Malaysian manufacturing returns to growth in June

Malaysia’s trade surplus above RM10b mark in May

According to IHS Markit PMI’s survey, Malaysia’s manufacturing sector returned to growth in June, rising sharply to 51.0, its highest since September 2018. This was up from 45.6 in May, indicating an improvement in the health of Malaysia’s goods producing sector and stronger economic growth more generally. Output grew at the joint fastest rate in the survey’s history as an increasing number of businesses restarted their operations post MCO. Its chief economist Chris Williamson said such a rapid turnaround in production since the severe collapse in April bodes well for a V-shaped recovery. However, a sustained recovery is by no means assured, and growth could easily lose momentum after the initial rebound. While business expectations continued to improve in June, confidence remains well below levels seen at the start of the year, in part reflecting worries about the impact of ongoing Covid-19 restrictions on demand, both at home and abroad. The survey noted there were encouraging signs that demand conditions were beginning to stabilise during June, with the New Orders Index rising to a six-month high. That said, overseas demand remained particularly fragile, weighing down total order book volumes.

Malaysia’s trade surplus above RM10b mark in May

According to International Trade and Industry Minister Datuk Seri Mohamed Azmin Ali, Malaysia recorded a trade surplus above RM10 billion in May – the fourth time this year – registering a double-digit growth of 14.7 per cent year-on-year (y-o-y) to RM10.41 billion. Major exports in May are E&E products (RM23.5 billion), petroleum products (RM3.94 billion), chemicals and chemical products (RM3.68 billion), palm oil and palm oil-based agriculture products (RM3.6 billion) and rubber products (RM2.71 billion). The country’s total trade in May amounted to RM114.96 billion, down 27.8 per cent from May 2019. Exports totalled RM62.69 billion, contracted by 25.5 per cent while imports decreased by 30.4 per cent to RM52.27 billion. Malaysia’s trade during the first five months of 2020 declined 8.7 per cent to RM688.57 billion compared to the corresponding period of 2019. Exports of rubber products especially rubber gloves registered double-digit growth for two consecutive months, increasing 20.5 per cent or RM461 million in May 2020. The contraction of manufactured goods, which constituted 86.5 per cent of total exports, was due to lower exports of electrical and electronic (E&E) products, petroleum products, manufactures of metal, chemicals and chemical products as well as machinery, equipment and parts.

Malaysia’s current account to rebound in 2021

According to S&P Global Ratings, Malaysia’s current account surplus which has backed the economy against its long-running fiscal deficit, should recover to up to three per cent next year. But for 2020 the surplus is expected to shrink to between 1.0 per cent and 2.0 per cent of the country’s gross domestic product (GDP). This would be due to lower prices of oil and gas and palm oil. The country’s current account balance reportedly came in at 2.9 per cent of GDP for the year until the first quarter. The figure was broadly steady from the average current account surplus of 2.7 per cent of GDP in the preceding five years. Malaysia had for a long time been running on a fiscal deficit but its economy was supported by an external account surplus. However, the surplus has gradually come down over the years, and there was a bit of correction due to the tumble of commodity prices in 2014 and 2015. Over the past five years, Malaysia’s account surplus was averaging 2.0 per cent to 4.0 per cent of GDP. The rating agency expects oil prices to recover over the new few years, and this will most likely lead to a gradual recovery in Malaysia’s trade volume.

Malaysia’s AAA/stable foreign currency rating affirmed

Malaysian Rating Corp Bhd has affirmed its foreign currency sovereign rating of AAA/stable for Malaysia under its national rating scale. It said the AAA rating reflects the country’s several credit strengths, including a competitive and well-diversified economy. Malaysia was, for example, positioned relatively high at number 27 in the 2019 edition of the World Economic Forum’s Global Competitiveness Index 4.0 rankings. It pointed out that Malaysia’s competitiveness has been evident in among other things, a persistent current account surplus, and consequently, a healthy external position. Due in part to this, as well as proactive and practical economic and monetary management, spill-overs from episodic financial market volatility into the real economy have been minimal. The rating agency said the key credit challenges included the disruptive Covid-19 pandemic and the recent crude oil price collapse. Not surprisingly, it said the pandemic was the most worrisome factor with still no vaccine to fight the coronavirus.

Short Selling suspension extended until year end

The Securities Commission Malaysia (SC) and Bursa Malaysia have extended the temporary suspension of short-selling till Dec 31 2020. In a joint statement, the market regulators said the scope of the suspension remains unchanged in that it applies to Intraday Short Selling (IDSS) and Regulated Short Selling (RSS) as well as intraday short selling by Proprietary Day Traders. Permitted Short Selling (PSS) is not affected by the temporary suspension of short selling as PSS is necessary for market makers to market make the relevant securities such as exchange-traded funds efficiently. The temporary suspension which began on March 24 was extended to June 30 and now to year-end is part of a slew of proactive measures to mitigate potential risks arising from heightened volatility and global uncertainties as a result of the Covid-19 pandemic.

Electricity bill discount period extended till December

The Energy and Natural Resources Minister, Datuk Shamsul Anuar Nasarah, announced that domestic electricity users across Malaysia will continue to enjoy discounts of up to 50 percent on their bill till Dec 31, 2020. It is an extension to the previously announced April 1 – September 30 discount period unveiled by Prime Minister on March 27 as part of the Prihatin Economic Stimulus Package. The extension also applies to the 601-900kWh (per month) energy usage and 10 percent discount under the Bantuan Prihatin Elektrik (BPE) which was announced on June 20. The extension will benefit 7.66 million users in peninsular Malaysia, while the 2 percent discount for users in East Malaysia will benefit around 520,000 users in Sabah and 580,000 in Sarawak. He added that in peninsular Malaysia, the extra three months of discounts amounting to about RM392 million will be funded by Kumpulan Wang Industri Elektrik (KWIE), while the Ministry of Finance has allocated about RM6 million for the discounts to be enjoyed by domestic users in East Malaysia.

This week, on Thursday (2July), the Ringgit was 4.2860 against USD from 4.2850 on Monday (2July). Meanwhile, the Ringgit was 3.0755 to the Sing Dollar on Thursday (2July).

On Monday (29Jun), the FBM KLCI gained 6.29 points higher or 0.42% to 1494.43 from previous Friday’s close of 1488.14. But as at Friday (3July) 10:00am, the FBM KLCI, following regional markets, was higher at 1541.62 from Monday, buoyed by Wall Street’s strong gains and NASDAQ’s all time high due to the massive 4.8million jobs rise in the US for June. But as at Friday (3July) 10:00am, the FBM KLCI was rose to 1541.62 from Monday, following regional markets optimism on business reopening globally and the yesterday US reported better than expected employment data report.

FBM KLCI 3 Years Chart

Retail net investment on Bursa soars to RM5.83b YTD

Malaysia’s stimulus packages have softened COVID-19 impact on the economy

The YTD net retail investments on Bursa have increased to RM5.83 billion compared to RM2.45 billion for the whole of 2019. Net investments from local institutions stood at RM8.21 billion. In terms of participation rate, the local institutional participation rate stands at 48.4% with retail investors at 38.3% and foreign investors making up the remainder 13.3%. Trading value hit a record high of RM9.3 billion on May 29 following the surge of retail investors’ participation. It is left to be seen if the momentum will continue now that Recovery MCO is in place and almost all business have reopened and the workforce is no longer stuck at home.

According to Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed, the Government’s initiatives PRIHATIN Rakyat and PENJANA have softened the impact of the COVID-19 pandemic and paved the path towards economic recovery. Malaysia is fortunate to have a very diversified economy that does not depend on just one or two sectors. Food was provided for the people and no Malaysian family is unable to have access to food. Health was prioritized to ensure effective prevention of the pandemic. He said “Going forward from the fiscal point of view, the strategy for the next five to 10 years – we introduced the Shared Prosperity Vision in October 2019 with three main objectives, we want Malaysians to enjoy a decent standard of living. Secondly, we want to close the gaps – development for all – and finally, we want to achieve a united, prosperous nation.” 

Malaysia’s growth slated to average 3.4% in the next decade

According to Fitch Solutions, Malaysia’s growth is expected to moderate to a 3.4% average rate over the next decade compared to an average of 6.4% over the past 10 years, dragged by the likely contraction in 2020 due to the Covid-19 pandemic. It also noted that Malaysia’s active population growth is projected to slow to an average 1% in the next decade compared to 2.3% previously, while slower than before, this will still provide a tailwind to the economy. An added complication could be the boom in household debt fuelled by low interest rate in recent years, which will act as a drag on growth and would pose risks to financial stability if interest rates need to be raised sharply. Household debt as a share of GDP stands close to 85%, which is one of the highest in Asia. While debt service ratios are still manageable, a rise in interest rates could tip service ratios to unsustainable levels, leading to a rise in defaults. It also noted that the Malaysian economy is undergoing a process of external economic rebalancing, which will act as a drag on overall headline real GDP growth. At the same time, it will see private consumption growth outperform, creating investment opportunities in catering for the domestic middle class rather than overseas demand. Additionally, a more domestic focused demand picture will allow the economy to be more resilient to global demand shocks, reducing recession risks.

