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. 

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. 

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. 

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. 

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

Overview 

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

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

Business Model 

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

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

Financial Review 

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

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

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

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

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

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

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

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

Cash Flow Statement  

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

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

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

Prospect and Challenges 

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

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

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

Rating System

Return on Equity (ROE) = Average 

Revenue [CAGR] = Poor 

Net Earnings [CAGR] = Poor 

Dividend Yield = Good 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Power Root Berhad Share Price Over 3 Years

Insight 

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

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

Disclaimers 

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

By Stella Goh – As published in Inve$t Malaysia 8 May 2020 issue

Overview 

Hup Seng Industries Berhad (HUPSENG) was founded in 1991 and is based in Kuala Lumpur. The company is one of the leading and established biscuits manufacturers in Malaysia. 

HUPSENG was listed in Main Market of Bursa Malaysia on 2 November 2000. With a strong line of established brands, “Hup Seng Cream Crackers” is well known for its excellent taste and quality which serves all consumer groups. The products have been awarded the Gold Medal consecutively for years 1994 to 2003 and Grand Gold Medal for years 2004 to 2019 awarded by Monde Selection, Belgium. It also garnered the “International High-Quality Trophy” award in 2017 and won the “25 Years Trophy” in 2018 by Monde Selection, Belgium.

In West Malaysia HUPSENG has 6 sales networks namely the Klang Valley, Kota Bahru, Kuantan, Ipoh, Butterworth and Alor Setar. There are another 7 distributors in East Malaysia located in Kota Kinabalu, Tawau, Sandakan, Kuching, Bintulu, Miri and Sibu. 

Business Model 

HUPSENG’s three main business segments are biscuit manufacturing, beverage manufacturing and a trading division. 

The biscuits range of key iconic brands include a diversified brand portfolio spanning from savory to sweet biscuits and are marketed as “Cap Ping Pong” and “Hup Seng Cream Crackers”. The “Kerk” and “Naturell” brand products are catered to upmarket consumers who prefer high-quality premium products and health conscious consumer groups. 

The beverage segment consists of wholesale coffee mix and various kinds of food stuff. HUPSENG’s beverage range marketed under the “In-Comix” brand has three main categories namely “3 in 1 Instant Coffee Mix”, “Instant Teas”, Nutritious Instant Cereal” among others.

HUPSENG’s trading division engages in the business of sales and distribution of biscuits, confectionery and foodstuff. The company offers Special Cream Crackers, Marie Biscuits, Coffee Marie Biscuits, Coconut Cookies, Butter Cookies, Peanut Butter Sandwich, Lingo Assorted Biscuits, Fancy Assorted Biscuits and many more. The company is also the distributor for other agent’s products such as “Wang Wang” rice crackers etc.

Financial Review 

HUPSENG has paid out a favourable dividend of 6sen per share each year for the past three years. The company has maintained an average dividend payout ratio of 111.73% over the past 3 financial years indicating that the company is paying out more dividend to shareholders than its earnings. And by paying out 100% of its annual net profit as dividends, it has exceeded its own dividend policy practice of paying out at least 60% of its net profit per year as dividends. (refer to Prospects & Challenges and Insight at the end of this article)

HUPSENG has achieved a consistent growth in its quality of earnings over the past 3 years (1.298 times) in FY2019 compared to 1.143 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, HUPSENG has achieved a current ratio of 1.960 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 (RM75.175 million) if any unforeseeable circumstances occur. Even though the current ratio has decreasing to the lowest in FY2019, HUPSENG still able to do so by using the current assets such as inventories, trade and other receivables, prepayments, cash and bank balances amounting to RM147.362 million. 

HUPSENG has a lower gross profit margin of 34.02% in FY2019 as compared to 35.71% in previous year. The gross profit margin is the lowest in FY2019 mainly due to the higher cost of production of RM309.539 million arising from higher and fluctuating material costs.  

Despite the crude palm oil (CPO) price averaging RM2,133 per tonne in the first half of 2019 (1H19), which was significantly lower than the average in 1H18 (RM2,442 per tonne), HUPSENG guided that it had been unable to recognize lower palm oil cost as the closure of many smaller palm oil refiners meant that large players can keep refined palm oil prices high despite lower CPO prices. It resulted in the increase in the materials cost as it is about 40% of the raw material cost made up from CPO. In Q4 2019, the economy started to slow to 3.6%, contracting to 4.3% for the full year (compared to 4.7% growth in 2018) due to lower output of palm oil, crude oil and natural gas, and a fall in exports amid the Sino US trade war.

HUPSENG has achieved the highest Return on Equity (ROE) of 27.36% in FY2019. Based on 3 years CAGR basis, the company’s Return on Equity has grown 0.46%. 

