MCO extended to May 12 but with certain relaxations

Sub-Title:  
Bank Negara Malaysia expected to cut Overnight Policy Rate by another 75 basis points 

By Stella Goh – As published in Inve$t Malaysia 24 April 2020 issue

On Thursday (23Apr) the PM announced the further extension of MCO to May 12 but with two groups of people being allowed to travel. The first group are students who have been in their campuses being allowed to return home but only after taking the Covid-19 test. The other group are those who had been in their relative kampungs since March 18, when the MCO was first implemented, will be allowed to return to their own homes.  
 

On Monday (20Apr), the FBM KLCI surged 5.78 points or 0.41% from previous Friday’s close of 1407.34 to 1413.12 but has reversed the trend and fell to 1381.89 on Wednesday (22Apr) as a confluence of weak crude oil prices and pandemic fears continued to pummel the global equity market. As at Friday (24Apr) 10:00 am, the FBM KLCI was at 1372.08. 

FBM KLCI

Malaysia’s inflation rate fell only 0.2% YOY to 120.9 points in March with much credit going to the lower fuel costs. However the drop was countered by the rise in housing, utilities, food and non-alcoholic beverages. The full year headline inflation forecast is expected to be at zero % based on weak oil prices, discounts on household electricity and overall weak demand.    

Bank Negara Malaysia (BNM) is expected to reduce the Overnight Policy Rate (OPR) by 50bps in May, followed by a further 25bps cut in the second half of 2020 in anticipation of a contraction in the country’s economy and subdued inflation in 2020. The reduction in the Overnight Policy Rate (OPR) is intended to provide more accommodative monetary environment to support the projected improvement in economic growth amid the price stability. The Monetary Policy Committee (MPC) will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation. In anticipation of the interest rate cuts and slower loans growth due to the challenging business environment, banks’ earnings outlook are expected to be slashed.    

On Monday the US crude oil futures plunged by almost 300 percent to its historical lowest. For the May delivery of US benchmark crude, the West Texas Intermediate (WTI) sank to a new low of minus $37.63 a barrel, a staggering level which essentially means the producers would be paying buyers to take oil off their hands. This resulted in the oil and gas (O&G) stocks on Bursa Malaysia to take a beating after the US crude oil price collapse. 

This week, with the weak crude oil prices hogging the news, the Ringgit against the USD was 4.3600 on Thursday (23Apr) from 4.3745 on Monday (20Apr).  

Company Spotlight on Petronas Gas Berhad (6033)

By Stella Goh – As published in Inve$t Malaysia 24 April 2020 issue

Overview 

Petronas Gas Berhad (PETGAS) is a Malaysia-based gas infrastructure and centralised utilities company founded in 1983 and is headquartered at PETRONAS Twin Towers, Kuala Lumpur. PETGAS is primarily involved as the world’s largest gas pipeline company that specializes in processing and transporting of natural gas via Peninsular Gas Utilisation (PGU) pipeline network to PETRONAS’ customers in Malaysia and Singapore.

PETGAS was listed in Main Market of Bursa Malaysia on 4 September 1995. With the liberalization of Malaysian gas market, the company foresees exciting new developments ahead for the industry and accelerating momentum towards being a more competitive solutions provider in this new era.

PETGAS’s subsidiaries include Pengerang LNG (Two) Sdn Bhd, Regas Terminal Sg Udang Sdn Bhd and Regas Terminal (Pengerang) Sdn Bhd.

Business Model 

PETGAS is primarily involved in four main core businesses namely Gas Processing, Gas Transportation, Utilities and Regasification.  

In the processing business the upstream natural gas from offshore gas fields in the East Coast of Peninsular Malaysia is processed for its customers in the power-generation & petrochemical industries. The 6 plants in Terengganu are at two complexes namely Gas Processing Kertih (GPK) and Gas Processing Santong (GPS). With a combined capacity of over 2,000 million standard cubic feet per day (mmscfd) of feedgas, the plants have the capability to process and produce salesgas, ethane, propane and butane.

