Analysis

Analysis of Superlon Holdings Bhd

Dear Readers

Ever thought something as simple as thermal insulators could be such a profitable business. To understand why, we shall delve into what makes Superlon Holdings Bhd (“Superlon“) tick.

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Credit: Superlon
Overview

Superlon is principally a manufacturer of, among others, high quality nitrile butadiene rubber (synthetic rubber) thermal insulators (“NBR“). NBR is mainly used in Heating, Ventilation, Air Conditioning and Refrigeration systems (“HVAC&R“) in residential, commercial and industrial buildings.

Superlon’s focuses on the premium segment in terms of quality of its manufactured thermal insulators. Superlon branded those products as its namesake.

The majority of its clients are product distributors and sales agents. You can also find Superlon’s products sold on Alibaba.

Superlon’s secondary activity is the trading of HVAC&R components, The earnings from trading is nominal and will not be mentioned in this write-up.

Manufacturing of thermal insulation

Insulation is extremely effective at saving energy. The science behind insulation is rather simple; to stop heat transfer.

Imagine turning on the water heater on a cold winter’s night. When hot water runs through the pipes, heat from the hot water dissipates because the hot water pipes are exposed to the cold environment. Energy is then wasted.

On the other hand, in a tropical climate, such as the one in Malaysia, insulation works the other way around – by keeping heat from affecting air conditioning or refrigeration systems. That way, the air conditioning compressors do not have to work harder to keep the air cold. A thermal insulator will also prevent air conditioning or refrigeration pipes from sweating (or condensation) by preventing hot air to come into contact with the cold pipes. This prevents water damage to building structures, furniture and machineries.

These are a couple of scenarios where thermal insulators are utilised to achieve energy savings and to prevent condensation.

Energy savings, although may not seem much at first glance but at a grander scale, such as air conditioning or refrigeration systems in shopping malls, hotels, airports, mega factories or cruise liners, thermal insulators take on a much impactful role.

Superlon diversifies production, from thermal insulators to exercise mats (yoga mats) and acoustics insulators. If you are unsure of what an insulation foam is, have a feel of a yoga mat.

Superlon’s thermal insulators have a market share of about 50-60% in Malaysia. Its major export markets are Asia, North America, Europe, Oceania and more recently, Africa. Major markets in Asia include India and Vietnam.

Its manufacturing site is located at Klang, Malaysia.

On top of that, Superlon also sells adhesives, copper tubes, compressors, refrigerant gas, vacuum pump, fan motor and a variety of temperature and gas detectors.

Financials
DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 106,269 90,411 74,509 61,787 59,959
PROFIT (RM’000) 23,715 16,660 9,381 5,851 4,098
OPERATING PROFIT (RM’000) 30,379 21,555 12,845 8,047 4,471
SHAREHOLDERS’ EQUITY (RM’000) 107,989 89,444 79,940 59,062 55,766
DEBT (RM’000) 36,093 20,153 17,485 13,946 13,093

RATIO

DEBT TO EQUITY RATIO 0.33 0.23 0.22 0.24 0.24
OPERATING PROFIT MARGIN 0.28 0.23 0.17 0.09 0.07
OCF RATIO 0.76 1.78 1.19 1.01 1.20
PROFIT MARGIN 0.22 0.18 0.12 0.09 0.06
EPS (CENTS) 29.87 20.98 11.81 7.34 5.19
EPS (ADJUSTED) CENTS 14.82 10.41 5.86 3.66 2.56
DPS CENTS 11 9 8 3.3 1.8
DIVIDEND PAY OUT (%) 36.8 42.9 67.7 45.0 35.6
P/E 11.38 9.39 10.33 8.72 6.74
ROE 21.96 18.62 11.73 9.91 7.35

Over the course of 5 years, there was a significant improvement in areas such as: turnover (revenue), profit, profit margin, dividend and cash flow (OCF ratio).

In 2013, Superlon achieved a profit margin of 6%. Fast forward to 2017, that profit margin increased exponentially to 22%. Concurrently, return on equity also increased threefold.

The factors which contributed to the increase in earnings and revenue were increased sales volumes, the weakening of Ringgit Malaysia, lower raw material costs and increasing production efficiencies (economies of scale).

The major raw materials which make up the production of NBR are acrylonitrile and butadiene. The price of both raw ingredients intertwines with the price of crude oil. Therefore, a low and stable crude oil price will translate to lower raw material costs.

During the years under review, earnings per share increased at a growth rate of 41%. That is phenomenal.

To keep up with demand and production, Superlon started the construction of a warehouse in 2016. The warehouse is now in operations. The construction of the warehouse hopes to alleviate the production bottleneck caused by the lack of storage space in Superlon’s factory. The freed up space in the factory will be utilised for the installation of more production lines. This is expected to add to its manufacturing capacity by an additional 30%.