Even though the gross profit margin has decreased in FY2019, the increase in Return on Equity (ROE) can be attributed to the decrease of total equity from RM158.270 million in FY2018 to RM151.801 million in FY2019. And it is also an indication that as there is more sales produced by the company relative to its assets, the more profitable it should be and the higher the ROE it earns since it has an asset turnover ratio of 132.17%. The management of the company is seen as effective and capable in deploying the resources in the company as well. 

HUPSENG has achieved the highest Total Debt to Equity ratio of 0.543 times in FY2019 among three financial years. Even though the Total Debt to Equity ratio of HUPSENG has increased in FY2019, the company is still able to pay off its debt obligations as the Total Debt to Equity ratio based on 3 years is almost lower than half of its liabilities compared to its equity. This may also indicate HUPSENG 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 RM51.192 million in FY2019 as compared to RM45.95 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 (-RM13.696 million) in FY2019 was mainly due to the purchase of Property, Plant and Equipment (RM16.558 million) and purchase of right-of-use-assets (RM127,200). 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 (RM48.295 million) was mainly due to dividend paid on ordinary shares (RM48 million) and repayment for lease liabilities (RM294,586).

Prospect and Challenges 

FY2020 will remain a challenging year due to global protectionism, uncertainty of the US monetary policy in global economy, the unsettled Sino-US trade standoff, the slowdown of China’s economic growth as well as COVID-19 pandemic. HUPSENG plans to further strengthen its product quality, expand its product portfolio, focus on costs management and broaden its distributor network.

HUPSENG had formulated a strong advertising & promotional strategy led by bestselling and high-quality products at strategic consumer touch points in FY2020. Plans were to also be present at hypermarkets and mini markets with stepped up promotions through sampling activities. However the Extended MCO prevented all those plans from being implemented which turned out to be not a bad thing after-all. In their rush to stock up on foodstuff, consumers snapped up everything leaving empty display shelfs in every retail outlet nationwide. 

If not for the Covid-19 pandemic and MCO, the company’s sales teams often go to schools to offer sampling packs to children to allow young generation from the 90’s and 00’s to understand the company’s range of foodstuff. The company is also ready to consider entering the online market to provide greater convenience to consumers. A new cracker line is also slated to be operational by FY2020. The company also is trying out new recipes to expand its product range which should help to improve the utilisation rate of its baking lines.

In 2019, in order to have a more systematic management, HUPSENG had produced a new and upgraded version of its Mobile Sales Systems (MSS) to enhance and simplify the handling and processing of daily orders by the sales teams and enabling the sales team to perform more efficient customer relationship management through better customers’ order information, product information at anytime-anywhere to meet the company’s processing requirements. The MSS also helps to strengthen customer after-sales service and establish a strong relationship. 

Rating System

Return on Equity (ROE) = Excellent 

Revenue [CAGR] = Poor 

Net Earnings [CAGR] = Poor 

Dividend Yield = Good 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Hup Seng Industries Berhad Share Price Over 3 Years 

Insight

Based on the calculation of Gordon Growth Model, HUPSENG has an intrinsic value of RM1.133. The current share price of HUPSENG is RM0.955 which makes it in the range of fair value (as at 6 May 2020). HUPSENG has a beta of 0.515 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), HUPSENG has an expected market return of 0.79%.

In conclusion, HUPSENG is a favourite among dividend hungry investors because of its consistently strong dividend payout. However investors still need to consider a host of other factors apart from dividend when analysing a company in view of weak global economic outlook and challenges ahead. Whilst in the midst of the extended MCO, we do not know if the company’s production capacity as well as it’s delivery logistics has been affected but we can observe that biscuits and such pre-packed foodstuff were the first to fly off the shelves as soon as the MCO was announced.

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

By Stella Goh – As published in Inve$t Malaysia 30 April 2020 issue

Overview 

Wellcall Holdings Berhad (WELLCAL) was founded in 1996 and is based in Lahat, Perak. WELLCAL is involved as Malaysia’s largest industrial rubber hose manufacturer that specializes in manufacturing of rubber hose for Original Equipment Manufacturers (OEM) and manufacturers. 

WELLCAL was listed in ACE Market in 2006 and successfully transferred onto Main Market of Bursa Malaysia on 3 March 2008. Their over 20 years in the rubber hose industry and with over 40 years of industry knowledge has served a solid platform for its presence in the global rubber hose marketplace. The customer base of the company spans from Malaysia to the Middle East, Europe, USA, Canada, Australia, New Zealand, Asia, Russia, Africa and South America.

Business Model 

WELLCAL is focused on being a “One-Stop Complete Industry Hose Sourcing Center” and principally places a lot of emphasis in Research and Development (R&D) to produce a wide and diversified range of high quality and value-added industrial hose products in order to cater to a vast variety of  applications. Their hoses are used in industrial and construction sites, mining, automobile, petroleum, oil & gas, land transportation and food & beverages.