Malaysia’s debt might hit 55% of GDP

According to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, Malaysia’s debt level could hit the statutory limit of 55% of gross domestic product at the end of the year from 52% currently following the implementation of measures to save lives, protect livelihoods and stimulate the economy. The government had announced the RM260bil Prihatin Rakyat economic stimulus plan followed by the RM35bil short-term Penjana economic recovery plan aimed at stimulating the country’s economy that has been hit by the Covid-19 pandemic bringing the government’s direct fiscal injection to RM45bil. He added that the government is very committed to ensuring fiscal discipline is maintained. He said “Moving forward, what is most important is what we can do to improve the situation. The government is committed to fiscal discipline and to reduce the fiscal deficit to below 4% within the next three to four years.”

Malaysia’s Leading Index (LI) slumped to negative 5.5% in April, pointing to weaker growth

According to chief statistician Datuk Seri Dr Mohd Uzir Mahidin from the Department of Statistics Malaysia (DOSM), Malaysia’s Leading Index (LI) which provides an early signal of the future economic direction slumped to negative 5.5% in April 2020 from negative 3.6% in March 2020. The main components driving the 5.6-point downward shift were the number of housing units approved and the number of new companies registered. Considering the weaker performance of the annual LI and the LI growth cycle deviation from the long-term trend, it is anticipated that the economy will remain on the contraction trajectory in the coming months. The year-on-year (y-o-y) CI slipped to negative 19.3% in April 2020 from negative 3.6% in March 2020. This showed that businesses shut down and demand plunged in April 2020. The roll-out of Penjana the short-term economic recovery plan with the thrust of empowering people, propelling businesses and stimulating the economy will help to relieve economic pressures despite the challenging economic outlook. Thus, short-term and long-term economic measures are seen to foster robust economic revival.

This week, on Thursday (25Jun), the Ringgit was 4.2790 against USD from 4.2740 on Monday (15Jun). Meanwhile, the Ringgit was 3.0734 to the Sing Dollar on Thursday (25Jun).

On Monday (22Jun), the FBM KLCI gained 3.98 points higher or 0.26% to 1511.24 from previous Friday’s close of 1507.26. But as at Friday (26Jun) 10:00am, the FBM KLCI was trading sideways at 1491.95 from Monday, indicating the market is looking for clearer direction ahead.

FBM KLCI 3 Years Chart

Company Spotlight on Pintaras Jaya Berhad (9598)

By Evelyn Yong

Overview

Pintaras Jaya Berhad (PTARAS) was incorporated as a limited company on 23rd November 1989 by their founder Dr Chiu Hong Keong, a civil and geotechnical engineer and successfully listed on Bursa Second Board in 1994. Then in 1998 it transferred to Main Market. Since then PTARAS has gained a solid reputation and grown as a foundations and pilings specialist leader in the Malaysian construction industry. In 2018, they acquired a Singapore-based piling contractor  Pintary International Pte Ltd in Singapore and its piling subsidiaries, Pintary Foundations Pte Ltd and Pintary Geotechnics Pte Ltd to expand its footprint outside of Malaysia.

Business Model

PTARAS’s core business is in the Malaysia and Singapore construction industry with specialization in foundation and piling systems. Its range of expertise includes earth retaining systems, abasement and substructure works, ground improvement, earth works and civil engineering works with their own large fleet of top-range equipment such as drilling rigs, crawler cranes, vibro-hammers etc. Over the years, it has completed some well-known projects such as MRT (from One Utama station to The Curve station), Pavilion Hilltop, Plaza Mont’ Kiara, I-City – Central Plaza to name a few.

PTARAS also manufactures metal containers via its subsidiary Prima Packaging Sdn Bhd operating in Selangor. The company produces industrial pails and cans and has served the paint industry for 40 years with long-term clients such as Nippon Paint, Colourland and Jotun Malaysia.

Financial Review

PTARAS has a stable dividend payout over the years and maintained a dividend yield at above 7% over past 4 financial years. For FY2019 a total of 20sen per share dividend amounting to RM33,172,960 has been declared with a dividend payout ratio of 127%. Although the dividend payment amount is more than the net profit, the company’s financials is still considered healthy since it has a cash ratio of 0.737.

PTARAS managed the lowest quality of earnings at 1.16 times in FY2019 compared to 2.03 times in FY2018 and 1.33 times in FY2017 and this was due to the interest charged on borrowings and unexpected higher operating expenses. Despite the lowest quality of earning over past 3 financial years, the Quality of Earnings at more than 1 indicates that the company is still having a healthy operating cash flow.

The Current Ratio for FY2019 shows the lowest over past 3 years at 1.98 compare to 5.859 in FY2018 and 4.763 in FY2017. The decline was due to a bad debt being written off amounting to about RM1.5 million. The increasing value of bank borrowings for leasing finance on building, site equipment and investment properties as well as motor equipment were also contributing factors. However, the investment is considered important for the company’s growth and the ratio at 1.98 indicates the company is still financially sound.

PTARAS obtained the highest gross profit margin in FY2019 among past 3 years at 20.89% compared to 14.4% in FY2018 and 20.6% in FY2017. The Singapore division has contributed around 78% of the revenue with full utilization of plant and equipment while the average utilization of the Malaysia division was only about 20% for the construction part and which contributed around 11% to the revenue. The low revenue from the Malaysian construction side was a result of suspension of works involving 2 projects due to non-payments and a deferment of the commencement of a major secured contract.

The Return on Equity of PTARAS is 8.2% in FY2019 while 4.8% in FY2018 and 10.6% in FY2017. Although the unexpected expenses have trimmed the FY2019 net profit for PTARAS, the company still managed to generate a 3.4% increase compared to the previous year and generated an increase in returns for investors.

The Debt to Equity ratio of PTARAS in FY2019 shows 0.086 times and was zero previously. Generally, the benchmark ratio is at 1 and the lower the better to imply a more financially stable position. PTARAS had no bank borrowings before FY2019. In some views, a manageable borrowing is essential to help boost the company’s growth and in this case PTARAS has decided to invest in its construction assets.

Cash Flow Statement

The net cash from operating activities has provided a positive cash flow of RM27.37 million in FY2019 as compared to RM28.58 million in FY2018. The decrease in net cash from operating activities was mainly due to the increase in working capital with a RM53million in negative receivables. Even though the cash flow indicates lesser than last year, the company has enough cash to use to cover their operations.

The net cash from investing activities in FY2019 (-RM46.49 million) was mainly due to the purchases of machinery and assets as well as acquisition of a subsidiary company. The negative cash flow has shown that it is investing in the business for growth.

The net cash generated from financing activities in FY2019 (RM45.04 million) was mainly due to the proceeds from bank borrowings (RM9.5 million) and repayment of finance leases as well as borrowings (RM21.41 million).

Prospect and Challenges

PTARAS revenue in FY2019 has indicated its reliance on its Singapore operations which provided a strong contribution to the overall result. The construction sector has just started to turnaround with good job prospects after several difficult years. However, the operating environment remains tough and competitive. Overheads and labour costs are higher than previous years. In addition, the outbreak of the Covid19 pandemic has halted the progression of the construction works. For FY2019, steel prices were stable but concrete prices were up about 12%. The capital expenditure has been increasing to RM38 million as PTARAS has to rapidly expand its office, storage space and plant and equipment to meet the higher business expansion. These challenges are foreseeable to continue into FY2020.

For the manufacturing division, the revenue of RM36million improved by about 12% from FY2018 due to higher selling prices. But margins remained squeezed by higher tin plate prices averaging RM3,900 per tonne, up by about 5% from FY2018.

Rating System

Return on Equity (ROE) = Poor

Revenue [3 Years CAGR] = Excellent

Net Earnings [3 Years CAGR] = Good

Dividend Yield = Excellent

Interest Coverage = Excellent

Quality of Earning = Good

Pintaras Jaya Berhad Share Price Over 3 Years

My Insight

Based on the calculation on Discounted Earnings Model, PTARAS has an intrinsic value of RM2.40. The current share price of PTARAS is RM2.62 which makes it a fair-valued stock (as at 25 Jun 2020). It has a beta of 0.868 (500 days) indicating that the share price is less volatile than the current market. However, the value is close to 1 indicating it is just slightly behind the market. Based on the computation of Capital Asset Pricing Model (CAPM) on 10 years period, PTARAS has an expected market return of 1.412%.