As for its gas transportation business, the processed gas (as a low-carbon fuel and the cleanest of fossil fuels in power generation) is carried through its 2,623km Peninsular Gas Utilisation (PGU) pipeline network across Peninsular Malaysia with a capacity to transport up to 3,500mmscfd of gas to end customers under multi-year agreements with Petroliam Nasional Berhad (PETRONAS). 

The company through its Gas Processing & Utilities (GPU) Division provides utilities such as electricity, steam, industrial gases like oxygen & nitrogen, de-mineralised water, raw water, cooling water and boiler feed water.

Its Gas Transmission and Regasification (GTR) Division operates and maintains the offshore Liquefied Natural Gas (LNG) Regasification Terminal in Sungai Udang, Melaka (RGTSU) and the onshore LNG Regasification Terminal in Pengerang, Johor (RGTP). The facilities receive vessels carrying LNG from around the world and offer a wide range of services including LNG regasification, LNG reloading and Gassing Up Cooling Down.

Financial Review

PETGAS has achieved highest dividend growth of 13.89% from RM0.72 in FY2018 to RM0.82 in FY2019. Based on 3 years of CAGR basis, PETGAS has a dividend growth of 9.77%. 

PETGAS has declared interim dividends of 16sen per share for Q1 and Q2 and upped it to 18sen per share in Q3. For Q4, the board has approved a final dividend of 22sen and a special dividend of 10sen which brought its total dividend for the year to 82sen per share, translating into RM1.6 billion of total dividend declared. PETGAS has a higher dividend payout ratio in tandem with the higher dividend declared.

PETGAS had an increase of gross profit margin from 44.55% in FY2017 to 46.12% in FY2018. The gross profit margin in FY2019 decreased by 5.18% compared to previous year mainly due to the Incentive-Based Regulation (IBR) on its regulated Gas Transportation and Regasification business segments.

Although the gas transportation and regasification on tariffs were regulated, PETGAS was compensated by higher remuneration via the second term of the 20-year Gas Processing Agreement with PETRONAS commencing on 1 January 2019, which influences its operating targets and planned expenditure over the next five years. Even though the Gross Profit Margin achieved in FY2019 is the lowest PETGAS was still able to achieve more than 30% of gross profit margin over the past 3 years indicating the profitability of its core business activities without taking into consideration its indirect costs. 

PETGAS has achieved the highest Return of Equity (ROE) in FY2019 from 13.96% in FY2018 to 14.61%. Based on 3 years CAGR basis the company’s ROE has grown 0.18%. 

The increase in ROE was mainly due to the company being well managed and is making good profit relative to shareholder’s capital and reflects the management’s effectiveness and capability in deploying its resources. 

PETGAS’s quality of earnings had increased from 1.578 times in FY2017 to 1.761 times in FY2018 but decreased in FY2019 to 1.631 times as compared to FY2018. Inspite of this PETGAS was still able to maintain its quality of earnings at more than 1 over the past 3 years indicating that the company’s business is conservative in its approach to income recognition.  

Based on the computation on liquidity ratio, PETGAS has a current ratio of 5.169 times in FY2019 compared to 7.042 times in FY2018. Even though the current ratio in FY2019 has decreased, it indicates that the company does not face any liquidity issue as it is capable of paying back its liabilities of (RM989.528 million) if any unforeseeable circumstances occur. PETGAS is able to do so by using the current assets such as trade and other inventories, trade and other receivables, tax recoverable, cash and cash equivalents amounting to RM5.114 billion. However this may also indicate that the company is not efficiently using its current assets or its short-term financing facilities.

PETGAS has a growing Total Debt to Equity ratio of 0.294 times in FY2019 as compared to 0.256 times in FY2018. Even though the Total Debt to Equity ratio of PETGAS has increased in FY2019, the company still able to pay off its debt obligations as the Total Debt to Equity ratio based on 3 years is lower than 0.5 times which indicates that the company has less than half of liabilities compared to its equity. This may also indicate that PETGAS has a lower risk.