Potentials

Superlon is in the midst of erecting a new factory-cum-warehouse in Vietnam. This is Superlon’s first overseas production plant and is expected to commence operations in the first half of FY19 (1H FY19). Not much details are available about the said production plant except that the company is set to invest about USD4 million to its setting up.

An expansion to Vietnam makes so much sense it is already one of Superlon’s major export markets and is geographically closer to Superlon’s other export markets, such as India and the cluster of South East Asian countries. In addition, the cost of doing business in Vietnam is well below that of Malaysia due to its lower wage level.

Conclusion

I like Superlon for:

  1. Increasing its earnings at an incredible rate.
  2. Tapping export markets such as Vietnam and Africa.
  3. Strong research and development (extended product range to acoustic insulators).
  4. Capital expenditure on the construction of a warehouse in Klang and a manufacturing site in Vietnam.

Superlon is unattractive for the following factors:

  1. Share price has increased about 165% from a year ago.
  2. Affected by the volatility of raw material price (crude oil) and currency fluctuation.
  3. Capital expenditure in Vietnam may not be a fruitful venture.

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

Disclosure

I do not own any shares in Superlon.

 Reference
  1. 2016 Annual Report
  2. Q4 FY2017 Quarterly Report
  3. http://www.superlon.com.my
  4. http://economictimes.indiatimes.com/markets/commodities/fall-in-crude-oil-prices-fails-bring-cheer-for-synthetic-rubber/articleshow/50554238.cms
  5. http://www.theedgemarkets.com/article/superlons-profit-attributed-higher-volume-better-margins
  6. http://www.theedgemarkets.com/article/attractive-valuation-superlon
  7. http://www.theedgemarkets.com/article/superlons-new-facility-boost-its-production-rate
  8. http://www.theedgemarkets.com/article/superlon-hits-alltime-high-solid-fy17-positive-fy18-earnings-forecast
  9. https://markets.ft.com/data/equities/tearsheet/summary?s=SUPERLN:KLS

 

 

Analysis

Analysis of Three-A Resources Bhd

Dear Readers

Three-A Resources Bhd (“3A“) is a manufacturer of halal and kosher (Jewish) certified food and beverage ingredients such as:

  1. Caramel colour, a food colouring.
  2. Natural Fermented Vinegar such a rice and distilled vinegar.
  3. Hydrolised Vegetable Protein/Soya Protein Sauce which is pretty much soy sauce.
  4. Glucose/maltose syrup.
  5. Maltodextrin, a thickener like starch which is used in food and beverage.

3A’s main operating site is in Sungai Buloh, Selangor.

subsidiary_sssfi
Credit: 3A
Financials
DATA 2016 2015 2014 2013 2012
REVENUE (RM’000) 387,718 352,400 311,410 302,910 306,428
PROFIT (RM’000) 38,921 20,082 18,214 10,316 17,638
OPERATING PROFIT (RM’000) 60,493 38,636 33,768 23,113 26,563
SHAREHOLDERS’ EQUITY (RM’000) 279,435 248,171 231,825 219,031 213,754
DEBT (RM’000) 60,142 70,948 47,824 73,748 100,894
RATIO
DEBT TO EQUITY RATIO 0.21 0.28 0.21 0.34 0.47
OPERATING PROFIT MARGIN 0.15 0.11 0.11 0.07 0.09
OCF RATIO 2.33 0.14 1.64 1.11 0.03
PROFIT MARGIN 0.10 0.06 0.06 0.03 0.06
EPS (CENTS) 10.00 5.10 4.60 2.60 4.50
EPS (ADJUSTED) CENTS 7.91 4.08 3.68 2.10 3.23
DPS CENTS 1.80 1.40 1.40 1.20 1.20
DIVIDEND PAY OUT (%) 18.0 27.4 30.4 46.1 26.7
P/E 13 20 19 32 24
ROE (%) 13.9 8.09 7.86 4.71 8.25

FY2016 was reportedly the best performing financial year of the company since being listed in 2002. 3A recorded a revenue of RM387 million as compared to RM352.4 million, in FY2015. That is an increase of 9%. Generally, the revenue trend is increasing over the years.

Of the total revenue for FY2016, 33% was derived from export sales which includes Singapore (10%). The remainder 67% of sales was derived from the local market.

Profit in FY2016 (RM38 million) increased 90% as compared to FY2015 (RM 20 million). Following the strong profit uptrend, earnings per shares also rose in tandem with higher revenue and increased profit margin. In fact, profit margin rose from 6% in FY2015 to 10% in FY2016. That is a tremendous increase of 60%. Further, the increase in earnings per share is validated with the increase in return of equity.

