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