Wednesday, July 31, 2013

This is not a small blip

When Fitch comes out and downgrade our sovereign rating from stable to negative, this should be looked at it entirely and is serious. Few times, I have highlighted the danger of over lending by the banks, but little did I mention about the government's debt.

With that downgrade in rating, it seems that we have a dual problem, i.e. not just on the overly high consumption debt among the people, but it includes national debt which if not kept in check may turn out into a problem to the country. With the negative outlook, our borrowings cost may just go up. If you have noticed, we have gone more overseas to get our funding although a large portion of our national borrowings still come from within i.e. from EPF, KWAP etc.

Besides the published national debt, another cause of concern is the off balance sheet debt where it seems that many people do not even know the extent of the off balance sheet debt. Frankly, if the off balance sheet debt is not kept in check, the government itself may not even know the quantum of the guarantees and other contingent liabilities that may have already been in place.

I think with the extent of the downgrade, it would be good for any investors to reposition their investment portfolio to assets which are not too overexposed to the consumption, government awarded projects or rather who are dependent on those projects. In fact, concentration should be focused on companies which are export led and companies where the assets are located overseas rather than those which are fully dependent on local consumption.

Sunday, July 28, 2013

Sometimes you just have to take the opportunity presented

I remember back in 2006, I managed to discover a stock which I was pretty sure it would have risen at least 40% to 50% - and it just needed a little bit of time and holding power. Looking back and after searching through the announcement, I am just trying to remember the past. I did not take the opportunity as I just bought some 7,000 units, which was too little.

QSR (then the controlling shareholder of KFC) made a general offer for KFC after triggering the 33% GO threshold. During then, QSR (under Johor Corp) just managed to take control of KFC. It wanted to consolidate its position, hence triggering a General Offer ("GO") at RM4.94 per share during which the price was considered very low. KFC was a cash cow as many would know, however for far too many times, there were just too many interested parties and the latest was Johor Corp. Johor Corp however does not have the funds to do the GO, hence CIMB acted as the financier. You see, seldom a bank would provide financing for an acquisition as such through a GO except for this particular case which include the pairing of state-owned organizations (in this case both of them are).

Priced at RM4.94 which was considered cheap

To initiate the GO, the price of the shares had to be cheap, hence it was priced at a single digit PE for an attractive company such as KFC (KFC's cashflow was indeed and in fact better than its earnings, if you know what I mean). At RM4.94, of course the GO will not turn into a Mandatory GO as it was fixed at too low a price, hence QSR was accumulating the shares (to close to 50%) with CIMB financing it. I knew that with CIMB financing QSR, the price of the shares would definitely rise post GO period as firstly QSR would need to repay CIMB for the financing (at market rate) and because of that, QSR being the controlling shareholder would force KFC to pay very good dividends as through the dividends from KFC, only then QSR can pay for the interest charged by CIMB for the financing of the accumulation of KFC's shares. Also, because of QSR wanted to increase to a decent percentage holding of KFC, it would not want to reduce holdings of the company (after all the hard work), hence the need for very good capital appreciation and dividends especially.

During the GO initiation period, QSR at that time would not allow the shares to rise above RM4.94 as if it were to rise, QSR would not have the chance to accumulate the shares at RM4.94. Accumulating it at a higher price would have triggered the GO at a higher price, which was not what QSR and CIMB wanted (I think).

I hence (together with QSR) seeing the plan, accumulated 7,000 units at RM4.94 per share. I was seeing the plan (without being an insider) from the actions, as I was monitoring KFC all along. KFC has always been a prized asset, until today. However, I did not take a plunge on the exercise as I was following the Benjamin Graham's principles (not to over expose on a position). Hence, I only took a RM35k decision and at price of around RM6 - RM8 I sold the shares, making a decent return but it was not good enough as (again) I was seeing the plan all along.

Of course, 6 years after that GO, KFC was delisted at a price of RM4 (after a combined split and bonus exercise of 1 share into 4 shares). So, if one is to purchase the shares at RM4.94, the shares would have effectively be worth RM16 after six years post GO at its delisted price (not inclusive of dividends income during the 6 - 7 years period). Hence, the person if to hold the shares from December 2006 until the delisting would have earned slightly less than 4 times at which price, the GO (RM4.94) was offered at in 2006. I actually have family members and friends who did hold onto the position for that entire period.