According to the Annual Report for FY2016, the main reason for the surge in profitability and profit margin is due to targeted pricing strategy employed by 3A. The company targeted high value customer to get better margins and profits. A higher operating margin (15%) in FY2016 (compared to 11% in FY2015) also indicates that management was effective in in keeping costs in check.

Suppose if 3A keeps up the trend of increasing profits and lowering costs (the fundamentals of a business), I am confident that this year’s profit will see an improvement from FY2016.

Potentials

Not letting success to invite complacency, 3A continued to invest in the business by initiating capital expenditures such as the construction of an additional maltodextrin plant namely Maltodextrin Plant No.3. This project is tagged as a growth driver for 3A in the near future and it is funded purely from internal funds. Maltodextrin Plant No.3 will add another 2,200 metric ton of maltodextrin a month and will bring the overall capacity of maltrodextrin production to 5,500 metric ton per month.

As of May 2017, Maltodextrin Plant No.3 is at 25% capacity and that capacity is expected to rise.

The management of 3A has also earmarked RM40 million for capital expenditure for FY2017 and FY2018. About RM17 million will be used to acquire 2 pieces of land for future plant expansion.

Conclusion

I like 3A for:

  1. Its involvement in the food business. The saying in the food business has always been “Everybody’s gotta eat.”
  2. Increasing the capacity of Maltodextrin.
  3. Sound financials.
  4. High earnings growth rate of about 19% CAGR by my calculations or about 20% CAGR as calculated by FT.

3A is unappealing because:

  1. In 2010, 3A partnered with Yihai Kerry Investment Co Ltd, a subsidiary of Wilmar International Limited,  to set up a factory in Shanhaiguan, China, to manufacture food and beverage ingredients. The collaboration is still suffering losses to the tune of  RM7.3 million in FY2015 and RM5.8 million in FY2016. Losses are expected for another 3-4 years because the products are getting a slow response from consumers in China.
  2. The directors of 3A are being charged for insider trading in relation to the joint-venture with Yihai Kerry Investment Co Ltd. Corporate governance is definitely put in the spotlight.

Notwithstanding the negatives, my take is that at its current price of RM1.35, 3A is trading at a bargain. Hence, this counter is on my watchlist.

As for the cherry on top, Three-A Resources Bhd is a pretty dull name for a company and there is no coverage of this company by any research houses. These traits fit into the investment philosophy propounded by Peter Lynch (not a joke).

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

Reference

  1. FY2016 Annual Report
  2. http://www.three-a.com.my/bursaAnnouncements/files/2017/2017-5-11-3A-AGM-Summary%20of%20Key%20Matters.pdf
  3. https://markets.ft.com/data/equities/tearsheet/financials?s=3A:KLS
  4. http://www.theedgemarkets.com/article/3a-and-wilmar-begin-partnerships-china
  5. http://www.thesundaily.my/news/2015707
My Journey

July 2017 Report Card

Dear Readers

The Feds’ decision to keep interest unchanged in July 2017 is a step in the right direction to quell the possibility of a recession. This means that cheap money is here to stay. By no means this is sustainable because a debt-fueled economic expansion will give way as soon as signs of inability to service debts appear. Do be weary of this.

market-roller-coaster
Courtesy of fxempire

I’ve made major changes to my portfolio since the last month by adding Evergreen Fibreboard Bhd and selling Maxis Bhd (for a -2% loss), Elsoft Research Bhd (for a 42% gain) and Kronologi Asia Bhd (for a 40% gain) for various reasons including profit-taking and to consolidate my portfolio.

The reasoning behind the purchase of Evergreen is that I’m sold by its turnaround plan which has already been implemented and is currently undergoing commercial operations. As for Elsoft and Kronologi, even though I have offloaded them, I still believe that the fundamentals of both these companies are still very much intact. In fact, Kronologi latest quarterly report showed an increased earnings of 140% than the reported earnings in the corresponding quarter a year ago.

Currently, my portfolio stands as follows:

Airasia Bhd – 17.22% gain

CIMB Group Holdings Bhd – 26.72% gain

Ekovest Bhd- 8.95% loss

Evergreen Fibreboard Bhd – 3.57% gain

Samchem Holding Bhd – 10.70% loss

I’m not too concerned about Ekovest and Samchem. I believe both companies will pose better earnings in the future. In fact, I’m considering purchasing more of Samchem, on a bargain.

In the aggregate, my portfolio advanced 1.5%, from a 23% gain in June 2017 to 24.5% gain, this month.

31 July 2017 is the Evergreen’s ex-date for a 2 cent dividend which is to be paid on 18 August 2017. At an average price of RM0.868 per share, that equates to a dividend yield of 2.3%.

