Company Spotlight on Taliworks Corporation Berhad (8524)

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

Overview 

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

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

Business Model 

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

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

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

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

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

Financial Review 

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

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

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

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

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

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

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

Cash Flow Statement 

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

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

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

Prospect and Challenges 

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

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

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

Rating System 

Return on Equity (ROE) = Poor 

Revenue [3 Years CAGR] = Average 

Net Earnings [3 Years CAGR] = Average 

Dividend Yield = Good 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Taliworks Corporation Berhad Share Price Over 3 Years 

My Insight 

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

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

Disclaimers 

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

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

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

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

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

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

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

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

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

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

FBM KLCI

Company Spotlight on SKP Resources Berhad (7155)

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

Overview  

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

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

Business Model 

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

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

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

Financial Review

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

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

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

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

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

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

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

Cash Flow Statement 

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

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

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

Prospect and Challenges 

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

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

Rating System

Return on Equity (ROE) = Good 

Revenue [3 Years CAGR] = Excellent 

Net Earnings [3 Years CAGR] = Average 

Dividend Yield = Poor 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

SKP Resources Berhad Share Price Over 3 Years

My Insight 

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

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

Disclaimers 

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

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

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

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

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

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

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

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

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

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

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

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

FBM KLCI

Company Spotlight on Kotra Industries Berhad (0002)

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

Overview 

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

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

Business Model 

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

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

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

Financial Review

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

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

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

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

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

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

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

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

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

Cash Flow Statement 

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

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

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

Prospect and Challenges 

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

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

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

Rating System

Return on Equity (ROE) = Average 

Revenue [3 Years CAGR] = Poor 

Net Earnings [3 Years CAGR] = Excellent 

Dividend Yield = Average 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Kotra Industries Berhad Share Price Over 3 Years

Insight 

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

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

Disclaimers 

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

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

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

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

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

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

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

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

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

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

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

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

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

Company Spotlight on Power Root Berhad (7237)

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

Overview 

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

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

Business Model 

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

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

Financial Review 

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

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

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

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

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

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

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

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

Cash Flow Statement  

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

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

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

Prospect and Challenges 

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

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

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

Rating System

Return on Equity (ROE) = Average 

Revenue [CAGR] = Poor 

Net Earnings [CAGR] = Poor 

Dividend Yield = Good 

Interest Coverage = Excellent 

Quality of Earnings = Excellent 

Power Root Berhad Share Price Over 3 Years

Insight 

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

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

Disclaimers 

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

Bank Negara Malaysia cuts another 50 basis points and lowers overnight policy rate to 2%

Sub-Title: 
Malaysia’s economy in 2020 could shrink more than initially forecast …. Finance Minister

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

Last Friday (1May), PM Tan Sri Muhyiddin Yassin announced that on Monday (4May) Malaysia will move to Conditional MCO and will reopen nearly all businesses but under strict health standard operating procedures (SOP). This is to help steer the economy recover after having lost almost RM63 billion due to the Covid-19 pandemic. However not all sectors are open so as to better manage the movement of people within a short time. During the MCO, Muhyiddin said Malaysia had absorbed losses of RM2.4 billion each day.

On Monday (4May), the FBM KLCI shed 31.19 points or 2.22% to 1376.59 points from previous Thursday’s close of 1407.78 as investors weighed the prospect of a renewed US-Sino trade tension and the on-going spat over the origin of the Covid-19 virus. The FBM KLCI continued to shed 12.62 points from 1389.55 on Tuesday (5May) to 1376.93 on Wednesday (6May). Meanwhile the headline HIS Markit Malaysia Manufacturing Purchasing Manager’s Index (PMI) has slumped to 31.3 in April from 48.4 in March. 

On Tuesday (5May), Bank Negara Malaysia cut its Overnight Policy Rate (OPR) by 50 basis points (the third reduction) with a total of 100 basis points cut to 2% since starting the year to ease the pain of the Covid-19 impact. According to Bloomberg, it is the lowest level since 2.5% in 2010 according to 14 of 20 economists surveyed.

According to Moody’s Investors Services, banks will be facing a sharp deterioration in asset quality and reduction in profitability from already low levels, while central banks are providing remarkable amounts of liquidity as the government’s strong incentives to support banking systems. The banking institutions may use Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) to meet statutory reserve requirement (SRR) effective from May 16 until May 31, 2021. BNM will effectively release RM16 billion worth of liquidity into the banking system. The SRR ratio remains unchanged at 2%.

