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.


PM announces RM35 billion Penjana to generate short-term recovery

Sub-Title: 
“Malaysia’s economy is expected to recover with a return of growth in 2021…The World Bank” 

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

Last Friday (5Jun), Prime Minister Muhyiddin Yassin unveiled a RM35 billion stimulus package which will cover 40 initiatives to help stimulate the economy recovery from the impact of Covid-19. The short-term Economic Recovery Plan (ERP) package called “Pelan Jana Semula Ekonomi Negara” or “Penjana” was launched with three major goals to empower the people, propel businesses and to stimulate the economy. 

The automotive, plantation and property sectors are some of the beneficiaries from the Economy Recovery Plans (Penjana). The PM announced that for the automobile sector there is a 100% sales tax exemption on locally assembled Completely Knocked Down (CKD) models while a 50% exemption on fully imported Completely Built-Up (CBU) models starting from June15 until Dec31. This move is expected to help overcome the lost sales and production during MCO.

In order to tackle the problem of unemployment, Prime Minister stated that the government will allocate RM9 billion to ensure job sustainability during the national recovery period post Covid-19. The allocation will be channelled through various initiatives which will benefit three million workers in the country. The initiatives will be set at RM600 per worker for up to 200 workers per company.

In addition the government will allocate RM50 million in matching grants for companies in the gig economy to make SOSCO and EPF contributions for their workers. There will be a special committee chaired by the ministers of Finance and Human Resources with members comprising leaders from the public as well as private sector to monitor initiatives related to the workers. In line with the government’s call to encourage SMEs to implement work-form-home practices, insurance coverage and tax incentives will be provided.

As businesses had been struggling with cashflow issues and reduced demand, the government assured that there would be help for all businesses regardless of size through various initiatives such as Shop Malaysia Online to encourage online shopping through the provision of promotion codes among others. There will be a RM700 million allocation to help SMEs digitalise their operations. Tax incentives would be extended for companies purchasing equipment such as Property, Plant and Equipment as well as thermal scanners. The government also will provide income tax rebates of up to RM20,000 for three years of assessment for SMEs set up between July1 and Dec31 in this year.

Furthermore, there will be a reintroduction of the Home Ownership Campaign (HOC) which will see various incentives such as stamp duty exemptions for the purchase of homes costing between RM300,000 and RM2.5 million from June1, 2020 to May31, 2021 subject to a developer’s discount of at least 10%. The ERP will also encourage foreign direct investments (FDI) where companies both foreign and local, which make capital investment of between RM300 million and RM500 million will be able to enjoy zero investment tax for 10 years. While for capital investment above RM500 million, companies will be given 15 years of tax holidays. For Malaysian companies which relocate their overseas facilities back to home, will be entitled to a 100% Investment tax allowance for five years, which the tax holidays are subject to location transfer.

On 7 June, PM also has announced that the Conditional Movement Control Order (CMCO) will be replaced by the Recovery MCO (RMCO) with more relaxed conditions from June10 to Aug31 which will allow interstate travel, meetings and workshops and this augurs well for the tourism industry and marks the beginning of the recovery of domestic tourism. 

According to The World Bank’s representative Firas Raad, Malaysia’s economy is expected to recover from the end of this year with a return to growth in 2021. With the pro-growth policies coupled with incentives, it would help to push the private sector which is the engine for growth from the current economic downturn. Firas Raad also added that Malaysia should continue its efforts on the reform agenda such as governance, regulatory environment and competition in economic sectors as well as education reformation in its bid to achieve a high-income nation status. The World Bank is also in the midst of reviewing the economic impact of Covid-19 before deciding whether to revise the country’s 2020 Gross Domestic Product (GDP) growth target this month. Business activities in Malaysia are resuming as the country gradually eases itself from the Covid-19 MCO measures.  

This week, on Thursday (11Jun), the Ringgit was 4.2495 against USD from 4.2753 on Tuesday (9Jun). Meanwhile, the Ringgit was 3.0493 to the Sing Dollar on Thursday (11Jun).  

On Monday (8Jun), the FBM KLCI gained 18.83 points or 1.21% to 1575.16 from previous Friday’s close of 1556.33. But as at Friday (12Jun) 10:00am, the FBM KLCI was at 1529.79 seeming to have followed the global markets which have all taken a breather from the bullish ride over the past 2 months.

FBM KLCI

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. 

PM to announce short-term Economy Recovery Plan today at 3pm

Sub-Title:
Bursa Malaysia sees continued surge in Trading Volume and Value

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

According to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, in line with the reopening of the economy which saw nearly 70% of the workforce returning to work in various sectors, Malaysia has the capacity that is set to spur an economy recovery in 2021. The International Monetary Fund (IMF) had forecast a 3% contraction in the global economy for this year due to the Covid-19 pandemic. The IMF managing director Kristalina Georgieva also stated that the global contraction might be even worse than the 3% forecast it made last month. 