Until next month.

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

Thoughts

P2P financing update

Dear Readers

In my last article, Who’s afraid of P2P financing?, I shared about my initial experience of P2P financing through Funding Societies Malaysia. So, if you haven’t read Who’s afraid of P2P financing?, I strongly suggest you give it a go.

lending-01-5
Credit Yourstory.com

Now, not everyone has the appetite for the volatility of equity investment (shares investing), and its derivatives. But, at the same time, I am sure most of us are seeking other investments which may yield better returns than conservative investments such as fixed deposit and bonds. This is because we are living in a low interest rate environment ever since the last global financial crisis in 2008. Interest rate in Malaysia, although higher than most developed economies such as Japan, USA and Europe, has remained stagnated since 2008. Low interest rates couple with higher inflation will see your hard-earned savings slowly diminishing, in terms of purchasing power.

Between 2008 and 2016, fixed deposit in Malaysia,  on average, yields a measly 2.85%.

deposit rate malaysia

Exacerbated by a rising inflation rate since the beginning of 2017, which has been hovering around 4% mark and hit a high of 5% in March 2017, higher inflation rate may have nudged us to look elsewhere for higher yields other than the low return generated by fixed deposits.

As for me, I only maintain a minimum amount in fixed deposit for a rainy day. My logic is simple; putting too much money in cash is not going to benefit me in the long run.  In fact, it may be detrimental. Hence, this is where P2P financing comes into the picture as it provides an opportunity to achieve a balance between a manageable risk and considerable return.

So, let’s get down to it.

What is your experience of P2P financing with Funding Societies Malaysia?

I am pleased to report that I have received my first monthly return from a crowdfunding which began in May 2017. I have made an initial test investment of RM1,000.00 in a crowdfunding exercise which raised RM1 mil for a small and medium-sized enterprise (“SME“). I did this after satisfying myself of the viability of the venture by carefully reading the investment fact sheet provided by Funding Societies Malaysia (think of it like a product disclosure statement).

Funding Societies Malaysia also performs stringent due diligence and credit assessments to sift out SME with bad creditworthiness – like how any banks would conduct themselves before approving a financing facility.

In this particular crowdfunding exercise, the investment tenure is for 6 months with an interest rate of 10% per annum. That is effectively, 5% interest over the course of 6 months (excluding service fee). Some crowdfunding exercise may yield up to 16% per annum (even after deducting service fee).

Screenshot_20170717-222827

So for July 2017, I received RM174.99 from the investment, of which, RM166.66 is principal and RM8.33 is the interest (or the yield). RM1.74 (or 1% of investment) is deducted from RM174.99, as service fee for Funding Societies Malaysia, thus leaving me with a balance of RM173.25.

A thing which I am particularly fond about P2P financing is that the money received from the instalment repayments can be reinvested, in another crowdfunding exercise, as soon as it is made available to me. In other words, if there is an available crowdfunding exercise (there are about 2-3 crowdfunding exercises per month on average), I can reinvest my balance of RM173.25 through Funding Societies Malaysia. Hence, I am constantly generating income, as I should, because inflation never sleeps.

In my case, a yield of 10% per annual (excluding service fee) is handsome and definitely ample to tackle a rising inflation.

How would you rank P2P financing against fixed deposits and bonds in terms of yield?

Because P2P financing via Funding Societies Malaysia could potentially yield up to 16% of interest per annum (after deducting service fee), it has a return which is much higher than that of fixed deposits and most investment grade bonds (the AAA or AA-rated bonds).

See, by taking on an acceptable risk, you could be in a position to potentially receive a yield of about 4-5 times higher than that of the yield from a fixed deposit.

How does P2P financing stack up against investment in the share market (equity)?

P2P financing is an investment in debt as oppose to an investment in shares (equity). Hence, it has zero correlation with the performance of the share market. In spite of that, the yield from P2P financing is comparable with the yield from investing in the share market, which averages to about 7-10% per annum, in the long run.

Furthermore, P2P investing is definitely a suitable investment for those who cannot stomach the volatility of the stock market (like my mum) or for those looking to balance their portfolio with some high-yield debt investing (like me).

As an investor, I can truly appreciate the element of certainty of the return from P2P financing. For example, I know beforehand the return of investment which I will be getting from the get-go.

Conclusion

P2P financing is definitely a strong contender to other conservative investment such as cash or bonds. On the other hand, equity investors could also benefit from a high-yield diversification into P2P financing.

Like any other investments, the element of risk is inevitable and should be accepted as part and parcel of investing. With proper risk management, the risks involved in P2P financing can be greatly reduced.