Cash Flow Statement 

The net cash from operating activities has provided a positive cash flow of RM3.357 billion in FY2019 as compared to RM3.311 billion 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 (-RM1.098 billion) in FY2019 was mainly due to the purchase of Property, Plant and Equipment (RM1.094 billion), increase in investment in a joint venture (RM31.031 million) and term loan to a joint venture (RM7.226 million). The negative cash flow indicates that the firm is investing in its business for growth.  

The net cash from financing activities in FY2019 (-RM1.850 billion) was mainly due to dividend paid to shareholders (RM1.425 billion), interest expense paid (RM229.525 million), payment to non-controlling interests on redemption of shares (RM73.320 million), repayment of lease liabilities (RM56.579 million), repayment of loan from corporate shareholder of a subsidiary (RM52.938 million) and dividend paid to a non-controlling interest (RM19.690 million). 

Prospect and Challenges 

PETGAS has announced that the Government via the Energy Commission (EC) has approved new gas tariffs under the Incentive-Based Regulation for two years starting from 1 January 2020 until 31 Dec 2022. The tariff has been set at RM1.129 per gigajoule, RM3.455/GJ and RM3.485/GJ respectively for its Peninsular Gas Utilisation facility (PGU), Regasification Terminal Sg Udang in Melaka and Regasification Terminal Pengerang in Johor.

According to the Managing Director and Chief Executive Officer of PETGAS, the company will continue to record excellent operational performance whilst making several significant steps towards securing its future revenue streams and becoming an integrated energy solutions provider. These include acquisition of new customers for steam and electricity for its utilities in Gebang as well as the introduction of new ancillary services at the company’s regasification terminals. 

PETGAS will continue to focus on growing its business as it steps up the new four-year strategy known as R2 Game Plan: 301Q99 Pushing Forward which will help to ensure a sustainable safe, reliable, and efficient operations. A few projects initiated in 2019 will be completed and commissioned in 2020 such as the Liquefied Natural Gas (LNG) bunkering project at Regasification Terminal Sungai Udang (RGTSU) and LNG truck loading service at Regasification Terminal Pengerang (RGTP).

The new propane and butane import facilities in Kemaman that were completed in November 2019 will also enhance the company’s revenue beginning from FY2020. The company also believes it is well-positioned to participate as a key player in the power supply market which is being opened under MESI 2.0. 

Rating System

Return on Equity (ROE) = Average 

Revenue [3 years CAGR] = Average 

Net Earnings [3 years CAGR] = Average 

Basic Earnings per Share (EPS) [3 years CAGR] = Average 

Interest Coverage = Good 

Quality of Earnings = Average 

Price Over 3 Years 

Insight 

Based on the calculation of Discounted Earnings Model, PETGAS has an intrinsic value of RM9.78. The current share price of PETGAS is RM15.38 which makes it an overvalued stock (as at 23 April 2020). PETGAS has a beta of 0.756 (500 days) indicating that the share price is less volatile than current market. Based on the computation of Compound Annual Growth Rate (CAGR), PETGAS has an expected market return of 0.83%.

In conclusion, PETGAS may look attractive to investors as a dividend growth stock. With the consistent dividend payout policy, it will help to generate investor confidence. Its prospect remains bright as it secures more projects that will provide continued growth and accrue long-term benefits for shareholders. However investors still need to consider a host of other factors apart from dividends when analysing a company.  

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 unintentionalIt 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 Real GDP projected to grow at a rate of 9% in 2021

Subtitle:
IMF projects Malaysia’s unemployment rate to spike to 4.9% in 2020 before easing to 3.4% in 2021

By Stella Goh – As published in Inve$t Malaysia 17 April 2020 issue

On Monday (13Apr), the FBM KLCI shed 1.47 points or 0.11% from previous Friday’s close of 1357.50 but reversed the trend to continue to surge up to 1386.53 on Thursday (16Apr). As at Friday (17Apr) 10:00 am, the FBM KLCI continued its strong upward trend to 1407.93. 

Malaysia has the highest household debt to Gross Domestic Product (GDP) in Asia and has exceeded several high-income nations including United States (66%) and Japan (59.3%). According to Ambank Group’s Chief Economist Anthony Dass, the GDP outlook for 2020 will be much slower balancing between technical and full-fledged recession that will cause an increase in household debts. Ambank’s sensitivity analysis shows household debts against GDP could range between 82.3% and 88.6% this year and GDP to range between 0.4% to -2%. The relief measures unveiled by the government and central bank are expected to provide some short-term relief to the households. 