On the dividend prospect, although PTARAS has maintained a dividend yield of above 7% over the years, in latest 2Q of FY2020, the company has announced a dividend of 4sen per share which is lower than previous years. As with most other companies, PTARAS too has been pressured by the lockdown due to the pandemic crisis. The stoppage in construction works in Malaysia and Singapore is expected to affect the revenue of FY2020. Hence the company will need to depend on sound financials and a strong management to help endure this FY. However for the long-term view, PTARAS still has a good outlook as it has secured in its order book a few big projects in both Malaysia and Singapore. As such the earnings outlook over the next 2-3 years remains positive on the back of its high-quality work and operational efficiency.

Disclaimers 

The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information in this article. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.


Bursa Malaysia announces six new additions to FTSE4Good Index

Sub-Title: 
“MSWG urges PLCs to appoint independent moderators at virtual general meetings”

 As published in Inve$t Malaysia 19 June 2020 issue

Bursa Malaysia announces six new additions to FTSE4Good Index Bursa Malaysia Bhd announced the addition of six companies and the deletion of two companies in the FTSE4Good Bursa Malaysia Index (F4GBM). The F4GBM Index measures the performance of PLCs demonstrating strong environmental, social and governance (ESG) practices. The six additions are Bermaz Auto, Duopharma Biotech, Inari Amertron, Karex, RCE Capital and Star Media Group while the two deletions are Parkson Holdings and UMW Holdings. Bursa Malaysia and FTSE Russell have been conducting outreach programmes to encourage and support companies in improving their ESG disclosures and practices. With this latest review, the total number of constituent companies is at 73, reflecting a 204 percent increase since its launch in 2014. The F4GBM Index constituents are drawn from the companies on the FTSE Bursa Malaysia EMAS Index, comprising PLCs from across the small, medium and large market capitalisation segments.

The Minority Shareholders Watch Group (MSWG) has called upon public-listed companies (PLCs) to appoint independent moderators at virtual general meetings to boost the transparency of Q&A sessions. PLCs have had to embrace technology in an unprecedented manner by having to hold their AGMs fully virtual online. According to MSWG CEO Devanesan Enanson, corporate representatives of MSWG have encountered cases of PLCs skipping questions posed to the PLC via the query box during the live streaming process of the virtual general meetings. And that subsequent to the virtual AGM, shareholders may sometimes get feedback from the PLC that the PLC was not able to address the question during the virtual general meeting due to ‘lagging’ or ‘buffering’, hence shareholders sometimes do not get their questions answered. More often than not since the moderator is the company secretary or an employee of the PLC, MSWG expressed its concern that PLCs would conveniently ‘overlook’ questions asked by shareholders, especially those that are ‘hard-hitting, sensitive or controversial’. Hence the presence of independent moderators will lead to more fair, objective and impartial Q&A sessions that will better replicate the experience of a physical meeting. To help prevent incidents of questions being overlooked by the board, MSWG also suggested presenting all questions on screen during the general meeting so that all shareholders see what questions are being asked. It also foresees virtual meetings becoming the preferred choice of the PLC (no longer a choice by necessity) which means the transparency of Q&A sessions are essential.

Malaysia’s RM35 billion short term Economy Recovery Package (ERP) called ‘Penjana’ was announced recently. To have a better insight on the sectors and companies that stand to benefit from this, please register for ShareInvestor’s free webinar on Monday 22June at 8.30pm hosted by JT Low, a full-time trading coach and the Founder-Director of Stock Aid Sdn Bhd.

Meanwhile, Honda Malaysia has issued a product recall for 55,354 vehicles to replace the fuel pump as a precautionary measure, in line with the carmaker’s global fuel pump recall. Among the affected models are the Accord produced in 2018, BR-V (2018), City (2019), City (HEV) (2019), Civic (2018), CR-V (2018 & 2019), HR-V (2018), HR-V (HEV) (2018), Jazz (2019) and Jazz (HEV) (2019). The company believes this product recall is necessary as a preventive measure to address the possibility of a loss of engine power or vehicle stalling. Honda Malaysia urges all affected customers to contact any Honda authorised dealer to make an appointment upon receipt of notification to replace the fuel pump subject to parts availability. The company said the replacement of the affected fuel pump, of which stock will be available in stages, is free of charge and all costs related to this replacement activity will be borne by the automaker. As the Honda toll-free number is undergoing technical maintenance, the company said vehicle owners could obtain more information on this product recall by contacting any Honda authorised dealer or log on to www.honda.com.my to check the status of their vehicles.

Ambank in its research expects the ringgit’s movement to come under pressure as the US dollar strengthened on the back of geopolitical concerns involving border skirmishes between Chinese and Indian troops, fresh provocation by Pyongyang as well as the ongoing Covid-19 pandemic. However, the central bank will use its ‘full range of tools’ to cushion households and businesses. The ringgit is expected to trade between the support levels of 4.2509 and 4.2673 while resistance is pinned at 4.2944 and 4.3126. Compared to major currencies, the ringgit rose mostly higher against major currencies, strengthening against the euro at 0.55%, British pound at 0.53%, 0.19% against the Australian dollar and appreciated 0.08% against the Singapore dollar, year-to-date. However, regionally the ringgit closed lower by 0.44% against Japanese yen, slid 0.06% against Thai baht, 0.20% to Philippine peso.

This week, on Thursday (18Jun), the Ringgit was 4.2755 against USD from 4.2725 on Monday (15Jun). Meanwhile, the Ringgit was 3.0709 to the Sing Dollar on Thursday (18Jun). On Monday (15Jun), the FBM KLCI shed 47.19 points or 3.05% to 1498.83 from previous Friday’s close of 1546.02. But as at Friday (19Jun) 10:00am, the FBM KLCI has recovered to 1508.67 from the lowest point of the week which follows the recovery of the global markets from the Monday drop.

FBM KLCI

Company Spotlight on Formosa Prosonic Industries Berhad (9172)

Overview

Formosa Prosonic Industries Berhad (9172) is a high-quality sound system manufacturer with a team of audio experts each of whom has over 30 years experience in the design, manufacturing and marketing of sound system products to worldwide multinational companies.

Formally established in 1989, Formosa Prosonic Industries Berhad (FPI) was listed in the Main Market of Bursa Malaysia on 17th June 1994. FPI is headquartered in Malaysia with manufacturing facilities strategically located in Malaysia’s Port Klang, Selangor and Sungai Petani, Kedah. FPI has also established a design and engineering centre in Taiwan.

Business Model

FPI specialises in Original Equipment Manufacturing (OEM) services including woodworking, plastic injection, driver units, PCB assembly and finished-products assembly as well as Original Design Manufacturing (ODM) services. These services are supported by proven engineering expertise, experience as well as reliable testing capabilities.

A wholly-owned subsidiary, Acoustic Energy Limited which is based in Cirencester, United Kingdom, hosts their in-house brand name Acoustic Energy (AE). Acoustic Energy has been producing a wide range of award-winning speaker system.

FPI is proud of its track record in product quality and services. It does this by working together with customers to provide support for product excellence, prompt feedback and strong service support. FPI values long-lasting relationships with its customers and has been in business with multinational and mid-sized companies in the home entertainment, audio, and musical instruments industries. Their customer list of renowned brands include Panasonic, Onkyo, Sharp, Sony, JVC and Kenwood to name a few brands names reflects FPI’s quality and reliability.

Financial Review

For FY2019, FPI has paid a final single-tier dividend of 11sen per ordinary share amounting to RM27,209,409 (dividend payout ratio of 65.2%) with a dividend yield of 6.47%. The total dividend paid in FY2019 is the highest over past 3 years supported by strong sales growth of 36.7% year-on-year for the full FY2019. (refer to Prospects & Challenges and Insight at the end of this article)

FPI has achieved growth in its Quality of Earnings over the past 3 years (1.801 times) in FY2019 compared to 1.764 times in FY2018 and 0.871 times in FY2017 indicating that the operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound.

Based on the computation of liquidity ratio, FPI has a lower current ratio of 2.201 times in FY2019 compared to FY2018 and FY2017, although a slight decrease over the past 3 years indicating that the company has used some of its cash to fund the operation expenses. Still, the company has a healthy margin of current assets due to extremely low debt and a substantial amount of RM203.6 million in cash holding and bank balances.