These kind of things does not recur often, and I am rueing the lost opportunity as I was just too careful, as I see it today.

Another lesson here is that shares investment is not just entirely about fundamental.

And again, these are partly my speculation which may not be true (as I see it).

Sales that does not makes sense

Do you notice anything that's fishy...

The company has more than RM0.80 of cash per share and very limited debt.

If the number is true, why would the shareholder sell? Why not capital distribution or dividend? Red chips stocks are really creating doubts if this persist. How do we trust the numbers or are they that naive to think that their shares are overvalued?

Wednesday, July 24, 2013

Will IJM continue to shortchange Kumpulan Europlus' shareholders?

I can tell you I have been monitoring and spending too much time on this. Who is Kumpulan Euro ("Keuro") in the first place - not too long ago (that is more than 10 years), it was Larut, and of course the controlling shareholder is whom many depressed house buyers in Klang Valley would know - Tan Sri Chan Ah Chye. Where many housing projects were (and are) doing well, Keuro has failed because in many instances it failed to deliver.

(Note that I am not writing this on behalf of Chan Ah Chye but for the minority shareholders. The shortchanging, I feel is not only onto the largest shareholder but all the other minority shareholders.)

Keuro does not have the cashflow and namesake (Keuro and Talam's brand are worthless and they have been hiding under IJM brand) to deliver. What Keuro has not failed though is the assets and its accumulation during the 1990s and 2000s.

In the balance sheet of Keuro, it has three large assets:
  1. 30% of Talam (or Trinity) - you can check the assets, despite it being a penny stock (at RM0.055), its Net Asset (before revision) is easily worth RM0.14 per share. I would not know how much if it is revalued as it has not been revalued for a long time;
  2. then the Rimbayu (or formerly Canal City Construction Sdn Bhd). This is a large piece of 1870 acres of leasehold land in south Klang Valley which it effectively owns 35% (the other 35% being IJM Land). The first phase launch of some 500 units of landed houses (priced between RM550k to RM600k) was very well received with many more in the waiting list (and there is no DIBS or 5/95 plan in the project). Upon completion, this area is supposed to have 10,000 households with RM11 billion in Gross Development Value. To make the shareholders of Keuro excited, an adjacent land of 1,200 acres (which is also called Canal City) was sold to Tropicana Group by Selangor state government for RM1.3 billion recently, hence effectively valuing the land held by Rimbayu at some RM2 billion. How much Keuro had to pay for it back in 2004? Nothing. So you probably would not see anything in the balance sheet except for some accumulation of expenses for the project delivery. And since it is a JV with IJM, it is equity accounting the project (not consolidation, hence you are not seeing the effect from its project sales). At my soft guess, the land would have worth easily more than RM700 million to Keuro. Can you imagine, with the land being free, how much can the project bring in terms of profitability to the project owner? And best of all, in the balance sheet it shows nothing until revenue recognition;
  3. now of course the most prized (with much fanfare) is the West Coast Expressway (WCE). Keuro has 80% of WCE and it has been awarded a 50 years concession by the government. If we are not so sure of what it is, WCE is almost parallel to the North-South Highway owned by PLUS linking Banting to Taiping (tolled road around 233 km). Hence, you can see it is the heavier traffic part of the linkage from north to south. How much would the concession be worth upon completion, that's the question? Since, there are very little details about the project, except for it being given a soft loan of RM2.24 billion of 4% interest by the government, its value may not be known to a lay shareholder like you and I. Much of the details are unknown, but what is announced is that since it is a public-private initiative, upon it reaching certain revenue threshold, 70% of the revenue will be used to pay off the government loan, until the loan is fully paid off. Upon that, the revenue sharing will be 30%:70% between WCE and government. On the valuation, just a note - PLUS (of which 84% of the revenue derived from North-South Highway) was sold to UEM and EPF for RM23 billion (tagged along with RM11 billion debt) in 2011 - hence effectively valuing PLUS at RM34 billion at enterprise value at that point of time. How much would you think a 233km concession along North-South be worth upon completion then? It is noteworthy that PLUS' North-South Highway is 840 km, but it also has portion which has lower traffic, i.e. the Penang - Bukit Kayu Hitam stretch.
With that 3 assets, how much would you think Keuro is worth? To me that is a tough question as one of its larger shareholder, IJM which also owns 23.8% of Keuro, has purchased assets of Keuro at amazingly low valuation. One should note though the partnership with IJM also comes with the good part as well, i.e. the delivery partner and the confidence that is associated with Keuro and Talam in the ability to complete projects. IJM has 20% of WCE in itself and through its 22% stake in Keuro, it is IJM's interest to keep the concession going as well as kickstarting Rimbayu and other land assets held through Talam. Why? For IJM, it is killing 2 birds with one stone, as besides owning the shares at low price, through Keuro, it will have continuous projects from Talam and Keuro's rich assets where the WCE project alone is going to be worth RM5.5 billion in terms of project value. Surely, IJM being the project owner and construction company would get a big chunk.