According to the International Monetary Fund (IMF), it has projected Malaysia’s real gross domestic product (GDP) to grow at a rate of 9% in 2021, the fastest among the Asean-5 countries which are expected to see a combined GDP growth of 7.8%. Besides Malaysia, the Asean-5 countries include Indonesia, Thailand, Philippines, and Vietnam which are set to expand by 8.2%, 6.1%, 7.6% and 7% respectively. IMF also forecasts Malaysia’s economy to contract 1.7% as the Asean-5 countries’ GDP shrinks 0.6% in 2020. The global growth is expected to rebound to 5.8% in 2021, reflecting the normalization of economic activity from a very low level. However some aspects that underpin the rebound may not materialize and the outcomes could be far worse depending on the course and extent of the Covid-19 pandemic. 

Malaysia’s Industrial Production Index (IPI) climbed 5.8% in February to a two-and-a-half-year high but it is unlikely to be sustained due to the Covid-19 pandemic. It results from an expected weak global demand coupled with supply chain disruption and factories closing temporarily during the Movement Control Order (MCO) periods. According to Malaysian Industrial Development Finance (MIDF), the outlook for the first half of year will be cloudy with major and emerging economies’ IPI remaining sluggish. Movement Control Orders and lockdowns in major economies such as US, Europe and Asia will impede global demand and exports. The plunge in global crude oil prices would also add pressure on the oil-exporting economies such as Malaysia, Australia, and Saudi Arabia. As a result of the gloomy outlook, MIDF is expecting the country’s IPI to contract in 1Q and 2Q of 2020. It has reviewed its IPI forecast from 1.5% to -2.8% y-o-y for 2020. 

The International Monetary Fund (IMF) in its recent World Economic Outlook April 2020 that was launched on Tuesday (14Apr), projects that Malaysia’s unemployment rate to spike to 4.9% in 2020 before easing to 3.4% in 2021. The labour force will be affected in 2Q2020 because many companies and particularly SMEs have been buffeted by both external headwinds and the internal MCO and its extensions. However MIDF maintains its confidence that the jobless rate will be remain below 4% for the whole year of 2020 as some of the stimulus measures announced by government may moderate the pressure. 

This week, the Ringgit has weakened against USD to 4.3668 on Thursday (16Apr) from 4.3283 on Monday (13Apr).  

KLCI past 1 year

Malaysia’s GDP may shrink to a low of -2% in 2020 amid Covid-19 pandemic

Subtitle:
World Trade set to plunge as COVID-19 pandemic upends global economy

By Stella Goh – As published in Inve$t Malaysia 10 April 2020 issue

On Monday (6Apr), the FBM KLCI gained 11.04 points or 0.83% from previous Friday’s close of 1330.65, while trading volume across Bursa Malaysia neared six billion shares as Asian equities ended higher. Investors seemed to favor the possibility that the increase in new Covid-19 cases had slowed down and anticipated a truce in the Saudi Arabia-Russia crude oil price war as announced by POTUS. But the impasse so far has increased supply of the commodity and sent prices lower.  

Bank Negara Malaysia (BNM) warned that recession seems imminent if Malaysia’s GDP shrinks to a low of -2% in 2020 due to the economic impact of Covid-19 pandemic while Malaysia’s Movement Control Order (MCO) will pose a dampener on domestic economic activity. According to BNM governor Datuk Nor Shamsiah Mohd Yunus, the projected GDP for 2020 is expected to be between 0.5% and -2%. Spillovers from the global slowdown and the pandemic containment measures will result in large output losses in the first half of this year (1H20). As for oil, according to BNM assistant governor Marzunisham Omar, prices are expected to range between US$25 and US$35 per barrel this year. During MCO period, the domestic economy will be operating at around 45% of capacity. The labour market is expected to be considerably weaker as well.  

