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.