FPI did face some challenges over the years due to geopolitical trade tension and disruption in supply chain affecting the gross profit margin. The company reported 9.7% gross profit margin in FY2019 which is lower than past 2 years.

However, FPI managed to offset the setback by achieving higher revenue in FY2019, an increase of revenue CAGR 30.62% over past 3 years. Without incurring a substantial increase in operating cost, FPI managed to improve net earnings for the company with growth in net earning CAGR 45.54% year-on-year.

FPI’s Return on Equity (ROE) has improved marginally to 13.47% in FY2019 from 12.50% in FY2018 but lower than the 14.92% in FY2017. The company was able to maintain the ROE at double-digit indicating that the net income generated relative to the value of its equity in FY2019 was better as compared to FY2018.

FPI started borrowing in 2019 to improve its cash reserve but with low net debt to equity of 0.016 times, the company has more than enough cash to settle the debt if needed.

Cash Flow Statement

FPI continued to display a strong balance sheet for FY2019. Financial position remained solid with net cash of RM203.6 million, an increase of 21.4% from RM167.7 million FY2018 mainly attributable to strong operating cash flow and lower capital expenditure. Total shareholders’ funds amounted to RM310.0 million, an increase of 5.7% as compared to FY2018. Book value per share was higher at RM1.25 as compared to RM1.19 at FY2018, an increase of 5%.

The trade receivables turnover improved to 49 days from 61 days attributable to vigorous credit vetting and monitoring which was consistent with the terms granted. FPI is comfortable with the quality of the receivables and will continue to exercise due care in managing credit exposure. Inventory level remained largely unchanged despite significantly higher sales value.

This has resulted in reduced inventory turnover to 23 days from 31 days thus driving down inventory holding cost and reducing possible slow-moving and obsolete inventory. These were achieved on the back of strong Just-In-Time (JIT) manufacturing including streamlining and synchronising the receiving store and incoming quality control (IQC) so that the incoming materials received are inspected in a JIT manner. IQC operations were reconfigured so that material specifications and inspection samples are supplied directly to the inspection stations thereby reducing handling activities by inspectors.

Prospect and Challenges

FPI anticipates 2020 to be a very tough and challenging year in view of the economic downturn due to COVID-19 and turmoil in the global market which have resulted in lower sales and higher operating costs, and barring unforeseen circumstances, FPI expects its performance for the financial year 2020 to be impacted.

Group Managing Director Shih Chao Yuan in the FY2019 annual report Director’s statement mentioned that in order to strive and continue to survive so as to be able to compete in the market, FPI will have the following strategies:- to maintain focus on current customers by providing strong engineering back-up and improving professional labour to increase productivity; to pay extra attention to supply chain and work closely with suppliers’ engineering to lower part cost; to maximize productivity and increase speed through enhanced product and process design capabilities; to further enhance and strengthen the quality control measures to further reduce costs and last but not least to continue to provide training for all engineers, business team and employees.

Rating System

Return on Equity (ROE) Average
Revenue (3 Years CAGR) Excellent
Net Earnings (3 Years CAGR) Excellent
Dividend Yield Good
Interest Coverage Excellent
Quality of Earnings Excellent

Formosa Prosonic Industries Berhad Share Price Over 3 Years

My Insight

Based on the calculation of the Discounted Earnings Model, FPI has an intrinsic value of RM1.78. The current share price of FPI is RM1.40 which makes it an undervalued stock (as at 18 June 2020). FPI has a beta of 1.217 (500 days) indicating that the share price is more volatile than in longer-term overall market movement. Based on the computation of the Capital Asset Pricing Model (CAPM) on 10 years period, FPI has an expected market return of 1.58%.

FPI’s with its strong management team will be expecting to drive the group into the next level in future. With most countries having to turn towards digitalisation which requires home-based learning and work from home (WFH), hence consumers will have to adopt technology and spend more time at home to appreciate the finer things in life. The resurgence in demand for high-end consumer audio-visual products is expected to benefit FPI with its core business in audio products.

However, with the global economy taking a hit due to COVID-19 pandemic, many analysts foresee that it will take more than 10 years for a full recovery to pre-pandemic era. FPI’s business as with many other businesses will not be spared. Investors need to consider the uncertainties ahead and take into account the new normal which still unknown.

Disclaimers

The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information in this article. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.


Company Spotlight on EITA Resources Berhad (5208)

By Stella Goh – As published in Inve$t Malaysia 12 June 2020 issue

Overview 

EITA Resources Berhad (EITA) was founded in 1996 and is headquartered in Subang Jaya, Selangor. The comapnt has grown to be a leading supplier to electrical contractors, switchboard fabricators, original equipment manufacturers (OEM) and manufacturers of Elevator Systems and Busduct Systems in Malaysia. Today, the company has expanded its business operations to the other Asian countries. 

EITA was listed in Main Market of Bursa Malaysia on 9 April 2012. The company’s suppliers and technology partners comprise some of the most respected names in the world such as Fuji Electric Asia Pacific, Leoni Studer AG (Switzerland), Panasonic Electric Works, Kyoritsu Keiki Co Ltd to name a few. EITA Research & Development Sdn Bhd provides in-house research and development (R&D) services for its own elevator and busduct products. 

Business Model 

EITA is involved in three core business segments namely E&E Components & Equipment, Elevators and Busduct Systems. Its business activities revolve around Design and Manufacturing, Marketing and Distribution, and Services for both passenger and commercial goods elevator systems.

The services provided by the company include designing, manufacture, installation, modernization, commissioning, maintenance and customization such as car size, interior design, hall door jamb, hall call button as well as indicators to suit its customer needs. As the company strives for modernization, passenger elevators can be equipped with LCD panels as well as audio systems to provide passengers with entertainment, news and advertisements.

To provide more rounded service to the clients, EITA also offers products and services such as power equipment system, cabling system, control equipment system and local area network (LAN), security systems, green technology, lighting and surge protection. To-date, EITA has installed over 3,400 units of elevators and escalator systems.

Financial Review

For FY2019, EITA has declared a first interim dividend of 3sen per ordinary share equivalent to RM3.899 million which was paid to its shareholders on 27 September 2019. EITA also has paid a final dividend of 3sen per ordinary share also amounting to RM3.899 million for the financial year end with a total final dividend of 6sen per ordinary share (4.36% dividend yield) in FY2019. Despite the total dividend paid in FY2019 being not the highest over the past 3 years, EITA has been able to pay out a favorable dividend consistently with a dividend payout ratio of 37.5%. The company has been consistently declaring a dividend payout of more than 30% of its net profit to its shareholders over the past 4 years. (refer to Prospects & Challenges and Insight at the end of this article)

EITA has achieved the lowest quality of earnings of 1.133 times in FY2019 over the past 3 years. Inspite of this EITA was still able to maintain its quality of earnings at more than 1 time over the past 3 years indicating that the company’s operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound. 

Based on the computation of liquidity ratio, EITA has a current ratio of 2.232 times in FY2019 as compared to 3.100 times in FY2018. Even though the current ratio in FY2019 was the lowest over the past 3 years it still indicates that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM111.806 million) if any unforeseeable circumstances occur. EITA is able to do so by using its current assets such as inventories, contract assets, trade and other receivables, current tax assets, deposit, prepayments, cash and bank balances amounting to RM249.570 million. 

EITA has a marginally lower gross profit margin of 28.17% in FY2019 as compared to 29.87% in FY2018 but was still higher than the 27.3% in FY2017. The decrease of Gross Profit Margin in FY2019 was mainly due to the increase of contract costs recognized as expenses and cost of goods sales as compared to FY2018. However, the company has achieved a total revenue of RM305.386 million in FY2019 compared to RM261.295 million in FY2018. The increase in revenue was mainly due from the Manufacturing (35.8%), Marketing & Distribution (25.9%), High Voltage segments (25.2%) and Services (13.1%). 

EITA’s Return on Equity has tapered down to its lowest over the past 3 years at 12.01% in FY2019. However the company was still able to maintain its Return on Equity (ROE) of more than 10% indicating that it is being well managed and is making good profit in relative to its shareholders’ capital. It may also indicate that the sales generated by the company is more than its asset since the company has an asset turnover ratio of more than 1 times in FY2019. The management of the company is seen as effective and capable in effectively deploying the resources in the company as well. 

EITA has achieved the highest Total Debt to Equity ratio of 0.175 times in FY2019 among the past three financial years. Even though the Total Debt to Equity ratio of EITA has increased in FY2019, the company is able to pay off its debt obligations as its total liabilities amounted to RM127.590 million as compared to RM176.215 million of total equity. 