In my next write-up about P2P financing, I will share some considerations which I personally make before investing in a particular crowdfunding exercise. Such consideration is part of my risk management strategy which I hope will be useful to you.

So how do you find P2P financing? Do drop me a comment.

Until then.

Helpful links

Click the link if you would like to know more about Funding Societies Malaysia.

Click on this special LINK should you would wish to sign up and create an investor’s account with Funding Societies Malaysia.

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

Analysis

Analysis of Evergreen Fibreboard Bhd

Dear Readers

Today, we look into Evergreen Fibreboard Bhd (“Evergreen“).

Introduction

Evergreen is, for all intents and purposes, a manufacturer of medium density fibreboard (“MDF“), so much so that MDF accounted to 80% of Evergreen’s revenue in FY2016. Other than MDF, Evergreen also produces particle boards (“PB“) (15% of FY2016’s revenue) and ready-to-assemble furniture parts (“RTA“) (5% of FY2016’s revenue).

1file__081205082919

The main raw materials in the production of MDF are rubber wood, derived from rubber trees, and resins, an adhesive substance. MDF is produced by binding the fibres, which have been chipped off from rubber wood, with resins, and to be pressed together to form a piece of board with varying thickness.

20170702_125954-e1498974393343.jpg
Particle board used to make my study table drawer

Evergreen has about 8 operation sites located in Malaysia (Johor, Negeri Sembilan and Kedah), Thailand and Indonesia. Resins are produced in Batu Pahat, Johor, and Gurun, Kedah.

The main markets of Evergreen’s products are ASEAN countries and the Middle East. Other notable markets include the USA, Europe and Far East Asia.

Financials

DATA 2016 2015 2014 2013 2012 2011
REVENUE (RM’000) 997,795 1,012,017 941,994 938,670 1,031,662 1,061,668
PROFIT (RM’000) 71,679 90,904 170 -42,776 32,170 63,602
OPERATING PROFIT (RM’000) 100,228 118,941 16,367 -35,147 40,272 76,830
SHAREHOLDERS’ EQUITY (RM’000) 1,124,019 1,038,285 801,655 786,172 825,820 818,710
DEBT (RM’000) 408,804 377,171 439,077 478,187 505,488 476,545

 RATIO

DEBT TO EQUITY 0.36 0.36 0.54 0.61 0.61 0.58
OPERATING PROFIT MARGIN 0.10 0.12 0.017 N/A 0.039 0.07
OCF RATIO 0.86 0.44 0.26 0.11 -0.10 0.50
PROFIT MARGIN 0.07 0.09 0.00 N/A 0.03 0.06
EPS (CENTS) 8.7 17.6 0 -0.01 6.3 12.4
EPS (ADJUSTED) CENTS 8.4 10.9 0.02 N/A 3.8 7.51
DPS CENTS 2 1 0 0 4 0
P/E 11.1 13.4  

2016.7 (this is not an error)

N/A 9.3 7
ROE (%) 6.3 8.8 0.02 N/A 3.9 7.8

Between FY2011 and FY2016, Evergreen’s top line was flat; never far off from the RM1 billion mark. In the same period, operating profit margin, profit margin and EPS were a hit-and-miss. Only in FY2015 did Evergreen perform exceptionally well as prices of resin and rubber wood were low and therefore contributing to an increase in earnings.

The severe monsoon, at the tail-end of 2016, which ravaged most of Indonesia, Malaysia and Southern Thailand, had disrupted production of rubber wood and caused prices of rubber wood to soar thus reducing profits. As a result, earnings were lower in FY2016, as compared to FY2015, and the spill over from such also affected Evergreen’s earnings for Q1 FY2017 (the last quarter). The lukewarm earnings were reflected in Evergreen’s share price, which tumbled from a high of RM1.12 in October 2016 to about RM0.870.

Adverse weather affected not only Evergreen but other wood-based furniture players too. In anticipation of a reduction in rubber wood supply, caused by the last monsoon season, Evergreen, prior to the monsoon season, increased its inventory of rubber wood. However, such mitigation is limited in its effectiveness because rubber wood can generally be stored up to about 3 months after being harvested.

Even though adverse weather is a matter of concern, I reckon the main grievances faced by Evergreen is the lack of a growth impetus as its top line growth has become stagnated over the years.

Potentials

Evergreen reckons that the antidote for a stagnated growth is a major restructuring exercise, which it has executed in phases, since 2015.

On top of capital expenditure, to upgrade plants and equipment and increasing production lines, the company has also initiated cost-cutting measures, which resulted in the closing down of non-performing operation sites, such as a MDF operation site in Masai, Johor.