The Malaysian government announced an additional fourth stimulus package worth RM10 billion (US$2.3 billion) to help struggling small-and-medium-size enterprises (SMEs) affected by the Covid-19. The benefits include expanded employees’ subsidies, a special grant for micro SMEs, waiver of interest rates for the Micro Credit Scheme and a levy cut on foreign workers. The government also announced there is a rental exemption or discounts for SMEs operating on premises owned by government-linked companies and tax breaks for landlords that give rental discounts or exemptions. 

According to the World Trade Organization (WTO) Director General Roberto Azevedo, this crisis is first and foremost a health crisis which has forced governments to take unprecedented measures to protect people’s lives. The unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the disease itself. The immediate goal is to bring the pandemic under control and mitigate the economic damage to people, companies and countries. But policymakers must start planning for the aftermath of the pandemic. These numbers are ugly and there is no getting around that. But a rapid, vigorous rebound is possible. Decisions taken now will determine the future shape of the recovery and global growth prospects. He urged Governments to lay the foundations for a strong, sustained and socially inclusive recovery. He presented two scenarios. In the optimistic scenario, the global merchandise trade could fall 13% in 2020 and rebound 21% in 2021 compared with a 0.1% contraction in 2019. While the gross domestic product (GDP) could contract by 2.5% in 2020 and grow by 7.4% in 2021. In a pessimistic scenario, the volume of global goods trade could drop by as much as 32% this year with the possibility of 24% increase next year. In this situation, world GDP could shrink by as much as 8.8% in 2020 and expand by 5.9% in 2021. If the optimistic scenario is achieved, the WTO projection will rival the modern peacetime record, which was set in 2009, when world merchandise trade volume declined about 12% and global GDP contracted 2%. If the pessimistic scenario is realized, it could be the most severe drop in global commerce since the Great Depression. 

As at Thursday (9Apr) the Ringgit had strengthened to RM4.3189 against the US dollar from RM4.3638 on Monday (6Apr). As at Friday (10Apr) 10:00 am, the FBM KLCI was at 1355.98. 

Company Spotlight on Mynews Holdings Berhad (5275)

By Stella Goh – As published in Inve$t Malaysia 10 April 2020 issue

Overview 

Mynews Holdings Berhad (MYNEWS), formerly known as Bison Consolidated Berhad was founded by Dang Tai Luk in 2013. Since its inception in 1997, the company has evolved from a single traditional newsstand to being one of the largest homegrown convenience retail chain stores operator in Malaysia. 

MYNEWS, headquartered in Petaling Jaya was listed on Main Market of Bursa Malaysia as Bison Consolidated Berhad on 29 March 2016. Its current name was adopted on 11 December 2017 in line with the company’s retail business “myNEWS” branding. It’s wholly owned subsidiaries include Mynews Retail Sdn Bhd, Eemerge Incorporated Sdn Bhd, Mynews Kukuh Sdn Bhd, Bison Foods Sdn Bhd, DKE Technology Sdn Bhd and Mynews Management Sdn Bhd. In 2019, it opened 97 new outlets and also obtained Halal Certification for its food production plant (FPC) in Kota Damansara.  


Business Model

MYNEWS is engaged in conceptualization, development, expansion, management and operation of its convenience retail chain stores throughout Malaysia under its trade name myNEWS.com, newsplus, MAGBIT, THE FRONT PAGE as well as WHSmith, which is operated under their equal joint venture with WHSmith Travel, one of the UK’s leading retailers. 

The WHSmith brand retails newspapers, books and convenience products within international airports in Malaysia. The company’s other stores are located throughout Malaysia and Sarawak offering a product mix comprising print media, food & beverage, grocery products and consumer services such as cashless payment, bill payment, mobile & game reloads, Touch N Go reload, SIM starter pack, send & return parcel, IQOS care-corner and myNEWS DASH as their e-commerce platform. It’s first flagship store opened on December 25, 1996. 


Financial Review

Based on past 3 financial years’ revenue chart (above) its revenue grew year-on-year (y-o-y) from FY2017 (+24.08%), FY2018 (+17.72%) to FY2019 (+34.26%). On a CAGR basis, MYNEWS has grown 25.17% based on 3 years. 