Cash Flow Statement 

The net cash from operating activities has provided a positive cash flow of RM24.715 million in FY2019 as compared to RM26.794 million in FY2018. The decrease in net cash from operating activities was mainly due to the increase in working capital requirements for the company’s on-going operations. Even though the cash flow is lesser in FY2019, the company has enough cash to use for business expansion.

The net cash from investing activities in FY2019 (-RM17.177 million) was mainly due to the acquisition of property, plant and equipment (RM15.606 million), acquisition of investment property (RM1.805 million), acquisition of intangible asset (RM255,000) and tax paid on the gain of disposal of investment (RM15,000). The negative cash flow indicates that the firm is investing in its business for growth.

The net cash generated from financing activities in FY2019 (RM6.023 million) was mainly due to proceeds received from bills payable (RM6.551 million) and proceeds received from term loans (RM8.833 million).

Prospect and Challenges 

The current geo-political and economic situation certainly poses some challenges ahead. In particular, the on-going trade tensions between China and the United States, Brexit, protectionist European Union sentiments, geopolitical tensions in the Middle East and volatility of commodity prices. 

According to Managing Director Fu Wing Hoong, he remains confident that the current situation is only a slight hiccup to another potentially good year. He also expressed optimism that the company will produce similar, if not better results than FY2019, backed by the company’s existing order book. As at the end of FY2019, its order book stood at a total of RM512.52 million of which about 42% or RM215.33 million was from its manufacturing business. The company’s high-voltage system segment, which involves installation of power substations, has also been growing steadily and now comprises 54% or RM276.38 million for the company’s order book. The contract periods for the projects in both segments range from two to three years. 

EITA’s current orderbook included government projects under the Light Rail Transit Line 3 (LRT3) and Mass Rapid Transit 2 (MRT2) to provide lifts and escalators installation and maintenance services. Both projects have been re-evaluated and renegotiated by the previous government which resulted in the LRT3 original contract sum of RM195 million being reduced to RM67.5 million but the MRT2 contracts value remains unchanged at RM70 million. The Managing Director stated that the MRT2 project’s contract value has been added to its FY2020 orderbook with the revenue progressively recognized from this year until FY2022. 

Rating System

Return on Equity (ROE) = Average 

Revenue [3 Years CAGR] = Poor 

Net Earnings [3 Yeas CAGR] = Good 

Dividend Yield = Average 

Interest Coverage = Excellent 

Quality of Earnings = Good 

EITA Resources Berhad Share Price Over 3 Years

My Insight 

Based on calculation on the Discounted Earnings Model, EITA has an intrinsic value of RM1.689. The current share price of EITA is RM1.25 which makes it an undervalued stock (as at 11 June 2020). EITA has a beta of 0.703 (500 days) indicating that the share price is less volatile than current market. Based on computation of Compound Annual Growth Rate (CAGR), EITA has an expected market return of 2.04%.

In conclusion, EITA may look attractive to investors due to its consistent dividend payout for the past 4 years which worked out to a dividend yield of 4.36%. EITA’s debt level will be comforting to those investors who find a company’s high debt reason for concern due to the global economic uncertainty ahead. The company has a net cash of RM68.727 million in FY2019 as well as more liquid assets (RM249.570 million) as compared to its current liabilities (RM111.806 million). According to the Deputy Transport Minister Kamaruddin Jaffar, the government has always given priority to improving the public transport system with several large scale public transport projects under construction in Klang Valley such as the Sungai Buloh-Serdang-Putrajaya MRT and LRT3 projects which would boost economic growth while increasing the use of public transport in Klang Valley. Meanwhile, the company’s prospects remain bright as the company’s long-term plans as a provider of lifts and escalators for Light Rail Transit Line 3 (LRT3) and Mass Rapid Transit 2 (MRT2). While investors will need to take into consideration all aspects that could positively affect growth prospects, they still will have to bear in mind the other events that could pose challenges to businesses in the near future.   

Disclaimers 

The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information in this article. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor. 

Company Spotlight on Taliworks Corporation Berhad (8524)

By Stella Goh – As published in Inve$t Malaysia 5 June 2020 issue

Overview 

Taliworks Corporation Berhad (8524) is an infrastructure company that was founded in 1987. Known as LGB Group it was one of the pioneers in the privatisation of potable water treatment and supply services in Malaysia. The company is involved in operating and maintaining water treatment plants in Selangor as well as supplying and distributing water systems in Pulau Langkawi, Kedah. 

TALIWRK was listed in Bursa’s ACE Market and successfully transferred to the Main Board of Bursa Malaysia under the utilities sector on 27 October 2000. The company operates in Malaysia and China, of which its main revenue is derived from Malaysia. 

Business Model 

TALIWRK is involved in four core businesses namely (i) water treatment, supply and distribution (ii) highway toll concessionaire, operations and maintenance operator (iii) engineering and construction and (iv) waste management.  

TALIWRK is involved in the business which entails an operations and maintenance (O&M) contract for water treatment plants and water distribution systems. For example Sungai Selangor Phase 1 Water Treatment Plant (SSP1) that supplies treated potable water to Selangor and Kuala Lumpur. Both Sungai Harmoni and Taliworks Langkawi manage a total of 6 water treatment plants with a combined design operating capacity of 1,037 litres per day. 

TALIWRK is also engaged in the provision of operations and maintenance services of toll highways. The company owns and operates two highways, specifically the Grand Saga Highway and the New North Klang Straits Bypass Expressway, also known as the Grand Sepadu Highway.  

Since May 2016, TALIWRK entered the waste management business when it acquired a 35% equity interest in SWM Environment Holdings Sdn Bhd (SWMEH). SWMEH is a waste management and public cleansing service provider in the southern region of Malaysia, namely Johor, Negeri Sembilan and Melaka, established in line with the National Privatisation of Solid Waste Management. 

TALIWRK’s engineering and construction activities are undertaken by its wholly owned subsidiary, Taliworks Construction Sdn. Bhd. Taliworks secured its first project in 2002 and has since undertaken several other projects in the infrastructure sector. Some of the more notable projects include the RM120 million Projek Bekalan Air Kedah Tengah that was implemented on a turnkey basis, the RM149 million design and build Padang Terap Water Supply Project in Kedah and the RM339 million Mengkuang Dam Expansion Project which comprised site clearance, earthworks, construction of reinforced concrete structures and pipe laying works. 

Financial Review 

TALIWRK has achieved the highest dividend growth rate of 9.38% at 5.25sen in FY2019 amounting to RM105.8 million from a total dividend of 4.80sen in FY2018. TALIWRK also has paid the highest dividend yield of 5.83% in FY2019 with a dividend payout ratio of 138.9% indicating that the company has exceeded its dividend policy of paying out 75% of its normalised profit after tax over the years, backed by the existing mature and long-term contracts and concessions in water treatment, supply and distribution and highway and toll operations that provide stable recurring income and cash flow. (refer to Prospects & Challenges and Insight at the end of this article)

TALIWRK achieved a stellar improvement in its quality of earnings over the past 3 years (8.313 times) in FY2019 compared to 0.478 times in FY2018. This was mainly attributed to the operating cash flow generated from the business being more than the net income suggesting that the business has strong cash flow and is financially sound.

Based on the computation of liquidity ratio, TALIWRK has achieved the highest current ratio of 3.705 times in FY2019 over the past 3 years indicating that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM218.028 million) if any unforeseeable circumstances occur. TALIWRK is able to do so by using its current assets such as inventories, amount due from contract customers, trade receivables, other receivables, deposits, prepayments, tax recoverable, investment designated at fair value through profit or loss, deposits, cash and bank balances amounting to RM807.899 million. 

TALIWRK’s gross profit margin has tapered down to its lowest over past 3 years at 38.38% in FY2019 reflecting the reversal of loss allowances of trade receivables of RM65.3 million in the previous year from the amount due from Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) arising from the re-measurement of expected credit loss rate. However TALIWRK was still able to maintain a favourable gross profit margin of more than 30% over the past 3 years indicating that the profitability of its core business activities is sound without taking into consideration its indirect cost. 

TALIWRK’s Return on Equity (ROE) has decreased marginally to 7.38% in FY2019 from 9.47% in FY2018 but was still higher than the 2.76% in FY2017. The company was unable to maintain the ROE at a double digit indicating that the net income generated relative to the value of its equity in FY2019 was lower as compared to FY2018. The company has a lower asset turnover ratio of 16% in FY2019. 