While the Masai operation area is being stripped down, and eventually, to be put on sale, the equipment and plants from Masai will be relocated to Evergreen’s Segamat operation site. Segamat, which houses Evergreen’s PB production, has undergone refurbishment to accommodate the receipt of equipment and plants from Masai. Furthermore, the current PB production line in Segamat has been upgraded and modernized to include the installation of Dieffenbacher pressing line from Germany. Dieffenbacher pressing line aims to:

  1. substantially increase production of PB from 120,000 cubic metres per annum to potentially 550,000 cubit metres; and
  2. allow the production of PB of less than 10mm in thickness, which Evergreen was unable to produce before.

Having MDF and PB productions integrated under one roof would mean that wastage from the production of MDF could be used in the production of PB. This leads to less wastage in totality.

PlywoodVsMDF-e1478442569522

The relocation, refurbishment and upgrading is expected to reduce processing time and increase production capacity.

Another benefit of the restructuring is to enable Evergreen to diversify away from MDF production. Evergreen intends to increase production of value-added products which entails RTA lower-end furniture. This can be seen from its investment in additional RTA production lines which will see commercial action in 2H 2017. The increase in PB production (which is the basic component of RTA lower-end furniture) will synergise with Evergreen’s plan to increase RTA furniture production.

Conclusion

I am liking the potential that will ooze from the restructuring program. I reckon higher profit margin could be obtained by increasing the production capacity of RTA furniture, which is where Evergreen is heading. With existing expertise in RTA furniture production, I expect that an increase in RTA furniture production will contribute positively to its earnings in the future due to better profit margin in RTA furniture.

As if nothing else can be more favourable to Evergreen, the Malaysia government announced that, as of 1 July 2017, all export of rubber wood from Malaysia will be banned. This aims to curb the shortage of supply of local rubber wood and its effect is expected to lower the price of rubber wood. Ultimately, Evergreen’s increased production capacity in Malaysia will benefit from such policy.

Evergreen is not without its negative. Concern is warranted especially with the economic slow down in the Middle East, the biggest contributor to Evergreen’s revenue. The low crude oil price environment (the new norm), although benefits Evergreen,  in decreasing the production cost of resins (the second largest cost component after rubber wood), will affect the sales of Evergreen’s products in that region.

There is also mixed economic data coming out of the USA which points to a economic slowdown, albeit positive outlook in Europe and Japan. Also exacerbating the whole situation is the Feds’ adamant stance of hiking interest rate at a time of economic weakness.

Disclosure

I am holding shares in Evergreen.

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

Reference:

  1. FY2016 annual report
  2. Q1 FY2017 report
  3. http://www.displays2go.com/Guide/Comparing-Building-Materials-Particle-Board-MDF-Plywood-17
  4. http://www.dieffenbacher.de/en/company/public-relations/news/holzwerkstoffe/dieffenbacher-sells-two-plants-to-asia.html
  5. http://www.woodbizforum.com/malaysian-allgreen-ordered-a-new-particle-board-plant-from-dieffenbacher/
  6. http://www.thestar.com.my/business/business-news/2016/05/23/evergreen-fibreboard-aims-to-be-among-top-10-in-the-world/
  7. http://www.theedgemarkets.com/article/evergreen-fibreboard-1q-profit-falls-489-due-floods
  8. http://www.theedgemarkets.com/article/earnings-prospects-intact-evergreen-fibreboard-says-hlib-research
  9. http://www.thestar.com.my/business/business-news/2017/04/10/evergreen-fibreboard-diversifies/
  10. http://www.thestar.com.my/news/nation/2017/06/30/govt-to-ban-rubberwood-export-cabinets-decision-is-to-address-shortage-of-raw-material-says-dr-wee/
My Journey

June 2017 Report Card

Dear Readers

This month’s portfolio does not differ much from last month’s except for the addition of Samchem Holdings Bhd (“Samchem“), purchased at a premium of RM1.002 per share, and Maxis Berhad (“Maxis“) which was purchased on 30 June 2017.

The purchase of shares in Samchem and Maxis is an attempt to diversity my portfolio with less volatile counters.

AR-170629984
Salvaged most of the losses in May

A mistake may have been made with Samchem. My indicative fair value for Samchem would be about RM0.80 to RM0.85, according to my calculations which I had before I wrote Analysis of Samchem. Instead of being vigilant, I let my lackadaisical discipline, coupled with the fear of missing out on an uptrend, get the better of me. So like any other idiot, those shares were bought, at the peak, and has since retreated a bit.

As at 30 June 2017:

Airasia – 18.3% gain

CIMB – 34.5% gain

Ekovest – 3.4% loss

Elsoft – 35.9% gain

Krono – 35% gain

Maxis – 0.9% loss

Samchem – 8.7% loss

In spite of that, the portfolio’s return of investment is about 23%, partly contributed by the dilution of returns from the injection of additional funds last month. Overall, June has turned out to be a better month than May, if I may say so myself.

