Breaking bad?

I know I will not be able to get away with this. All these while, consistencies, track record, good management have always been the mantra. But this?

Like I have said in my earlier article, I have looked at this deal for a long time. Keuro is not the mark of the type of company which I have pitched all these while. It has not really gotten any real profits for the last 5 years. Balance sheet is cleaner now, but nowhere near where I want to see it having. People behind the company have not been what I can call good management. Nothing is there. Or is it?

As in the earlier article, it has great assets or soon to be. A company with great asset but bad management is like a country like Cambodia with its Angkor Wat but the assets (or relics) in Angkor Wat have been stripped by thieves piece by piece. I am not saying Cambodia has bad leaders but it has gone through tough times not too long ago, but turning around now. Will Keuro be that one day? I am counting on the new managers (whom are yet to known, or will there be?) to protect that assets, or rather kick start the projects.

It is announcing its raising of new funds in the form of rights and warrants to fund for the West Coast Expressway ("WCE") project. The Rimbayu project has gone off really well, and the latest I have heard is that the 2nd phase which consists of 484 units (priced at the minimum RM660,000) have received overwhelming response with non-bumi units fully taken up within days. Try multiplying RM660,000 with 484, assuming it is sold at minimum price without considering the corner lots and the larger units. And this is just one of the early phases - heard that it has 20 phases with pricier units later stage. What would the profits be assuming the land is almost free? The sad part is the sale of the 10% to IJM - a golden handshake? Question is, will there be more of these kind of golden handshake?

More importantly will the WCE project commence? I am buying without much details in hand with regards to the terms of the project. Hence valuation of Keuro is not certain and that is assuming that it will be able to complete WCE. The thing I can see is that IJM will be taking lead on this project - hence it is on safe hands.

Now, with these risks, what makes me buy. Remember, more money will need to be coughed up for the rights. At 3 for 4, I would think at least another RM7,000 will be needed for the subscription for this portfolio. At today's price, despite no show in the 5 years track record, the company is trading at RM700 million valuation. New funds have been injected in through private placements with more than RM100 million injected over the last 2 years to survive the company. No one will put new cash into a dying company - that's what I have experienced. No one would put something for nothing especially if it is more than RM100 million. But yet, Keuro manages to raise that kind of funds. And it is asking for more funds. Will all the large shareholders be willing to put in more money if they are not too confident of what lies ahead for the company? Remember, the ones that just put in close to RM60 million recently will need to cough up more in the near future.

Like I have said, I am not sure of what would the valuation of its 80% WCE be like - Keuro's crown jewel. But I guess, it may not be at RM700 million. If all questions are answered, it won't be at today's price, won't it? Another thing with this investment is that I am into it for the long haul - as WCE will not be seeing money until 2018 or 2019. At least that part is where I preach - long term. But for a concession highway, despite how much we may dread it as a motorist, it provides consistent return to the shareholders with the assumption that it is the right link with the right traffic. The question now is, whether WCE is the one where motorists will use in the future, competing against PLUS. Sometimes, we may look at it as competing but in certain cases it may be complimenting.

For the funding of this investment, I have sold YSPSAH. Question, is it the wrong move - from a decently good company into a potentially bad one?

And the portfolio looks like this now.

For those who do not know, Breaking Bad is a very popular series currently running in US. It is about a very brilliant chemistry teacher who decided to turn into the world of methamphetamine (a kind of drug) or in short "meth" or "ice" (or in Malaysia if not mistaken, it is called "feng tau" drug) after finding out that he had lung cancer. I must say it is a very well written series, and sadly it cannot be shown here as it is about meth. Err...I have yet to watch it. Sort of heard from friends from US.

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

YSP: You Shall Pass?

With the recent market hike, it is really getting more and more difficult to find good deals or something which we can digest. While globally, market is on the uptrend, Malaysia included, I have just noticed Malaysia in fact is lagging behind markets like Singapore, Hong Kong, Thailand - in fact almost everywhere else now.

I would not call the market as expensive but I am surprise of its strength. What provides that impetus for the bullishness. I do not know actually. Lesser people with pessimism the last few months?

Anyway, as I was looking at some companies, one did really get me to hmmm... wanted to know more. Most companies that announced to Bursa are either doing well, I have sort of covered, but there is one which started with "Y".

Once Warren Buffett used to joke to his audience, "do read through the Annual Reports of all the listed stocks in the exchange." The other person asked, "But, Mr Buffett, there are more than 10,000 companies listed". Buffett, replied, "Start from A". I sort of did that. And now reaching "Y" although Malaysia is far from having 10,000 companies. And anyway, along the way I did jump quite a few alphabets.

YSP SAH is a pharma company, something I can digest, have a decently good growth prospect. Small (around RM150 - RM160 million market capitalisation), I can digest as well as long as it is doing consistently decent or good. It is controlled by Taiwanese. Well, if I have invested into Wellcall and Latitude Tree, previously put some money into Uchitec, did decently well, I may want to try on this. More importantly, is it consistent and is it providing good enough return previously and perhaps for the future. If you look below, there is a sense of consistencies although not too bullish.

Yes, its Return of Equity is deteriorating but this is one company which is a growing. It does reinvest. I have done some checking as well among the hospitals, well this one is pretty small, no doubt but it has been supplying to hospitals for quite a while. Started its business since the 90s, its growth is far from amazing but consistent. Importantly, the dividend is above 5% yield, which in Bursa, not many now you can find. If you are getting some 3% from FD, I would say check out this one. The PE is slightly more than 10x.

Pharma in future is probably going to be a much more recession proof and more and more generic drugs companies are doing better due to many patents are expiring or already expired. It is a competitive business but yet there are monies to be made for many companies. YSP is not a fantastic company, there aren't any with regards to pharma in Malaysia. Why? Pretty much dominated by the big brands globally. With the current price though, it is still a buyable company, pretty much like Wellcall. You would have noticed that a small portion of my portfolio is meant for dividends stocks. Wellcall is one, so is Jobstreet but with the rise, it's Dividend Yield is moving further from the 4% to 5% threshold. For a small portfolio like this I couldn't be bothered with holding cash like what most fund managers are doing i.e. holding some 20% to 30% cash. This is unless the market is grossly overvalued and I am not good at timing the market, so why bother?

Anyway, I am not going to be taking too much of a risk but I am spreading my risk a bit as Wellcall seems to be tapering off in terms of performance, although still providing good dividends. Hence, I am selling half of my Wellcall and move to another which similarly provides good dividend - proposed to be 6.5% this year.

Any wonder why Taiwanese companies some of them provide good dividends? This is your food for thought.