Weak ROE can also mean that the company is reinvesting capital in unproductive assets. For example, the engineering and construction segment’s revenue was significantly lower by RM8.08 million. Moreover this division only managed to chalk up the revenue to RM34.5 million in the previous year due to the completion of a new access road project to the New North Klang Straits Bypass Expressway (Jalan Haji Sirat) since the third quarter of 2018. Also the lower contribution from two other on-going projects, namely the development of the Langat 2 water reticulation system in Selangor Darul Ehsan and Package 7 for Pengurusan Aset Air Berhad (L2P7 Project), which commenced in the fourth quarter of 2017 and the construction and completion of the Ganchong water treatment works, main distribution pipeline, booster pump stations and associated works in Pekan, Pahang Darul Makmur (GP3A Project). Overall, the division only contributed close to 9% of the total revenue of the company.

TALIWRK’s Total Debt to Equity ratio has been increasing over the past three financial years to 0.470 times in FY2019. Despite this increase in debt, the company is still able to pay off its obligations as the Total Debt to Equity ratio based on 3 years is less than half of its liabilities compared to its equity. This may also indicate TALIWRK has a lower risk since the debt holders have less claim on the company’s assets. 

Cash Flow Statement 

The net cash from operating activities has provided a positive cash flow of RM642.753 million in FY2019 as compared to RM61.446 million in FY2018 indicating that the company is healthy and has enough cash to use for business expansion. 

The net cash from investing activities in FY2019 (-RM540.538 million) was mainly due to the purchase of investment designated at fair value through profit or loss (RM598.800 million), placement of deposits pledged as security (RM31.356 million) and purchase of Property, Plant and Equipment (RM3.403 million). The negative cash flow indicates that the firm is continuing to invest in its business.

The net cash from financing activities in FY2019 (RM119.524 million) was mainly due to dividend paid (RM96.760 million), interest paid (RM24.972 million), dividend paid by a subsidiary to non-controlling interest (RM15.680 million), repayments of borrowings (RM10 million), repayment of lease liabilities (RM2.108 million) and capital distribution paid by a subsidiary to a non-controlling interest (RM4,000). 

Prospect and Challenges 

During the movement control order (MCO), all of TALIWRK’s businesses, except for construction activities, continued to operate as usual as those services were deemed as essential services. Other than the toll highway division which recorded a substantial reduction in the volume of traffic during the movement control order, there was minimal financial impact from the water and waste management divisions.  

TALIWRK’s business continuity plans (BCP) were activated and actions were taken by the respective business divisions to minimize the risk of their operations being affected. The nature of business activities undertaken by the company is predominantly in the provision of essential services to the public. Thus, the company anticipates that its long-term business outlook will remain relatively intact.

According to TALIWRK’s executive director Dato’ Ronnie Lim, the management will maintain its strategies to focus on mature operational cash-generating utilities and infrastructure businesses to continue delivering long-term consistent results to its shareholders. 

Rating System 

Return on Equity (ROE) = Poor 

Revenue [3 Years CAGR] = Average 

Net Earnings [3 Years CAGR] = Average 

Dividend Yield = Good 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Taliworks Corporation Berhad Share Price Over 3 Years 

My Insight 

Based on the calculation on Gordon Growth Model, TALIWRK has an intrinsic value of RM1.103. The current share price of TALIWRK is RM0.835 which makes it an undervalued stock (as at 4 June 2020). TALIWRK has a beta of 0.616 times (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), TALIWRK has an expected market return of 2.07%.

In conclusion, TALIWRK may look attractive to investors due to its consistent revenue growth and its commitment to a dividend payout ratio of more than 75% of its profit after tax. The company’s growing debt, although well within its ability to pay, may not be comforting to those investors who find a company’s growing debt reason for concern during economic uncertainties as well as lockdowns. However the company has plans to continue with its strategy to focus on mature operational cash generating utilities and infrastructure business with a view of generating new income streams that provide recurring and stable sources of cash flow. Nevertheless investors will still need to assess other key aspects like renewal or extension of contracts and concessions, the uncertain political environment, the uncertainty in the recovery of the global economy and the extent of Covid-19 pandemic impact on the construction sector, all of which could affect future revenue and growth prospects. 

Disclaimers 

The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information in this article. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor. 

Company Spotlight on SKP Resources Berhad (7155)

By Stella Goh – As published in Inve$t Malaysia 29 May 2020 issue

Overview  

SKP Resources Berhad (7155) was founded in 1974 and is based in Johor Bahru. SKPRES is a plastic contract manufacturer in the electrical and electronic plastic industry. The company’s growth since then has been phenomenal with Sin Kwang Plastics conceiving and producing a plethora of general plastic products that have become household mainstays.

Today, SKPRES is a stalwart in the region and was listed in the Main Market of Bursa Malaysia. The company has more than 1 million combined square feet of plastic manufacturing facilities in Johor Bahru, housing more than 250 of the latest injection moulding machines as well as a workforce of 2,500 which is still growing as its operations expand to meet the needs of its clients.

Business Model 

SKPRES is in the business of offering manufacturing and assembly services to its clientele with brands from office automation equipment, IT equipment, audio and visual equipment, home appliances, automotive components, medical equipment and computer peripherals. For example SHARP, Pioneer, Flextronics, Dyson, SONY, FUJITSU and Panasonic are just a few global brands that are clients of SKPRES.

With more than 40 years of industry experience, the company is armed with a wide array of manufacturing capabilities, state-of-the-art technologies and a professionally trained technical team. The company provides services from product conception right down to the assembly and finally international shipment. A typical example of the services would be new product development, full-services engineering consultation and support, prototype creation, mould design and fabrication, close-tolerance plastic injection, advance secondary process operation for cosmetic and appearance finish, component assembly, contract manufacturing and quality assurance.

SKPRES has 120 to 280 tons of Electrical Injection moulding machines, self-developed spray-painting facilities and even an in-house robotics research and development team that produces industry-leading solutions fitted exactly to clients’ requirements. 

Financial Review

For FY2019, SKPRES has paid a final single-tier dividend of 3.84sen per ordinary share amounting to RM48,007,000 with a dividend yield of 2.87%. Even though the total dividend paid in FY2019 is not the highest over past 3 years, the company was still able to maintain a dividend payout ratio of 49.7% indicating that the company is paying almost half of its earnings as dividend to shareholders. The company has intentions to maintain 50% of its net profits as dividend to shareholders, which it has accomplished over the past 8 years.  (refer to Prospects & Challenges and Insight at the end of this article)

SKPRES has achieved a consistent growth in its quality of earnings over the past 3 years (1.647 times) in FY2019 compared to 1.487 times in FY2018 indicating that the operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound. 

Based on the computation of liquidity ratio, SKPRES has achieved the highest current ratio of 2.502 times in FY2019 over the past 3 years indicating that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM267.166 million) if any unforeseeable circumstances occur. SKPRES is able to do so by using its current assets such as inventories, trade and other receivables, tax recoverable, other current assets, other investments, cash and bank balances amounting to RM668.569 million.

Even though SKPRES is unable to achieve the gross profit margin of more than 30% over the past 3 years, the company was still able to achieve the highest gross profit margin of 11.54% in FY2019 when compared to FY2018 & FY2017. The increase in gross profit margin was mainly due to the company’s continuing diversification plans to its business proposition by differentiating its business model and pursuing a manufacturing strategy in various sectors. 

Based on Annual Report 2019, the Electronic Manufacturing Services (EMS) segment of the company which serves its customers in the Food & Beverage, Industrials and Automotive sectors saw a positive growth throughout the year. The company has made progress on improving its product offerings and new injection moulding capabilities through the installation of state-of-the-art manufacturing facilities. As a result, it contributed to increased productivity and efficiency throughout its operations, supply chain and other key functions. These initiatives have enabled the company to achieve the sustainable results.

SKPRES has achieved the lowest Return on Equity (ROE) of 16.45% in FY2019 over the past 3 years. However the company was still able to maintain its Return on Equity (ROE) of more than 10% indicating that it is being well managed and is making good profit relative to its shareholders’ capital. It may also indicate that the sales generated by the company is more than its assets since the company has an asset turnover ratio of 8.09% in FY2019. The management of the company is seen as effective and capable in effectively deploying the resources in the company as well. 

SKPRES has a decreasing Total Debt to Equity ratio of 0.483 times in FY2019 over the past 3 years indicating that the company is good at paying off its debt obligations. The Total Debt to Equity ratio, being the lowest in FY2019 at less than 0.5 times, indicates that the company has a lower risk as its total liabilities only amounted to RM284.444 million as compared to RM588.664 million of total equity.

Cash Flow Statement 

The net cash from operating activities has provided a positive cash flow of RM151.902 million in FY2019 as compared to RM183.769 million in FY2018. The decrease in net cash from operating activities was mainly due to decreases in the operating profit before working capital changes. Even though the operating cash flow is lower in FY2019, the company is still healthy and has enough cash for business expansion.   