Prime Minister Tan Sri Muhyiddin Yassin is set to announce later today a slew of initiatives to kick start the economy. The short-term Economic Recovery Plan (ERP) will be focusing on three main goals ie (i) empowering the people (ii) propelling businesses and (iii) stimulating the economy.  

Last Friday (29May), the local stock exchange’s daily traded value hit a record high of RM9.03 billion which surpassed its previous highest of RM9 billion in May 2018 with a turnover of 9.308 billion of shares. On Monday (1Jun), the FBM KLCI has gapped up 16.89 points or 1.15% to 1490.14 from previous Friday’s close of 1473.25, while the trading volume across Bursa Malaysia topped 10 billion securities for the second time in less than a month driven mainly by the rubber glove manufacturers. 

On Tuesday (2June), both Maybank Investment Bank and RHB Bank Investment Bank Berhad tightened their share margin valuation on glove related counters following the recent rush for glove makers’ stocks which sent the stock prices to new heights. The margin financing caps will be imposed on the shares of Hartalega Holdings Berhad, Top Glove Corporation Berhad, Kossan Rubber Industries Berhad, Supermax Corporation Berhad, Rubberex Corporation Berhad and Comfort Gloves Berhad at a lower valuation compared to their current share prices. Share prices of those stocks took a temporary breather upon the announcement but appear to have recovered since. 

On Wednesday (3June), the oil and gas (O&G) stocks dominated the list of most active stocks on Bursa Malaysia after oil prices reached a three-month high. It is expected that the Organization of the Petroleum Exporting Countries (OPEC) and Russia may extend the production cuts of 9.7 million barrels per day (bpd), equivalent to 10% of global output in July or August. The cuts are currently due to run through May and June, scaling back to a reduction of 7.7 million bpd from July to December but Saudi Arabia has been pushing to keep the deeper cuts in place for longer.  

According to MIDF Research, Malaysia saw the third least foreign selling of RM13.3 billion for year to date (YTD) among seven Asian countries as foreign selling of Malaysian equities narrowed to RM663.8 million last week from RM714.7 million sold in the week before.  

According to the Statistics Department, Malaysia’s exports declined faster than imports to RM64.9 billion, lower by 23.8% resulting in a trade deficit of RM3.5 billion.  

This week, on Thursday (4Jun), the Ringgit strengthened to 4.2738 against USD from 4.3145 on Monday (1Jun). Meanwhile, the Ringgit was 3.0570 to the Sing Dollar on Thursday (4Jun). As at Friday (5Jun) 10:00am, the FBM KLCI was at 1550.65 

FBM KLCI

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. 

More businesses to reopen next week towards full productivity in coming weeks …Datuk Seri Mustapa Mohamed

Sub-Title:
“Foreign selling of Malaysian equities slowed down to RM714.7 million last week … MIDF Research”

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

Last Friday (22May), the FBM KLCI shed 15.35 points or 1.06% at 1436.76 as news of China’s plan to impose a new national security law on Hong Kong to tighten its grip on the riots & demonstrations ravaged island state. The news battered global equity markets and crude oil markets. The FBM KLCI resumed trade on Wednesday (27May) after the two days Hari Raya holiday on a strong note to gain 14.97 points or 1.04% to 1451.73 from the previous Friday’s close of 1436.76 led by a rally of index-linked glove manufacturers.

Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed says the government is anticipating more businesses to reopen next week after the Hari Raya Aidilfitri celebrations and resume their full productivity level in coming weeks which is to ensure that jobs are kept intact and businesses can run as usual to stabilise the economy. The government is dealing with the challenges and is focusing on problem solving through their regular interaction with various stakeholders, while ensuring that the foreign direct investment (FDI) and domestic investments continue to grow, as well as to boost consumer’s confidence. The long-term plan for the country will be expected to be announced in the next three to four months as government agencies are currently working on implementing measures to address challenges faced by various economic sectors. 

According to MIDF Research’s Adam M Rahim, the foreign selling of Malaysian equities on Bursa Malaysia slowed down to RM714.7 million last week, from RM843.2 million in the preceding week. In comparison to its other six Asian peers, Malaysia remains as the nation with the third smallest foreign net outflow on a year-to-date basis after Indonesia and Philippines. The foreign investors have so far taken out RM12.6 billion net of local equities from Malaysia. The foreign net selling surged to RM320.2 million, the highest during the week as investors anticipated an escalation of US-China tension after Beijing effectively proposed that China security laws be applied inside Hong Kong. MIDF also stated that the risk-off sentiment has prevailed as the US Senate passed a bill that could bar Chinese companies from listing on American exchanges.