The increase in revenue was due to the higher retail sales of RM121.94 or 36.9% while the other operational income increased by RM10.20 million or 18.4% contributed by both existing and new outlets.  

MYNEWS has recorded a RM36.451 million increase in gross profit, translating to a growth of 24.39% from RM149.437 million in FY2018 to RM185.888 million in FY2019. Based on 3 years CAGR, the company’s gross profit has grown 25.31%. 

The increase in gross profit was due to MYNEWS rolling out its in-house Maru Kafe which offers over the counter food such as coffee, ice-cream and hot snacks. This was followed by the rolling out of more in-house produced ready-to-eat (RTE) meals and bakery products from its food production centre (FPC). Except for print media, all other product categories recorded double digit growth. 

The Profit After Tax (PAT) for FY2019 was RM24.324 million, which is RM1.689 million or 6.49% lower compared to RM26.013 million in the previous year as the effective tax rate was relatively higher than last year. The tax expenses included a sum of RM0.76 million for tax underprovided in 2018. In addition MYNEWS could not enjoy any group tax relief for two loss making subsidiaries Mynews Kineya Sdn Bhd and Mynews Ryoyupan Sdn Bhd which operate the food production centre (FPC). 

Cash Flow Statement 

The net cash from operating activities has provided a positive cash flow of RM83.130 million in FY2019 as compared to RM9.540 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 (-RM73.464 million) was mainly due to purchase of Property, Plant and Equipment (RM104.657 million), placement of funds in other investments (RM6 million) and placement of fixed deposits (RM0.113 million). The negative cash flow indicates that the firm is investing in its business for growth. 

The net cash from financing activities in FY2019 (-RM19.048 million) was mainly due to payment of lease liabilities (RM30.544 million), dividend paid (RM6.822 million), repayment of bank borrowings (RM3.525 million) and interest paid (RM3.457 million).  

Is the company able to pay back its liabilities? 

Based on the liquidity ratio calculation, MYNEWS has a current ratio of 1.327 times in FY2019 indicating that the company does not face any liquidity issue as it is capable of paying back its liabilities (RM114.916 million) if any unforeseeable circumstances occur. MYNEWS is able to do so by using current assets such as inventories, contract assets, trade and other receivables, amount due from jointly controlled entity, tax recoverable, other investments, fixed deposits with licensed banks, cash and bank balances amounting to RM152.514 million. 

Prospect and Challenges 

MYNEWS launched its Japanese inspired ready-to-eat 130,000 sq ft food production centre (FPC) in Kota Damansara, in partnership with Ryoyi Baking Co Ltd and Gourmet Kineya Co Ltd with a total investment of RM100 million in the FPC. The Japanese-inspired food catered to Malaysian tastes ranging from sandwiches, onigiri, bento, fresh baked breads, hot and cold beverages, curry laksa, nasi lemak and others will be available in MYNEWS’s stores. The products currently being produced are sent to more than 300 MYNEWS’s outlets in Klang Valley. MYNEWS’s DASH online delivery services will also be provided to customers who wish to have their food and other daily needs delivered to their doorstep. 

As at FY2019, MYNEWS had a total of 513 stores compared to 436 stores in FY2018 (an increase of 77 stores year-on-year), with an opening target of about 100 additional stores in 2020. 

At the same time, the company will increase the number of MYNEWS outlets with Maru Kafe concept through the refurbishment of existing stores in addition to making it a standard for as many new stores as possible. Their product mix will continue to be improved with RTE food and beverages as the prime category of growth. MYNEWS will also continue to embrace technology and innovation in retail to improve the stores towards providing better shopping experience. 

Rating System

Return on Equity (ROE) = Average 

Revenue [3 years CAGR] = Good 

Net Earnings [3 years CAGR] = Average 
 
Basic Earnings per Share (EPS) [3 years CAGR] = Average 

Interest Coverage = Good 

Quality of Earnings = Average 

Price Over 3 Years

Insight

Based on the calculation of Discounted Earnings Model, MYNEWS has an intrinsic value of RM1.939. The current share price of MYNEWS is RM0.84 which makes it an undervalued stock (as at 9 April 2020). MYNEWS has a beta of 1.036 (500days) indicating that the share price is more volatile than current market. Based on the computation of Compound Annual Growth Rate, MYNEWS has an expected market return of 0.74%. 