To kick start the WCE concession though, Keuro needs RM200 million as highlighted by the board yesterday. That is something which Keuro does not have, and has always been a problem for the company. If I am IJM, I would of course continue to retain that, as a hungry and weak partner will always needed me to catch and feed it with fish, rather than it catching the fish itself.

The value for Keuro is not in its financials. It is highly geared with little revenue to show.

Now, how did IJM went into Keuro in the first place? Back in 2007, when Keuro needed help, IJM took a 25% stake at RM0.28 per share - now that share is worth RM1.28 or 23.85% of Keuro's RM666 million market cap (and the value could probably be much more once the projects kickstart, in which case some like the Rimbayu project had). During the period until now, IJM has become a delivery partner to many of Keuro and Talam's projects and in the process got to buy an additional 10% of the Canal City Construction (from Keuro) at an amazingly low price of RM2 million in 2008 and 20% of WCE from a partner of Keuro (actually partly held through Chan Ah Chye's brother) at RM6.75 million. The RM2 million for 10% of Canal City was basically valuing the land at RM20 million. What is it worth now?

Hence, while Keuro benefited out of this (sort of partly rescued), the main beneficiary was IJM. Keuro remained to have poor liquidity. As said earlier, the WCE project will need RM200 million of capital injection by September with 3 months extension option. It needed to raise cash fast and as said, one of the options is to sell part of the Rimbayu project. I can only guess that the buyer is IJM as by doing that, it would be able to consolidate the financials from the Rimbayu project, and what more to do it off a hungry and weak partner at a low price? (Note that under IFRS10, IJM should be able to consolidate the Rimbayu project as at now as it seems to have full control over the project) 

If I am a shareholder, I would prefer the equity fund raising option for Keuro but I just could not understand why it took them so long to raise the needed RM200 million after 7 months since the concession was signed in January 2013. Probably IJM was the hyena, that was just waiting to have more flesh out of them...perhaps? Why not let it be hungry as long as it is still alive! I am just wondering, after all these while why the need to sell the assets of Rimbayu as one of the options...

I am sure given the proper explanation and the partners that are involved, raising the RM200 million equity would not be that difficult, but the work (as I see it) is not planned properly. 

In previous times, any fund raising would just dilute the shareholders (which is the case why the fund raising has been dragged, as they may not want it or may not have the funds for it), but new shareholders with more firepower would allow rights issue to be done and Keuro (and Talam for that matter) needs to do rights issue rather than private placements. Hard land assets is worthless without the funds to deliver - that's the POINT. UNLESS OF COURSE YOU SELL THE ASSETS.

The latest news however, a probable stronger shareholder in town (MWE) which has some RM350 million cash in its coffer would probably have a bigger voice once the shares from Chan Ah Chye changed hands and perhaps IJM may not just bully the very weak Keuro anymore, as we have witnessed in the past. It will then has a stronger shareholder to content with, and that's hopefully better for the minorities. What is more important though is making sure of the money needed for the WCE project is resolved for now, and Keuro is running out of time to get it done.

To be fair to IJM, it has forwarded some RM200 million interest-bearing loan for kickstarting the Rimbayu project. Without that, it can't even commence.

Disclaimer: These are entirely my opinion and observation and it may not be fully accurate.

Stabilizing action on Airasia X

I have been looking at the stabilizing action as made on Airasia X's stock price. Stabilizing action or green shoe option has been made on the shares for almost everyday since its listing date. Stocks have been purchased at RM1.25 for it not to drop below the IPO listed price.