According to Fitch Ratings, Malaysian Islamic fund’s asset under management (AUM) has decreased by around 15% due to the Covid-19 pandemic but it is expected to experience incremental growth in the longer term boosted by tax and policy initiatives. The rating agency also stated that Malaysia’s Islamic fund mix is more balanced and therefore aggregate fund AUM are less sensitive to future declines in the Islamic Fund AUM and in the event of a sustained market recovery leading to outflows from the money market funds (MMFs).

On Thursday (28May), the oil prices fell in early trade after the U.S. crude, gasoline and heating oil inventories all rose more than expected, dousing hopes of a smooth recovery in demand from the coronavirus lockdowns. The decline extended loses from Wednesday (27May) on uncertainty about Russia’s commitment to deeper oil production cuts in the lead-up to a June 9 meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its allies. According to Bursa Derivatives Berhad (BMD), the FTSE Bursa Malaysia KLCI Futures (FKLI) contract registered an all-time high on May 27 in a daily trading volume of 65,000 contracts. Chairman Datuk Muhamad Umar Swift said the new FKLI contract   all-time high recorded surpassed the previous record of 61,429 contracts registered on Oct 29, 2019. He added “As we continue to build upon the strong momentum achieved last quarter, I am encouraged to see growing interest of foreign institutions which accounted for 80% of total trading volume. This is an indication of consistent growth in confidence in BMD’s products by local and international market participants to manage their price risk exposure amid the global uncertainties”.

This week, on Thursday (28May) the Ringgit was 4.3516 against USD from 4.3542 on Wednesday (27May). Meanwhile, the Ringgit was 3.0693 to the Sing Dollar on Thursday (28May). As at Friday (29May) 10:00am, the FBM KLCI was up at 1454.21

FBM KLCI

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. 

Malaysia’s Consumer Price Index (CPI) dropped 2.9% in April

Sub-Title: 
Next monetary policy committee meeting to be held on 7 July 2020

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

On Monday (18May), the FBM KLCI gained 6.72 points or 0.48% to 1410.16 from previous Friday’s close of 1403.44 as trade volume across Bursa Malaysia rose to another record high at 11.21 billion securities worth RM4.41 billion. The surge in trade volume was attributed to heavy trading of shares in Bursa Malaysia-listed oil and gas (O&G) related companies as a result of the rising price of crude oil. 

Bank Negara Malaysia (BNM) has cut interest rates three times this year by a total of 100 basis points (bps), with the most recent cut of 50 bps on May 5. It had earlier cut OPR by 25bps in January and by another 25 bps in March. The current OPR rate stands at 2%. The next monetary policy committee meeting will be held on July 7, 2020. 

Malaysia’s consumer price index (CPI) for April fell at a sharper rate of -2.9% from a year ago compared with Bloomberg’s survey of a -1.6% decline due to the drop in prices of transport, housing, water, electricity and fuel. Not only is this the second consecutive month of decline in CPI after the 0.2% drop in March 2020 but it is also the sharpest contraction in more than five decades. The hugely lower average price of RON95 fuel in April 2020 at RM1.27 per litre compared to RM2.08 in April 2019 contributed to the decrease in the transport component and the overall index. Nevertheless, food and non-alcoholic beverages continued to increase in April 2020 by 1.2% to 133.9 as compared to 132.3 in April 2019. Food and non-alcoholic beverages contributed 29.5% of CPI weight. Similarly, miscellaneous goods and services also rose by 2.3% followed by communication (1.6%), health (1.2%) and education (1.2%).

On Wednesday (20May), short-term interbank rates ended stable on Bank Negara Malaysia’s (BNM) operations to absorb surplus liquidity from the financial system. The surplus in the conventional system declined to RM39.71 billion from RM48.72 billion while the Islamic system fell to RM20.90 billion from RM22.78 billion. BNM has also revised the Murabahah overnight tender from RM18.9 billion to RM20.9 billion. The average Islamic overnight interest rate stood at 1.97 percent, while the one-, two- and three-week rates stood at 2.04 percent, 2.09 percent and 2.13 percent, respectively.

According to RAM Rating Services Berhad, foreign holdings of Malaysian bonds contracted RM2 billion in April 2020 compared with the RM12.3 billion drop in the preceding month as global and domestic liquidity-boosting measures were seen stabilising market sentiment. 