The net cash from investing activities in FY2019 (-RM111.826 million) was mainly due to the purchase of other investments (RM90.862 million) and purchase of Property, Plant and Equipment (PPE) (RM29.108 million). The negative cash flow indicates that the firm is investing more in its business for growth.  

The net cash from financing activities in FY2019 (-RM63.447 million) was mainly due to the dividend paid (RM63.347 million) and repayment of finance lease liability (RM100,000).  

Prospect and Challenges 

Despite the challenges in the global market caused by US-Sino trade tensions as well as Covid-19 pandemic, business sentiment of SKPRES remains positive. The company is strategically well positioned in the Electronics Manufacturing Services (EMS) industry and continues to pursue opportunities to grow its market share from its existing customers. It plans to continue to expand its Printed Circuit Board Assembly (PCBA), injection moulding and engineering capabilities to take advantage of a widened product portfolio. It remains driven to achieve profitable growth by focusing on operational excellence.

During FY2019, the company has invested approximately of RM25 million towards growth. The investment includes the purchase of a new factory which is adjacent to its current Johor Bahru operations and will house the brand-new setup for its state-of-the-art injection moulding facility. SKPRES also stated that the new facility will expand the company’s injection moulding capability and capacity in Johor Bahru for higher added value products. The first phase is expected to commence operations in the second half of FY2020.

Rating System

Return on Equity (ROE) = Good 

Revenue [3 Years CAGR] = Excellent 

Net Earnings [3 Years CAGR] = Average 

Dividend Yield = Poor 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

SKP Resources Berhad Share Price Over 3 Years

My Insight 

Based on the calculation on Discounted Earnings Model, SKPRES has an intrinsic value of RM1.401. The current share price of SKPRES is RM1.06 which makes it an undervalued stock (as at 28 May 2020). SKPRES has a beta of 1.487 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), SKPRES has an expected market return of 1.37%. 

In conclusion, SKPRES may look attractive to investors due to its consistent net earnings growth, low debt level, excellent Quality of Earnings and good Return on Equity. However its dividend payout ratio, although more than 40% for past 3 years worked out to a dividend yield of 2.87%. SKPRES’s low debt will provide comfort to investors who find a company’s high debt reason for concern during economic uncertainties and as well as lockdowns. The company has a net cash of RM40.035 million in FY2019 as well as more liquid assets (RM668.569 million) as compared to its current liabilities (RM267.166 million). The company’s prospects remain bright as the company’s long-term plans are focused on driving shareholder value. It still remains to be seen how the MCO has affected its production & logistics capabilities. Moreover the outlook for the global economy remains uncertain which will be a dampener on market sentiments. Investors will need to take into consideration all the aspects that could affect growth prospects in the near future.   

Disclaimers 

The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor. 

Company Spotlight on Kotra Industries Berhad (0002)

By Stella Goh – As published in Inve$t Malaysia 22 May 2020 issue

Overview 

Kotra Industries Berhad (KOTRA) was founded in 1982 and is based in Melaka. KOTRA is ranked as one of South East Asia’s leading pharmaceutical manufacturers that’s engaged in research and development, manufacturing and trading of pharmaceutical and healthcare products.

KOTRA was listed in Bursa’s ACE Market in 2000 and successfully transferred to Main Market of Bursa Malaysia in 2007. As the diverse range of healthcare needs are increasing, the company is dedicated to continuously maintain top-of-the-line research in order to create innovative, high quality products that improves health and enhances holistic well-being. 

Business Model 

KOTRA has a wide range of healthcare products, nutritional products as well as pharmaceutical products in various dosage forms such as tablets, capsules, cream, ointment, gel, liquid, dry powder preparation and injectables. KOTRA has carved its market niche via three main brands namely Appeton, Axcel and Vaxcel. 

The Appeton brand offers high quality of over-the-counter (OTC) products that cater to different stages of life from prenatal needs to geriatric health supplements. For example, dietary supplements for infants and teenagers, multivitamin tablets, syrup for kids, vitamins and mineral supplements for pregnant and lactating women, antioxidant vitamins for adults, products for weight-gain related conditions, wellness products for senior citizens and so on. 

Axcel products specializes in pediatrics care, anti-infective medicine and dermatological care while Vaxcel products focus on sterile injectables that feature a range of antibiotics to treat an extensive range of health conditions. 

Financial Review

KOTRA has achieved the highest dividend growth of 48% from a total dividend of 5sen in FY2018 to 7.4sen in FY2019. KOTRA also has paid the highest dividend yield of 4.27% in FY2019 compared to previous years. 

KOTRA had paid an interim dividend of 3sen per share for the financial year ended 30 June 2019. The company has also approved a final dividend of 4.4sen during the financial year bringing the total favorable dividend for the year to 7.4sen. The company’s dividend payout ratio for FY2019 stood at 46.5% indicating that the company is paying almost half of its earnings as dividend to its shareholders. The company is confident that it will be able to deliver a healthier dividend when the company reaches a more solid financial position. (refer to Prospects & Challenges and Insight at the end of this article) 

KOTRA has achieved the lowest quality of earnings of 1.586 times in FY2019 over the past 3 years. Inspite of this KOTRA was still able to maintain its quality of earnings at more than 1 times over the past 3 years indicating that the company’s operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound. 

Based on the computation of liquidity ratio, KOTRA has achieved the highest current ratio of 2.473 times in FY2019 over the past 3 financial years indicating that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM40.836 million) if any unforeseeable circumstances occur. KOTRA is able to do so by using current assets such as inventories, trade receivables, other receivables, derivative assets, fixed deposits with licensed banks, cash and bank balances amounting to RM100.992 million.  

KOTRA has achieved the highest gross profit margin of 39.84% in FY2019. Despite the growing gross profit margin to its highest in 3 years, KOTRA was still able to maintain a favorable gross profit margin of more than 30% over the past 3 years indicating the profitability of its core business activities without taking into consideration of its indirect costs.

KOTRA’s profit before tax has improved from RM15.903 million in FY2018 to RM21.364 million in FY2019 or an increase of 34.3% resulting from higher foreign exchange rates for its export sales, lower finance cost and focus on quality on its selling and administration expenses. 

KOTRA has achieved the highest Return on Equity (ROE) of 12.89% in FY2019. Based on 3 years CAGR basis, the company’s Return on Equity has grown 29.65%.

The increase in Return on Equity (ROE) indicates that as the company generated more sales relative to its assets, the more profitable it should be and the higher the ROE since it has an asset turnover ratio of 70.02% in FY2019. The management of the company is seen as effective and capable in deploying its resources in the company as well.

KOTRA has a decreasing Total Debt to Equity ratio of 0.258 times in FY2019 over the past 3 years indicating that the company is good at paying off its debt obligations. Despite the Total Debt to Equity ratio being the lowest in FY2019 which is less than 0.5 times, it still indicates that the company has a lower risk as its total borrowings only amounted to RM44.447 million as compared to RM172.160 million of total equity.  

Cash Flow Statement 

The net cash from operating activities has provided a positive cash flow of RM36.967 million in FY2019 as compared to RM35.576 million in FY2018 indicating that the company is healthy and has enough cash used for business expansion. 

The net cash from investing activities (-RM25.757 million) in FY2019 was mainly due to placement of fixed deposits with tenure more than 3 months (RM14 million) and purchase of Property, Plant and Equipment (RM12.513 million). The negative cash flow indicates that the firm is continuing to invest in its business for growth. 

The net cash from financing activities in FY2019 (-RM17.394 million) was mainly due to repayment of term loans (RM12.663 million), dividend paid (RM8.628 million), interest paid (RM2.409 million), repayment of hire purchase (RM305,000) and repayment of other short-term borrowings (RM287,000). 

Prospect and Challenges 

As Covid-19 continues to spread globally creating disruption & uncertainty ripples across industries & markets, many companies’ expansion plans have been put on the back burner. However that is not the case for KOTRA Industries Berhad. 

According to managing director Jimmy Piong Teck Onn, the pharmaceuticals and consumer products company is carrying on with its expansion plans. He also qualifies by explaining that the company will be increasing its product range overseas but will not be entering into new markets as it is more challenging and it takes much longer for sales to materialise. Expansion plans will be to push for more exports in the over 30 countries it is already in.

KOTRA remains optimistic by working diligently to optimise its available resources to meet market demands. The company is looking into optimising its operations efficiency by rolling out robust cost control measures and innovative approaches in its operations to drive greater output in productivity. The company will also rigorously focus on the fundamentals by engaging more contract manufacturing and tender supply opportunities in its current market base to maximize the production capacity utilisation and improving production efficiency.