Airasia X's stock is not that bad, but it is not just worth the price it is listed for. I do not know how much it is worth, BUT I AM WONDERING WHY NOT LET THE MARKET DECIDE.

A stabilizing action can actually causes fear among the shareholders as the share price is deemed as not true worth of what its underlying value is - hence probably more selling.

And in the future, for any IPO per se, let's not overprice the initial offer. The recent large IPOs, we have seen the shareholders have sort of become greedy and think that their share price can do wonders.

IPOs (which are sort of new kids on the block) should not do wonders as they have yet to prove their performance consistencies in the market. If the company is beautiful, overtime its stocks price and financial performance would show. But to expect immediate results from selling expensive is not the way.

Tuesday, July 23, 2013

Will the Central Bank’s First Tapering Move Come in September?

by Joe Winter

Just last month, Federal Chairman Ben Bernanke made assurances that the high level of bond buying would begin to decrease later this year, with the aim of ending the controversial program by the end of Q2 next year. He didn’t give exact details as to when this tapering would begin, but we can guess that it’s likely to start in a matter of months, if mid-2014 really is a target. A sudden halt would of course be a dangerous move. Many are predicting September as the likely starting point, but how likely is this?

It’s important to note that any plans to begin tapering are subject to economic performances matching forecasts issued by the central bank. Things could still change.

The President of the Federal Reserve Bank of Philadelphia Charles Posser, believes that September should see the start of tapering actions, but he goes further; believing that the quantitative easing program should end before 2014. The $85 billion per month bond buying scheme is seen as an unorthodox method of stimulating the economy, and as a result, has many opponents, as popular as it is with certain entities.

Posser warns against “another housing boom”, a potential consequence of the bond buying. He’s not alone in believing that the practice should end by year-end. Last month’s Federal Open Market Committee saw nearly half of the participants press for it.

One of the FOMC’s primary concerns is that the Federal Reserve’s QE plan will be difficult to de-route the longer it continues, with the balance is currently at a hefty $3.5 trillion. Opponents are concerned that inflation may continue to drop if things carry on the way they are.

Plosser has also highlighted an issue with the way the Federal Reserve explains its forecasting, claiming that it contributes to confusion rather than clearly defining the outlook. The Fed chief has argued that while unemployment is above 6.5 percent and inflation is at or below 2.5 percent, there should be a definite commitment to interest rates being kept as close to zero as possible. It’s certainly likely that unemployment rate will continue to rise above that figure.

Of course, there are many who are comfortable with QE. This is clearly illustrated through market analysis and chart interpretation. The S&P 500 saw a drop immediately after Bernanke announced that tapering could begin later this year. Conversely, when James Bullard, president of the St. Louis Fed, suggested that QE might have to be ramped up if inflation slows, a bullish trend immediately emerged. PBC governor Zhou Xiaochuan, BOJ president Haruhiko Kuroda and ECB president Mario Draghi all issued more lenient outlooks on QE policy.

VGK, EWJ and GXC all saw exactly the same movement as their American counterpart.
So is September a realistic time for tapering to begin? There are certainly a lot of people that would like to know sooner rather than later, but the differing attitudes towards QE can make things difficult to say for certain. We know that Bernanke is open to tapering to begin by the end of the year, many in the FOMC want it to end by the start of 2014, and the markets still seem to appreciate QE.

Taking all things into account however, September does seem to be the most likely choice. There isn’t the same degree of pressure for QE to continue as there is for it to end by 2014. The FOMC should see to it that the final quarter would be a reasonable period of time for tapering to both begin and end.