RAM also stated that the lowering of statutory reserve requirement (SRR) while allowing principal dealers to recognise up to RM1 billion of MGS (Malaysian Government Securities) and MGII (Malaysian Government Investment Issues) as part of their SRR compliance may also have supported domestic demand for fixed-income securities which in turn lowered yields. The yield of the benchmark 10-year MGS fell 51.3bps to 2.9% as at end of April, reversing the 56.9bps surge in March. Looking ahead, RAM said the bond yields still face downside pressure as the recent measures of broadening the usage of MGS and MGII to meet SRR should support demand for government bonds. 

This week, on Thursday (21May) the Ringgit was 4.3462 against USD from 4.3550 on Monday (18May). Meanwhile, the Ringgit was 3.0659 to the Sing Dollar on Thursday (21May). As at Friday (22May) 10:00 am, the FBM KLCI was at 1445.76 

All of us at ShareInvestor Malaysia wish all our Muslim readers Selamat Hari Raya Aidilfitri.

FBM KLCI

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. 

Malaysia’s GDP Grow 0.7% in 1Q20 – Lowest in 10 years

Sub-Title: 
“Foreign Selling of Malaysian equity at a total of RM11.08 billion …. MIDF Research”

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

On Sunday (10May), PM Tan Sri Muhyiddin Yassin announced the fourth extension of the movement control order (MCO) with further loosened restrictions under the conditional MCO (CMCO) for another four weeks from May 13 until June 9. Since the period will cover several major Malaysian celebrations, namely Hari Raya Aidilfitri, Kaamatan Festival and Hari Gawai, when it usually involves in heavy movement of people, such movement will not be allowed.  

On Tuesday (12May), the FBM KLCI shed 2.38 points or 0.17% to 1379.93 from previous Friday’s close of 1382.31. The FBM KLCI has reversed the trend and inched up to 1397.25 on Thursday (14May). Based on feedback from Bursa Malaysia, the MCO has had a positive impact on its trading activity. 

For YTD April 2020, Millennials were responsible for 49% of total new individual accounts opened. For the same period, Retail investors continued to post a net buy position of RM4,011mil. And the Retail Net Buy Position YTD Apr 2020 is currently higher than FY2019. 

Malaysia’s Industrial Production Index (IPI) dropped 4.9% in March 2020 from a year earlier due to the decrease in all three components (manufacturing, electricity and mining) of the index. According to the Statistics Department, the IPI’s manufacturing component fell 4.2% in March 2020 after recording an increase of 6.2% in February 2020. The major sub-sectors contributing to the decrease in the manufacturing sector in March 2020 were electrical and electronic products (-5%), non-metallic mineral products, basic metal and fabricated metal product (-9.8%), food & beverage and tobacco (-9.9%). While the electricity index and mining index recorded a reduction of 0.4% and 1.8% respectively.

According to MIDF Research, the foreign selling of Malaysian equity swelled almost nine times to RM774.1 million last week from RM87.6 the prior week. Based on the weekly fund flow report on Tuesday (12May), the foreign investors have so far taken out RM11.08 billion net of equities from Malaysia. In comparison to the other six Asian peers, Malaysia remains as the nation with third smallest foreign net outflow on a year-to-date basis after Indonesia and the Philippines.

Bank Negara Malaysia (BNM) stated that Malaysia’s average headline inflation in 2020 is likely to turn negative due to mainly projections of substantially lower global crude oil prices and other commodity prices including food as well as evolving demand conditions. Malaysia’s economic growth in gross domestic product (GDP) terms has dipped sharply to 0.7% in 1Q20 (4Q19: 3.6%) which is the lowest since third quarter of 2009 due to the impact of measures taken both globally and domestically to contain the spread of Covid-19 pandemic. 

According to BNM, during the first quarter (1Q20), headline inflation remained modest at 0.9% mainly reflecting the lapse in the remaining impact from Sales and Services Tax (SST) implementation and lower price-volatile inflation. The core inflation moderated slightly to 1.3%. BNM also stated that the sizeable fiscal, monetary, and financial measures and progress in transport-related public infrastructure projects will provide further support to growth in 2H20. In line with projected improvement in global growth, the Malaysian economy is expected to register a positive recovery in 2021. 

According to the Senior Minister of International Trade and Industry Datuk Seri Mohamed Azmin Ali, the government will announce a six months short-term recovery plan by the end of May to revive the economy. Following the recovery plan, government also plans to table a medium-term revitalization plan under the 2021 Budget in November, followed by a long-term reform plan which will be under the 12th Malaysia Plan that is scheduled to be revealed in January 2021. 

This week, on Thursday (14May) the Ringgit was 4.3405 against USD from 4.3336 on Monday (11May). Meanwhile the Sing Dollar to Ringgit was 3.0513 on Thursday (14May). As at Friday (15May) 10:00 am, the FBM KLCI was at 1402.52

Site last updated November 13, 2020 @ 4:49 am