In conclusion, even though the Profit After Tax (PAT) of MYNEWS has decreased in FY2019 due to higher of effective rate, MYNEWS still achieved a strong performance in FY2019 with the highest revenue and gross profit over the past 3 years. The company’s prospect remains bright as the focus on growing its customer reach and driving demand in the ready-to-eat (RTE) segment in near term through higher store openings, while investing in the marketing of Maru Kafe and RTE products to lift overall sales. 

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 ELK-Desa Resources Berhad (5228)

By Stella Goh – Market Data Analyst | 3 April 2020

Overview 

ELK-Desa Resources Berhad (ELKDESA) is an established Malaysia-based investment holding company founded in 1989 and is headquartered in Kuala Lumpur. ELKDESA started its hire purchase financing operation in 2004, in view of continued growth of the automobile industry as well as rapid urbanization taking place throughout the country reflecting Malaysia’s progress towards a high-income nation. ELKDESA’s core focus area was in the under-served hire purchase financing for used motor vehicles. Over the years, the company has successfully established a strong presence and reputation in this segment. 

ELKDESA was listed on Main Market of Bursa Malaysia on 18 December 2012. This significant milestone provided the company with the impetus to expand even further in a dynamic and sustainable manner. 

Business Model 

ELKDESA is involved in two business segments that provide products and services targeted at the consumer market. They are hire purchase financing and other integrated services for used motor vehicles and furniture trading. 

The company’s hire purchase financing division remains its primary business activity and income generator through its subsidiary called ELK-Desa Capital Sdn Bhd. The company has carved a strong presence as a reputable lender in the used motor vehicle sector specifically targeting buyers who are seeking small value financing.  As an extension of its hire purchase financing business, ELKDESA also cross-sells general insurance products to its hire purchase customers. These products are mainly from leading insurance providers such as Tokio Marine Insurance (Malaysia) Berhad and Berjaya Sompo Insurance Berhad. 

Besides that ELKDESA is also focused in the wholesaling of home furniture in domestic market under its subsidiary ELK-Desa Furniture Sdn Bhd. The company has four furniture retail showrooms located in Klang and Shah Alam and has started to distribute its furniture products to more than 800 furniture retailers throughout Malaysia. Although the furniture division is relatively new but is a growing business venture that has the potential to contribute positively to ELKDESA’s earnings and growth in the foreseeable future. 

Financial Review

Based on past 3 financial years’ revenue chart above its revenue grew year-on-year (y-o-y) from FY2017 (+47.25%), FY2018 (+10.20%) to FY2019 (+18.50%). On a CAGR basis, ELKDESA has grown 24.35% based on 3 years.  

ELKDESA’s revenue was due to the higher contribution from both the company’s hire purchase financing business and furniture segment. According to the Annual Report for FY2019, hire purchase financing division remains its main income generator contributing 98% to the company. 

ELKDESA has recorded a RM14.250 million increase in gross profit, translating to a growth of 16.82% from RM84.705 million in FY2018 to RM98.995 million in FY2019. Based on 3 years CAGR, the company’s gross profit has grown 18.84%. 

The rise in gross profit was attributed to the net hire purchase receivables growth of a notable 22% to RM490 million as at 31 March 2019. This was one of the key factors that had led the Division’s increased revenue and gross profit. ELKDESA’s furniture division although icurrently a small and non-core business activity of the company has also contributed positively during the year. (Source: Annual Report 2019) 

The Profit After Tax (PAT) of ELKDESA rose 26.97% from RM25.924 million in FY2018 to RM32.916 million in FY2019. Based on 3 years CAGR basis, the Profit After Tax (PAT) grew by 20.55% which was in line with the growth in revenue and gross profit. 

Cash Flow Statement 

The net cash from operating activities has provided a negative cash flow of (-RM53.977 million) in FY2019 as compared to (-RM25.689 million) in FY2018 as the hire purchase receivables and trade receivables increased in FY2019 compared to previous year. 