Tuesday, July 16, 2013

The Real Deal in Stock Investing

This is a guest post by KC Lau from
I am frequently asked by a lot of readers about where they should invest their money. I often tell them that there are two ways by which they can invest their money wisely. These two investment options aren't new, and you probably have heard them before. The first option is business, either a self-owned business or someone else's business. The second option is real estate; these are properties which can either be for residential or commercial purposes. Lands, apartments, condominiums, housing complex, farms and warehouses are examples of real estate properties.
I’ve created an article and a video tackling the ins and outs of real estate investing before. For now we will be discussing about investing your money in stocks. Investing in stocks makes you a shareholder, and grants you partial ownership of the business.
Invest your money not where it would be kept, but where it would generate revenue
In this age where the worth of paper money decreases on a daily basis, I receive a lot of questions requesting for my views about investing on gold and silver. I acknowledge the importance of these valuable metals, and I understand that it can produce a big turnover when prices spiked up. It has been tried and tested before. You have probably toyed on the idea of converting some of your cash equivalents into gold coins and silver, and then use these metal bars and coins in embellishing your safety boxes. But is it really wise to invest all your money in these precious metals?
The simple answer is – no. These are valuable metals, I know, but these won’t yield more value. My standpoint will always be: If you would invest your hard-earned cash, you should invest it on resources that will generate more cash. In essence, corporations can make competitive products and commendable services by using the money provided by investors. All these goods and services they create make our everyday life easier. It improves our well-being through health products. It powers our communication system. It propels us forward and lets us reach our destinations. It even enhances the way we learn and do research.
One of the most successful investors of our time often talks about how stock investment can shatter the dog-tired concept of investing on gold. Essentially, stock investing isn’t just about buying an asset that generates income. It’s investing on goods that benefits many individuals.
It’s More Difficult to Build a Successful Business than Own a Share of it
It doesn’t take a genius for you to know how hard it is to make a profitable business. Initially, businessmen work day and night. Their efforts are sometimes based on risks – trial and errors. Ultimately, if you already have an established business, the rewards are endless. What I want to reiterate is that starting your own business warrants substantial effort, money, time, common sense and great sacrifices.
Now, comparing the amount of hardships and risks it would take to build a corporation than buying a share of an already successful business, I know one thing. Imagine how easy it is to buy a stock of a profitable business in your country. Think about the comforts of not being required to be present in the company’s office every day; of not having the need to make reports or fix business problems that may arise. No long, boring meetings. No discussions with the boards. You stay in the comforts of your own home or office cashing in dividend cheques. Even that miniscule task can be taken care of if you’re using a pledged account.
It’s Flexible and Easily Tradable
Good thing about investing in stocks is that they are highly flexible, and can easily be converted into cash. You can do the buying and selling virtually anywhere; provided it’s the right trading time and you have internet access. In times that you can’t connect to an internet provider, a stockbroker or an agent can be reached through phone.
I’d go back to comparing investing with managing a business. If one of your businesses fails, you’re doomed. Some people just don’t have the heart to close down a business because of emotional reasons. Either because the business has been significant to their family or because of fear of dealing with the many hassles of starting all over again. I’m not pulling you away from being an entrepreneur. I just want to point out that compared to running a business, stock investing is favorable in many levels – flexibility, liquidity and all.  Unlike a business that can get you stuck, changing switching into different stocks is easy.
Let’s say for example that your investments in company #1 is quite unsuccessful; what you can do is sell your shares, and look for a much cheaper stocks you can buy from another company.  Investing in stocks gives you a more flexible option of dispersing your money into different companies, trades, and even to different countries. Looking for a number of successful companies to invest in – you don’t need to look very far – we have a wide range of great corporations in this country alone.  In the current market, a lot of firms allow investors to engage in stock buying in other countries.
It Can Be Done From the Comfort of Your Home
If you have read my article about real-estate investing, I have pinpointed there that property investing is for an outgoing person – the socializer. These are people who love the idea of visiting properties, meeting new people and building rapport with them to seal the deal. On the other hand, stock investing is for the quiet thinkers. Those people who would rather stay home, read and learn.
Suffice to say that when it comes to stock investing, you don’t need to be far from home. Buying and selling can be done at home. You can search the internet for reports, wait for updates on the news. Having these portals is essential in conducting proper examination of how to invest and what type of companies are valuable.
Unlike having your own business and investing in real estate, you don’t need staff to pay and leaseholders to supervise. Truth be told, one of the many perks of investing in stocks is that the only thing you need to facilitate is your own time and resources.
It Provides Long Term Business Revenue
Some stocks that only worth a penny before, costs millions today. There’s a beer industry in the 70s, and if you purchased 100 shares from that company, your stocks will now costs more 1 million. That’s why it’s important to look for notable companies. They’re reliable and they’re more likely to generate big revenues.
Anyone can do it
A company that sells their shares makes it available to almost everyone who want to be a shareholder. Some countries may require minimum transaction costs and a limit in the number of stocks you can buy at a time, but anyone can buy their own share. Minimum costs per transaction becomes insignificant the bigger the number of stocks you buy.
Trade listing is being strictly regulated, thus it is possible to get all company information that you need from these business. You can get reports, annual analysis from the company’s websites or by paying a visit to their company’s location. It’s easy to buy stocks because of low initial capital required, and because of readily available information you can acquire from companies you are interested in.
Every Financially Successful Individual Are Most Likely Stock Owners
I know a lot of rich and famous people who put a big sum of their money in business and real estate. Rich businessmen either own shares from the business they’re running, or own a share from other companies, which entitles them partial ownership of other people’s business.