Rating System

Return on Equity (ROE) = Average 

Revenue [3 Years CAGR] = Poor 

Net Earnings [3 Years CAGR] = Excellent 

Dividend Yield = Average 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Kotra Industries Berhad Share Price Over 3 Years

Insight 

Based on the calculation of Discounted Earnings Model, KOTRA has an intrinsic value of RM3.258. The current share price of KOTRA is RM2.33 which makes it an undervalued stock (as at 21 May 2020). KOTRA has a beta of 0.521 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), KOTRA has an expected market return of 1.33%.

In conclusion, KOTRA may look attractive to investors due to consistent Net Earnings growth and a dividend payout ratio of more than 40% for past 3 years. KOTRA’s dividend yield of 4.272% looks interesting, although thencompany has only been paying for three years. Besides, KOTRA’s low debt is also comforting to investors who find a company’s high debt reason for concern during economic uncertainties and as well as lockdowns. The company has a net cash of RM14.755 million in FY2019 as well as more liquid assets (RM100.992 million) as compared to its current liabilities (RM40.836 million). Moreover in view of the Covid-19 outbreak, consumers are stocking up on vitamins to help boost their immunity which is expected to augur well for sales of its pharmaceutical products. In fact the pharmaceutical & gloves manufacturing industries have been big beneficiaries of the Covid-19 pandemic.  

Disclaimers 

The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor. 

Company Spotlight on Power Root Berhad (7237)

By Stella Goh – As published in Inve$t Malaysia 15 May 2020 issue

Overview 

Power Root Berhad (PWROOT), formerly known as Natural Bio Resources Berhad was founded in 1999 in Johor Bahru. PWROOT is one of Malaysia’s leading beverage manufacturers and is a specialist distributor coffee, tea, chocolate malt drinks and herbal energy drinks.

PWROOT was listed in Bursa’s ACE Market in 2007 and successfully transferred to the Main Market in 2010. The company exports its products regionally to countries in the Middle East, South Korea, Indonesia, Singapore, China, HongKong, Taiwan, Japan, Thailand.

Business Model 

PWROOT develops and promotes herbal energy drinks fortified with two main rainforest herbs called Eurycoma Longifolia or commonly known as “Tongkat Ali” and Labisia Pumila and Pathoina or “Kacip Fathimah”. These herbs, indigenous to Malaysia, have properties which are beneficial in strengthening the body’s immunity, combating fatigue and helps in healing of wounds due to its anti-bacterial properties.

PWROOT’s leading functional (Tin) and premixed (Instant) products are mainly marketed under the brand names of “Alicafe” and “Per’l” while its instant white coffee is sold under the brand of “Ah Huat”. Other than instant premixed coffee the company also sells ready-to-drink (RTD) canned energy drinks and tea under the brand names of “Power Root Extra” and “Alitea” respectively. The company also sells chocolate malt drinks which are marketed under the brand names of “Oligo”, “Per’l Choco” and “Ah Huat Choco”.

Financial Review 

PWROOT paid a higher annual total dividend per share of 8sen in FY2019 compared to 7.92sen in FY2018 but was lower than the 9.58sen it paid in FY2017. 

Despite the total dividend per share paid in FY2019 being not the highest in 3 years, PWROOT has been able to pay out a favourable dividend consistently over a 10-year period. The company’s dividend payout ratio for FY2019 stood at 112.4% or RM31.5million and has maintained an average dividend payout ratio of 176.8% over the past 3 financial years indicating that the company is paying out more dividend to shareholders than its earnings. And by paying out more than 100% of its annual net profit as dividends, it has exceeded its own dividend policy practice of paying out at least 50% of its net profit per year as dividends. (refer to Prospects & Challenges and Insight at the end of this article) 

PWROOT’s quality of earnings had increased from 1.013 times in FY2017 to 1.787 times in FY2018 but decreased in FY2019 to 1.464 times as compared to FY2018. Inspite of this PWROOT was still able to maintain its quality of earnings at more than 1 over the past 3 years indicating that the company’s operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound.

Based on the computation of liquidity ratio, PWROOT has achieved a current ratio of 2.218 times in FY2019 as compared to 1.847 times in FY2018. Even though the current ratio in FY2019 is not the highest among 3 financial years, it still indicates that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM112.946 million) if any unforeseeable circumstances occur. PWROOT is able to do so by using the current assets such as inventories, trade and other receivables, current tax assets, cash and cash equivalents amounting to RM250.473 million. 

PWROOT has a marginally lower gross profit margin of 35.41% in FY2019 as compared to 35.92% in previous year. The gross profit margin is the lowest in FY2019 mainly due to a decline in export sales to Saudi Arabia from RM204.6 million to RM173.5 million as expatriates there left the country due to a Government scheme of imposing a higher levy on expatriates and their dependents. This had reduced PWROOT’s customer base in the region. However, the company has restructured its distributorships and is also leveraging its strong brand image in the Middle East and North Africa to continue to expand its market share. 

PWROOT’s Return on Equity (ROE) has increased to 12.83% in FY2019 from 4.66% in FY2018 but was still lower than the 18.75% in FY2017. 

Even though the gross profit margin has slightly decreased in FY2019, the increase in Return on Equity (ROE) indicates that more sales was produced by the company relative to its assets as the higher the profit gained, the higher the ROE it earns since it has an asset turnover ratio of 101.76%. The management of the company is seen effective and capable in deploying the resources in the company as well.

PWROOT has a lower Total Debt to Equity ratio of 0.515 times in FY2019 as compared to 0.704 times in FY2018 indicating that the company is able to pay off its debt obligations as the Total Debt to Equity ratio in FY2019 is almost less than half of its liabilities compared to its equity. This may also indicate PWROOT has a lower risk, since creditors have less claim on the company’s assets.

Cash Flow Statement  

The net cash from operating activities has provided a positive cash flow of RM41.626 million in FY2019 as compared to RM16.860 million in FY2018 indicating that the company is healthy and has enough cash used for business expansion.

The net cash from investing activities (-RM2.149 million) in FY2019 was mainly due to the acquisition of Property, Plant and Equipment (PPE) amounting to RM8.620 million indicating that the firm is continuing invest in its business for growth. 

The net cash from financing activities in FY2019 (-RM34.062 million) was mainly due to dividends paid to shareholders (RM23.099 million), net repayment of banker’s acceptances (RM12.795 million), interest paid (RM625,419), repayment of finance lease liabilities (RM412,443), repurchase of treasury shares (RM315,415) and repayment of term loans (RM237,360).

Prospect and Challenges 

PWROOT’s export sales is expected to recover after the lifting of Movement Control Order (MCO) as well as easing of lockdowns that were implemented in the company’s export markets such as China, Singapore, the Middle East and North Africa (MENA) region. The company also experienced some minor disruptions to its supply chain with its distributors in the initial stages of MCO but the issues have since been resolved. 

In China, PWROOT’s sales are driven by the Alicafe and Ah Huat brands, where the products are consumed across the country but with a concentration in urban centres. In order to boost growth, the company has restructured its online business by setting up a dedicated and experienced online sales team which now accounts for about 75% of PWROOT’s sales in China being done online. PWROOT has also revamped its inventory management system as well as added new equipment to reduce wastages and optimise productivity.

In the upcoming year, the company will focus on strengthening its distribution network while maintaining its commitment to improve on its operational efficiencies and cost management activities. On the export front, PWROOT will continue to pursue market growth, particularly in the MENA region by developing its distribution network and launching high-quality new products in order to attract new customers and meet their changing tastes. 

Rating System

Return on Equity (ROE) = Average 

Revenue [CAGR] = Poor 

Net Earnings [CAGR] = Poor 

Dividend Yield = Good 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Power Root Berhad Share Price Over 3 Years

Insight 

Based on the calculation of Gordon Growth Model, PWROOT has an intrinsic value of RM2.537. The current share price of PWROOT is RM2.27 which makes it in the range of fair value (as at 14 May 2020). PWROOT has a beta of 0.922 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), PWROOT has an expected market return of 0.94%.

In conclusion, PWROOT may look attractive to investors due to its consistently strong dividend payout. Besides, PWROOT also looks impressive to investors who find a company’s debt reason for concern as the company has a net cash of RM56.845 million in FY2019 as well as more liquid assets (RM250.473 million) compared to its current liabilities (RM112.946 million). However investors still need to consider a host of other factors apart from dividend when analysing a company in view of the weak global economic outlook and Covid-19 pandemic still in play.

Disclaimers 

The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.

Site last updated July 6, 2020 @ 3:54 am