According to Bank Negara Malaysia, the domestic financial markets saw non-resident portfolio outflow totalling RM17.7 billion (US$4.1 billion) in March as risk sentiments intensified amid heightened uncertainties on the severity of COVID-19 pandemic impact on the economy. The global risk aversion remained elevated despite the large-scale monetary and fiscal stimulus measures introduced worldwide as funds sought safety in more liquid assets such as cash and US Treasury securities. 

According to Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz, Malaysia’s economy in 2020 could shrink more than initially forecast due to extended curbs on movement imposed to stem an outbreak of Covid-19. Malaysia’s central bank had forecast in April for growth in gross domestic product (GDP) of between -2% and 0.5% this year. 

According to the Department of Statistics Malaysia, Malaysia’s exports fell 4.7% Y-o-Y in March to RM80.1 billion, mainly driven by a decline in exports of electrical and electronics products. Similarly imports also fell 2.7% Y-o-Y to RM67.8 billion in March. Total trade in March was at RM147.9 billion, a 3.8% Y-O-Y decline whereas the trade surplus, compared to a year ago, shrank by 14.2% to RM12.3 billion.

This week, on Thursday (7May) the Ringgit was 4.3241 against USD from 4.3161 on Monday (4May). As at Friday (8May) 10:00 am, the FBM KLCI was at 1384.53

Company Spotlight on Hup Seng Industries Berhad (5024)

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

MCO restrictions to be relaxed further under Phase 4

Sub-Title:  
Short selling temporary ban extended another two months by SC & Bursa 

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

On Tuesday (28Apr), the FBM KLCI edged up higher by 2.04 points to 1372.20 from Monday’s close of 1370.16 after the International Trade and Industry (MITI) Minister Datuk Seri Mohamed Azmin announced that all the economic sectors allowed to operate at half capacity during phases 1, 2 & 3 of MCO are allowed to conduct business at full capacity with effect from Wednesday (29Apr). And Chairman of special Cabinet Committee Datuk Seri Ismail Sabri has said that under Phase 4, MCO restrictions will be relaxed to allow people to go out in pairs beyond 10km but person accompanying must be a family member and must still have good reason to go out together. 

The Securities Commission Malaysia (SC) and Bursa Malaysia announced that the temporary suspension of short selling on Bursa, which initially was targeted to end on April 30, has been extended to June 30. Both SC and Bursa will continue to monitor the developments affecting the securities market while evaluating the adequacy of existing measures to support an orderly market and mitigate any potential risks.

According to Reuters, the Brent crude fell below $20 a barrel and U.S crude plunged 25% on Monday (27Apr), driven lower by skittish investor fleeing the U.S. benchmark due to lack of available storage to deal with a coronavirus-induced collapse in demand. The economic concerns continue to plague the oil market as the global economic output is expected to contract by 2% this year which will be worse than the financial crisis while global demand is expected to collapse by 30% due to the Covid-19 pandemic. 

According to MIDF Research, foreign selling of local equity on Bursa Malaysia surged to RM1.13 billion last week from RM638.6 million the week before. Bursa started the week seeing foreign investors pull out RM215.4 million net of local equities despite news that China slashed its benchmark lending rate for the second time this year to boost the nation’s economy. And amid reports that Gilead Sciences Inc’s potential antiviral drug for the Covid-19 had failed in its first randomised clinical trial, the foreign net outflow grew to RM240.6 million on Friday (24Apr).

According to the Moody’s Analytics, Malaysia is currently facing several challenges in continuing its growth trajectory, despite having made commendable progress over the past four decades. The challenges include income inequality, which is a growing issue among Malaysia’s states, particularly between the richer manufacturing hubs and states that rely on agriculture and other natural resources like palm oil and mining. However Malaysia is moving towards diversifying its economy through services such as tourism and Islamic banking. Malaysia needs to adapt to broader trends as being a net exporter of petroleum and palm oil, it is heavily dependent on volatile commodity prices and vagaries in global demand.

This week, the Ringgit was USD to 4.3437 on Wednesday (29Apr) from 4.3580 on Monday (27Apr). Also this is a short week with Friday (1May) being a Labour Day holiday, the KLCI on Thursday (April 30) at 10am was up 13.2% at 1395.24.


FBM KLCI