Not surprising that Yee Lee is doing a quick takeover exercise

Wilmar which part of its business is selling cooking oil in China, just announced a good result considering the huge impact from COVID-19 in China. This is what it reads for Wilmar which sells flour, cooking oil in China largely.

"Being a producer of essential products for both food and non-food categories, the Group’s operations were not significantly impacted by the various stages of lockdowns globally. Demand for the Group’s consumer products grew amidst the COVID-19 pandemic as household consumption increased due to the implementation of movement restriction measures globally. Sales volume for consumer products grew by 34.8% to 2.9 million MT in 1Q2020, mainly from increased demand for the Group’s consumer staples such as rice, flour and cooking oil."

Back here in Malaysia, Yee Lee which just announced a takeover offer after a failed in 2019, this time offering at a lower price of RM2.06.

One of Yee Lee's larger business is cooking oil under the brand "Helang". At the first time of offering, its offered price was deemed "not fair but reasonable" - which is common for Malaysian companies in Bursa nowadays.

Consumer staples stocks

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

The last of the consumer stocks

Kenanga called it a hidden gem and put a target price of RM1.50. I do not put a target price in my blog (as I do not think of my purchases and sale this way). I however would not go so far to call it a hidden gem. A hidden gem is a precious stone which nobody have yet to find.

Yee Lee is a very old consumer stock which have been rather consistent i.e. in being profitable. The bulk of its business is in the trading and manufacturing of edible oil in Malaysia. If it is a gem, what are the products that it does. So here it is as below. Which one you think is the Star among the list of products? Helang. Vesawit and maybe the other edible oil products. I do not think the Sabah Tea and Morning Kiss are much of a value. Besides the below, it also owns an associate stake in Spritzer - a very decent drinking water brand.

Now, what makes me feel like wanting to write about this stock. It is again probably a boring stock. It is hidden among many investors but is it a hidden gem? Currently at RM1.20, it is trading at RM212 million market cap. Given that the company has been around for so many years, I would say it has come a long way. The business that it is in is rather competitive, but Yee Lee has proven to be able to be equal among the others. It may not have the brand strength as Knife (Lam Soon) or perhaps the balance sheet strength of Neptune (under Robert Kuok's PPB), but it has survived and well alive.

How?

If you look at the above 5 year financial highlights and inclusive of its better performance in FY2012, it has done pretty well for the last 5 years from 2008 to 2012. The first quarter results for FY2013 is even better achieving PAT of somewhere around RM8 million for the quarter.

Now, I want to highlight another segment which is in the second red boxed. Not the ROE though. Do not expect the ROE to be good for a business with refinery like Yee Lee. Margin is not expected to be good and we cannot expect business like this to have a ROE of 15%. If ROE is the main indicator, walk away as Yee Lee will never provide this figure as long as it is selling edible oil.

A very important trend is the Net debt to equity ratio. If we look way to the right, it was not doing so well there in terms of its health of its balance sheet. A business like Yee Lee is where it buys crude palm oil or Fresh Fruit Bunch, crush them and turn them into refined oil, brand them and sell. To do that, it needs to use some financing to purchase the raw bunch (it also use the financing for terms provided to retailers). This is where mainly the net debt is from, not overly worrying but if its balance sheet is not strong, it will need to finance it longer or even at a higher rate.

Walk through the left, that indicator which is the net debt to equity has gotten much stronger. Partly to do with the shareholders funds getting bigger as well as a much controlled short term financing. This is also to do with better collection, which could be internal as well as a healthier overall industry - AEON, Giant, Tesco probably pay earlier. Another indicator which is my favorite is cashflow.

If you look above where I have included 2012 numbers for Net cash from operating activities. You can look at the record from 2008 onward from the above chart. It shows a huge improvement. A better cashflow despite the consistency of profitability is very important. Better collection means, lesser bank borrowings as compared to turnover. It hence means lower interest costs. Why did I highlight the depreciation? This is because in a operating cashflow, the depreciation following accounting principle where the earlier or continuous investment will need to be depreciated over a period of time. It is not a cashflow item.

What makes me excited? The better cashflow although I doubt it will achieve another RM64 million of net operating cashflow for FY2013 would probably mean better balance sheet (again), hence better profits as financing costs will be lower and hopefully better dividend as well. As usual I do not know where it stands in terms of wanting to pay and its strategy moving forward, but the much better balance sheet is something which we can appreciate.

Yee Lee has gone up to RM1.20. Frankly, at one point of time few years ago, around RM0.70 I took a look and deemed its balance sheet as not attractive but with the trend of its cashflow and strengthened balance sheet, I am relooking at the business and where it stands.

The business is rather consistent, the lower the crude palm oil price, it probably would be better for Yee Lee, as in current situation. But even if the price of palm oil gets higher, the subsidy from government would have allowed companies like Yee Lee to still be profitable. And, I do not think the subsidy for palm based edible oil would be taken away as by doing so, it would be negative to the country and probably allow other types of edible oil to be more competitive against palm oil based edible oil. It would be inflationary as well. Another thing with this industry in Malaysia is that there seems to be a quota for each of the palm based edible oil producer. Hence, there is always some small margin to be made, but it will remain to be small. For these companies to get out of that trap, they would need to sell some other things. This strategy has been used by Lam Soon pretty well. As for Yee Lee, it does try as it has other businesses in can packaging and corrugated carton packaging. These businesses are always competitive but given where Yee Lee is at, they I would say have done decent, but not fantastic.

The gist of it, Yee Lee is a smallish consumer stock, with a rather steady business, decent balance sheet, positioning in terms of its brand and at its current valuation of around 8x PE, I definitely do not think it is expensive.