Thank you for reading.

Thoughts

Stock watchlist

Dear Readers

It’s almost the end of June. What an interesting month on Bursa. Market volatility started warming up after the Trump-Comey scandal; another Watergate in the making which will unlikely result in an impeachment.

After that, the market got hit when the Feds decided to hike interest rate. Even though this was expected, the effects of such rate hike has dented the mood on Bursa. There is a likelihood that foreign funds may decrease their exposure in the Malaysian equity market.

However, let’s not be swayed by things which are out of our control. Remember, the Malaysian economy is doing fine and if you are investing in a company with good fundamentals, there is nothing which you should be concerned about.

This brings up to the purpose of this write-up. There are companies which are fundamentally sound but are suffering minor hiccups every now and then either because their earnings are below market’s expectation, their businesses are affected by external factors i.e. hike in prices of commodities, purely market sentiment or a combination of all or any of the said factors. Yet nothing has changed, at the core of their businesses, which warrants concerns.

cropped-derivative-analysis

Today, we will look into 4 companies which have fallen out of favour by the market in recent time. This is not a recommendation, or anything of that sort, to be acted upon. Treat this write-up as an idea and rely on your own research.

  1. Maxis. From a high of RM6.60 in May and to a low of RM5.60; that translates to a 17% discount on Maxis Bhd’s share price. Partly to be blamed is a tighter competitive environment between the telcos, caused by price wars, and Maxis’ more recent private placement of newly issued 300 million shares which raised about RM1.66 billion. The fund raising will be used to pare down its borrowings. This of course raised the concern of share dilution which in turn affected its share price.
  2. BjFood. Berjaya Food Bhd posted its maiden loss in its last quarterly report for the first time ever since it went public. Earnings were dragged by the closures of non-performing Kenny Rogers Roasters (“KRR“) restaurants which resulted in an impairment to its earnings. Its Starbucks business remains the only growth impetus. This can be seen from its top line growth (revenue) which grew at a stupendous rate of about 9% from FY2016 to FY2017 notwithstanding the drag from KRR. BjFood share price looks enticing @ about RM1.55 from a high of RM1.90 in May 2017. That is a 22% drop. I reckon that the company will be more profitable if it runs a pure Starbucks business. However until that day comes, expect earnings to be unexciting. Regardless of the setbacks, Vincent Tan was not perturbed from accumulating about 4.6 million shares since 29 May 2017. For more information about the company, please refer to my analysis of BjFood.
  3. Malakoff. Malakoff Corporation Bhd is like a bleeding hemorrhoid that never stops bleeding. Malakoff’s share price has decided to take a plunge to an all time low of about RM1.06. Having gathered more information about Malakoff, I do not expect its share price to rebound above its listing price of RM1.80 anytime soon due to worries of its future earnings (lower tariff on extended power purchase agreement) and the outage which plagued its newest coal-fired flagship plant,  in Tanjung Bin,  from March to May 2017. On the plus side, it paid out about 7 cents of dividend in FY2015 and FY2016. If things play out the same in the current FY2017, you can’t really complaint about a 6.6% dividend yield @ RM1.06. Keep a watchful eyes of its next quarterly report to absorb and gauge the risk associated with Malakoff’s business. For more information about the company, please refer to my analysis of Malakoff.
  4. SEM. 7-Eleven Malaysia Holdings Bhd, like its related company, BjFood, by virtue of common substantial shareholders, is also feeling the heat. Its shares has gradually been beaten down to the current RM1.40 since the start of the year. This is synonymous with a decrease in earnings caused by higher overheads namely store expansion and an increase in employees’ wages and rents. The company also blames logistical reasons for the slow sale in February and March 2017. Further, shareholders did not view the company’s proposed issuance of 616.69 million new warrants in a positive light. Because of that the said proposal was scrapped earlier this month. On the plus side, Vincent Tan has been accumulating about 24 million shares since end of April 2017.
Disclosure

I do not own shares in any of the companies listed above.