Typically the company produces and exports various types of hoses including extrusion & Mandrel built hoses, single and twin welding hoses, general and multi-purpose air & water hoses, tank truck hoses, sand blast hoses, concrete and cement hoses, food suction & delivery hoses, mining air and water hoses, marine fuel hoses and marine exhaust hoses just to name a few.

Financial Review

WELLCAL has achieved a consistent growth in its quality of earnings over the past 3 years (1.332 times) in FY2019 compared to FY2018 indicating that the operating cash flow generated from the business is more than the net income suggesting that the business has a strong cash flow and is financially sound. 

Based on the computation of liquidity ratio, WELLCAL has achieved the highest current ratio of 4.661 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 (RM16.504 million) if any unforeseeable circumstances occur. WELLCAL is able to do so by using current assets such as inventories, trade and other receivables, cash and bank balances amounting to RM76.924 million.  

WELLCAL had a higher annual total dividend per share of 5.65sen in FY2019 compared to 5.45sen in FY2018 but was lower than the 6.17sen it paid in FY2017.

Despite the total dividend per share paid in FY2019 being not the highest in 3 years, WELLCAL has been able to pay out a favorable dividend consistently. The company has maintained an average dividend payout ratio of 85.22% over the past 6 financial years. And by paying out 70% of its annual net profit as dividends, it has exceeded its own practice of paying out at least 50% of its net profit per year as dividends. 

The gross profit margin in FY2019 has increased by 13.19% compared to FY2018 mainly due to operational efficiency arising from effective costs management and productivity such as lower raw material purchase costs, better control on stockholding period and maximization of raw material usage to reduce wastage and scrap in the production processes. However the decrease of gross profit margin from 36.89% in FY2017 to 31.98% in FY2018 was mainly due to higher cost of production arising from higher and fluctuating raw materials prices. 

WELLCAL’s Return on Equity (ROE) has increased to 31.62% in FY2019 from 29.45% in FY2018 but was still lower than the 35.35% in FY2017. The company was still able to maintain the ROE at a double digit indicating that it is 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. 

WELLCAL has a decreasing Total Debt to Equity ratio of 0.187 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 based on 3 years is less than 0.5 times indicating that the company’s liabilities is less than half of its equity reflecting the company has a lower risk. 

[Note: There is no short-term debts and long-term debts incurred during FY2018 and FY2019] 

Cash Flow Statement 

The net cash from operating activities has provided a positive cash flow of RM49.035 million in FY2019 as compared to RM40.940 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 (-RM5.556 million) in FY2019 was mainly due to the purchase of Property, Plant and Equipment (RM6.202 million) and investment in associate company (RM49) attributed as share of loss in associate company. 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 (-RM27.885 million) was mainly due to dividend paid amounting to RM27.885 million. 

Prospect and Challenges 

The outlook and headwinds for the global economy remains challenging, particularly in the industrial rubber hose market. WELLCAL’s strategies are to focus on leveraging its extensive customer network, productivity, quality service and product range to enhance its competitive edge.  

WELLCAL also has initiated its product diversification into composite hoses entering a Joint Venture (JV) 51%: 49% with Sweden’s Trelleborg AB subsidiary Trelleborg Holding AB (THAB) on 15^th January 2019. The joint venture has produced Trelleborg Wellcall Sdn. Bhd with the purposes of manufacturing, marketing and selling of composite hoses and fittings to the Asean market with deliveries scheduled to begin in 2020. Typical applications for hoses in composite materials include hoses for road and rail tanker trucks, hoses for aviation fuel and hoses for aggressive chemicals. According to Jean-Paul Mindermann, the President of Trelleborg Industrial Solutions business sector, Trelleborg will contribute technological know-how in composite hoses and WELLCAL, with its operations based in Malaysia, will contribute local knowledge concerning both the market and operations.

Return on Equity (ROE) = Excellent 

Revenue [CAGR] = Average 

Net Earnings [CAGR] = Average 

Dividend Yield = Excellent 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Wellcall Holdings Berhad Share Price Over 3 Years 

Insight 

Based on the calculation of Discounted Cash Flow Model, WELLCAL has an intrinsic value of RM0.907 with a margin of safety of +11.80%. The current share price of WELLCAL is RM0.80 which makes it in the range of fair value (as at 29 April 2020). WELLCAL has a beta of 0.809 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), WELLCAL has an expected market return of 0.82%. 

In conclusion, WELLCAL is paying out more than half of its Net Profit as dividends. With the consistent dividend policy, it helps to generate investors’ confidence. However investors still need to consider a host of other factors apart from dividend payment when analysing a company in view of the weak global economic outlook and challenges ahead.

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. 

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 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. 

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. 

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 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.