This is a guest post by KCLau. KCLau is the best selling author of Top Money Tips for Malaysians. His popular personal finance blog is one of the most visited websites in the financial blogosphere with more than 14,000 email subscribers. He also hosts regular and free financial training online featuring different financial experts. You can follow his latest updates by visiting

Sunday, July 14, 2013

Me, MLM and morality

I guess that the best consumer stocks in terms of margins, historical growth numbers as highlighted by a nice article by a contributor, (inclusive of Amway) are MLM based companies. Those are strong reasons to purchase a stock which is quite right.

It seems to me along with Amway, Zhulian and Hai-O are really doing well as MLM companies. While Zhulian, Hai-O have done well, many more MLM companies have closed down. Hence, these are the survivors and have succeeded. But my problem is that I could not kick off my mind (or am blocked mentally) of figuring out how MLM companies will perform in the future. Perhaps I am wrong as I have never believed in the products, pricing, methods of selling and the way I was approached before.

I have always felt that if I would have wanted to buy the necessities, I would have drove to AEON or Tesco or Giant, and get my shampoo by P&G, diapers by few companies including NTPM, Coke or even F&N, Nestle's Milo, tissue paper from NTPM and Kimberley, milk by Dutch Lady, infant milk by Mead Johnson and distributed by DKSH etc etc. If the price is right, I will buy. If it is not right, I won't. Many times, MLM purchases are not done through this way. It is the obligation to a friend or a family member that purchases are made.

I am probably among the few that have felt that products distributed by Amway are way too expensive and I would have bought Breeze rather than the detergent by Amway.

If I am to buy clothes, Gap, Uniqlo, perhaps some from Padini, products by Bonia. Thank god there is NO MLM there, in selling clothing.

Frankly, I could not have figured out how a company like Zhulian which is associated with jewellery can be selling cookware, Hai-O, a chinese medicinal products company selling expensive coffee. They are not so focused. As long as the products can be expensive, with high margins - the line of products will be pushed through the channels. It is about the rich - MLM promoters taking opportunities of the poor whom have to look for a second job selling MLM products.

These MLM method of selling are the same as the way most of the life insurances are being sold in which case they have channels and down liners. I am just not convinced of products being sold this way. Life insurance which is a good product and concept - should not be sold through the direct selling method and its sales force getting motivated to do more sales than helping friends.

As an investor who is thinking of value, I have to look at companies that provide value. This does not mean that companies that compete have to be fair. Competition is never fair. But as a value investor, it is not just the shares that provide value - the products have to have value - a good product is to be sold at above average price - not exorbitant price.

In support of Amway, Zhulian and Hai-O

Based on the numbers and dividends that are paid out to shareholders, frankly they have done the right thing - giving the excess cash to the shareholders. These are companies that have provided value to shareholders both on terms of capital appreciation and good dividends. Amway, Zhulian and the rest of the MLMs have trained a lot of people into becoming very good motivational speakers as well as sales people. These are people out of the need to survive, will have to put up with their guts and a thick face into approaching friends, families and colleagues. That is a very important part of training for one's life adventure.

On the other hand however, if I were the shareholder, I would have hoped that the money that I have made is not made out of people whom are buying the products out of feeling sorry towards the family members or friends.

I have bought products from MLM companies and paid thousands of ringgit, and those products were left in the shelf until it past expiry. To me, those purchases did not really enrich my friend (and in the process made me poorer) but rather helped the MLM company. Again, look at the margins that they have made.

Probably it is the morality aspects of it which I am thinking of. Read this on MLM.

Saturday, July 13, 2013

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.

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
Yee Lee

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

Yee Lee
Growth Last Year
Net profit
Profitability and efficiencies
Operating margin
Net profit margin
Return of assets
Return of Equity
Return on invested capital
Market valuations
Price on 11/7/13
PE ratio