraction in revenue of 9% and 3%
respectively. Apollo achieved the highest growth in net profit of 47%. Zhulian,
Haio and Yee Lee also enjoyed good growth in net profit of 23%, 22% and 14%
respectively. On the other hand, YSPSAP suffered from a contraction of its net
profit due to higher tax expense. London Biscuits is the worst performer with
its bottom line contracted by a huge 23%.
Profitability
and operation efficiencies
In terms of net profit
margin (NPM), Zhulian excels with the highest of 23%, followed by Haio and Apollo, both with
double digits NPM of 15.9% and 14.4% respectively. Yee Lee has the lowest NPM
of 3.1% due to its competitive environment.
The high profit
margin of Zhulian in turn boasts up the return of equity (ROE) and return on
invested capital (ROIC) of 26% and 39% respectively which are the highest among
the companies as shown in Figure 2 below. These returns are way above its costs
of capitals. Its cash return (Free Cash Flow/Invested Capital) is also remarkable
at 27.5%. Zhulain is obviously has been enhancing its shareholders value
greatly with these operating numbers.
Haio follows
closely with respectable ROE and ROIC at 17.8% and 27% respectively. Its cash
return is also as good at 27%. Apollo is also performing satisfactorily with
returns above its costs of capitals.
Figure 2: Return of equity and invested capital
YSPSAP, Yee Lee
and London Biscuits did not do well with their low ROE and ROIC which are below
the cost of capitals . The worst performer is clearly London Biscuits with ROE
and ROIC of just 4.1% and 5% respectively. It has no free cash flows at all. In
fact it never seems to have any FCF for years. Wonder why it should still be in
business.
Ranking
With the past
year growth and the profitability and efficiencies of the companies, I would
rank the companies from the best to the worst as the following Table 2:
Table 2: Ranking of companies
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Zhulian
|
Haio
|
Apollo
|
Yee Lee
|
YSPSAP
|
LonBisc
|
I would expect
the market to give the highest valuation for Zhulian, followed by Haio and the
lowest London Biscuits. But does the market do so? Let’s look at figure 3 below.
Price-earnings
ratio
I am indeed
surprised that YSP is given the highest valuation with a PE ratio of 14.6, followed
by Haio and Zhulian both at 13. Apollo and Yee Lee both have a PE of about 9,
though Apollo’s performance appears to be much better. London Biscuit as
expected ranks the lowest at 8.4, a ratio not considered really as low in view
of its poor performance.
Figure 3: Market Valuation
Enterprise
value
A better market valuation should be based on
enterprise value over earnings before interest and tax (Ebit) for valuation of
the whole firm, rather than just the equity. This is because some firms have low
debt, debt free or large amount of excess cash such as Zhulian and Apollo,
whereas Yee Lee has considerable amount of debt. London Biscuits’ total debts
are huge.
Referring back
to Figure 3 above, It is a real shocker to see that London Biscuits, being the
worst in terms of growth, profitability and efficiencies, is given the highest
valuation of a firm with enterprise value 11.4 times its ebit. In fact those
companies with poorer performance are given higher valuations than those better
ones as shown in Figure 3 above. Haio and Apollo with great performance last
year, are given an enterprise value just about 6 times their ebits, or a
earnings yield of about 15%.
So which company
do you favour as an investment?
KC Chong
(11/7/13)
Table 1: Appendix
|
Company
|
Haio
|
Zhulian
|
YSP
|
Yee Lee
|
Apollo
|
LonBisc
|
|
Growth Last Year
|
||||||
|
Revenue
|
12%
|
26%
|
15%
|
-9%
|
11%
|
-3%
|
|
Net profit
|
22%
|
23%
|
-11%
|
14%
|
47%
|
-23%
|
|
Profitability and efficiencies
|
||||||
|
Operating margin
|
21.9%
|
20.9%
|
12.0%
|
4.5%
|
19%
|
11.3%
|
|
Net profit margin
|
15.9%
|
26.0%
|
7.5%
|
3.1%
|
14.4%
|
5.4%
|
|
Return of assets
|
13.9%
|
22.1%
|
4.6%
|
4.1%
|
12.5%
|
2.2%
|
|
Return of Equity
|
17.8%
|
25.9%
|
6.2%
|
7.6%
|
13.9%
|
4.1%
|
|
Return on invested capital
|
29.1%
|
39.1%
|
6.4%
|
7.0%
|
17.6%
|
5.0%
|
|
FCF/IC
|
27.1%
|
27.5%
|
-1%
|
16%
|
13.8%
|
NA
|
|
Market valuations
|
||||||
|
Price on 11/7/13
|
2.70
|
3.17
|
1.49
|
1.32
|
4.09
|
0.685
|
|
PE ratio
|
12.8
|
12.5
|
14.6
|
10.5
|
10.3
|
8.4
|
|
EV/Ebit
|
6.9
|
8.5
|
8.7
|
8.8
|
5.8
|
11.4
|