The net cash from investing activities in FY2019 (-RM3.042 million) was mainly due to the purchase of Property, Plant and Equipment (RM4.477 million). The negative cash flow indicates that the firm is investing in its business for growth. (Source: Annual Report 2019). 

The net cash from financing activities in FY2019 is RM38.165 million was mainly due to net drawdowns of block discounting payables amounting to RM63.938 million. The company also has to pay dividend (RM20.657 million) and interest (RM5.115 million) to its shareholders. 

Is the company able to pay back its liabilities? 

Based on the liquidity ratio calculation, ELKDESA has a current ratio of 2.449 times in FY2019 indicating that the company does not face any liquidity issue as it is capable of paying back its liabilities (RM71.901 million) if any unforeseeable circumstances occur. ELKDESA is able to do so by using current assets such as inventories, other assets, trade receivables, hire purchase receivables, other receivables, deposits, prepayments, current tax assets, short term funds, cash and bank balances amounting to RM176.123 million. However this may also indicate that the company is not efficiently using its current assets or its short-term financing facilities. 

Prospect and Challenges 

ELKDESA has announced its maiden medium-term notes (MTN) program of up to RM1 billion in nominal value to raise funds for the expansion of its used car hire purchase financing business. According to ELKDESA, the program with a tenure of 10 years will be done via its special vehicle Premier Auto Assets Berhad. The first tranche of the senior MTNs totaling of RM105 million, comprising RM85 million of AAA-rated Class A MTNS and RM20 million of AA3-rated Class B MTNs were issued on 19 July 2019 which are rated by RAM Rating Services Berhad.  

ELKDESA aims to utilize the fresh funds to grow the hirer base of its used car hire purchase financing business, the primary business activity and main income contributor of the company. (Source: The Malaysian Reserve, 19 July 2019). According to the executive director and chief financial officer, Henry Teoh Seng Hee, MTNs will finance their growth. As such, they do not need to worry about insufficient funds to grow their hire-purchase financing business. With the MTNs, the company is expected to leverage up with its gearing ratio expected to almost double to 0.5 times in FY2020, up from 0.28 times as at March 31, 2019. (Source: The Edge Markets, 13 August 2019). 

According to Affin Hwang Capital, they believe there are still ample opportunities for ELKDESA to tap into the used car market. Robust Proton and Perodua sales in 2H 2019 indicated that the mass market is not facing constraints, and that the bottom 40% and middle 40% income groups (B40 and M40) consumption spending is still intact. 

The robust national car sales in 2019 were a good sign boding well for ELKDESA’s prospects. It is highly likely whenever the car owners (B40 and M40 groups) need to upgrade, they would first dispose of their existing cars in the used-car market. This is where the hire purchase financing players such as ELKDESA would finance and the transactions at rates of 8.75% to 10%.  

Rating System

Return on Equity (ROE) = Average 

Revenue [3 years CAGR] = Good 

Net Earnings [3 years CAGR] = Good 

Basic Earnings per Share (EPS) [3 years CAGR] = Good 

Interest Coverage = Good

Quality of Earnings = N.A. 

(*Unable to get Quality of Earnings because Net Cash from Operating Cash Flow is Negative Figure)


Insight

Based on the calculation of Discounted Earnings Model, ELKDESA has an intrinsic value of RM1.972. The current share price of ELKDESA is RM1.15 which makes it an undervalued stock (as at 2 April 2020). ELKDESA has a beta of 0.543 (500days) indicating that the share price is less volatile than current market. Based on the computation of Compound Annual Growth Rate (CAGR), ELKDESA has an expected market return of 0.45%. 

In conclusion, ELKDESA has achieved a strong performance in FY20219 with the highest revenue, gross profit and profit after tax over the past 3 years. The company’s prospect remains bright as the MTNs program is also timely as higher purchase financing for the used car segment remains underserved, with the demand far out-stripping supply. Since ELKDESA has carved a niche as a reputable lender in Klang Valley, I believe it is well poised to drive further growth moving forward.  

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 unintentionalIt 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.