Reference:
  1. http://www.thestar.com.my/business/business-news/2017/06/19/maxis-suspended-ahead-of-corporate-news/
  2. https://www.nst.com.my/business/2017/06/250667/maxis-private-placement-shares-priced-rm552-rm166-billion-raised
  3. http://www.thesundaily.my/news/2017/06/21/maxis-shares-fall-news-private-placement-exercise
  4. http://www.theedgemarkets.com/article/maxis-raises-rm166b-oversubscribed-private-placement
  5. http://www.theborneopost.com/2017/03/18/starbucks-expansion-to-alleviate-bjfoods-cost-margin-pressure/
  6. https://cdn1.i3investor.com/my/files/dfgs88n/2017/06/14/1506076963–1498835816.pdf
  7. http://www.thestar.com.my/business/business-news/2017/06/24/challenging-times-for-malakoff/
  8. https://cdn1.i3investor.com/my/files/dfgs88n/2017/05/24/1506016511-602355912.pdf
  9. http://www.thestar.com.my/business/business-news/2017/06/01/7eleven-malaysia-scraps-rights-issue/
Analysis

Analysis of the IPO of Lotte Chemical Titan Bhd

Dear Readers

Seeking to raise a massive RM5.3 billion, Lotte Chemical Titan Bhd’s (“LCT“) initial public offering (“IPO“) is said to be the largest IPO in Malaysia since August 2012 and the largest in Southeast Asia since May 2013.

An IPO is one of the many avenue which a company, seeking to raise funds, offers a portion or all of its shares to be purchased by the general public. The general public then become part-owners of the newly listed company.

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Introduction of the initial public offering

About 30% of LCT, or approximately 740.5 million shares, will be offered for subscription at a retail price of RM8.00 (subject to final retail price which then depends on the demand for the IPO).

Of the 740.5 million shares, 684 million shares will be set aside for institutional investors. Cornerstone investors which will take the plunge are said to be Permodalan Nasional Bhd, Maybank Asset Management Sdn Bhd, Maybank Islamic Asset Management Sdn Bhd and Eastspring Investment Bhd and Great Eastern Life Insurance (Malaysia) Bhd. They represent 18.4% of the would-be-floated shares or 136 million shares.

The general public can only subscribe to an allocated 48 million shares (24 million to bumiputeras and 24 million to non-bumiputeras), via balloting.

The controlling stake of LCT will remain with South Korea’s Lotte Chemical Corp (“LCC“) (70%) which is part of the Lotte group, a South Korean conglomerate, well-known for its confectioneries.

Introduction of the business

LCT is for all intents and purposes, a petrochemical company. It manufactures principally two types of products:

  1. polyolefins, comprising of polyethylene and polypropylene; and
  2. olefins, comprising of ethylene and its derivatives such as butadiene, tetra-n-butylammonium (“TBA”), benzene and toluena
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LCT’s Pasir Gudang Plant

Polyolefins are used as building-blocks in an extensive range of consumer and industrial products such as packaging films, trash bags, automotive parts, plastic bottles, caps, compound for wires and cable insulation. LCT supplies their products to plastic fabricators in the packaging, household, automotive and construction industries.

On the other hand, olefins are feedstocks in the production of polyolefins products. To put simply, olefins are used as raw materials to make polyolefins products.

In FY2016, product sales of polyolefins contributed 80% of LCT’s revenue. Polyolefins, as they are higher up the value chain, contribute to a higher gross profit than olefins.

In 2016, LCT is the fourth biggest producer of polyolefin in Southeast Asia with regard to production capacity.

LCT’s products are sold domestically and overseas. In FY2016, LCT’s customers are located in 60 countries such as Indonesia (28.5%), Southeast Asia (9.7%), China (11.3%), Indian sub-continent, South Korea, Oceania and Europe (collectively about 11.8%). In the same financial year, the domestic market contributed to roughly 38.7% of LCT’s revenue.

Pasir Gudang and Tanjung Langsat are where LCT concentrates its operations. They are 12 kilometres apart and there is an underground pipeline which delivers feedstocks from Pasir Gudang to Tanjung Langsat.

Risk

As a petrochemical company, LCT’s earnings are affected by the volatility of crude oil prices. The major component in the production of LCT’s products is naphtha and it constitutes a majority of LCT’s cost of goods. The price of naphtha correlates with crude oil prices. Therefore, a significant volatility in crude oil prices may affect the costs of procurement of naphtha thus putting pressure on LCT’s profit margin. This is because the sale price of LCT’s finished products may lag behind the price increase of the procurement of naphtha.

In addition, an environment of high crude oil prices would translated to lower operating margins as the cost of higher crude oil prices may not necessarily be passed on to LCT’s customers. Demand and quality of products are amongst other factors which influence the sale price of LCT’s finished products.

In an industry where price competitiveness is the major selling point, I would expect profit margin to be squeezed when competition amongst petrochemical manufacturers intensifies. The main competitors to LCT include Petronas Chemicals Group Bhd (“Pet Chem“) and PT Chanda Asri (Indonesia). Consideration however must be accorded to the fact that once Pet Chem has completed the RAPID project in Pengerang, Johor, the market competitiveness may intensify. The effect of the RAPID project is may be more pronounced with regard to LCT as the RAPID project is relatively close, in distance, to LCT’s plants in Pasir Gudang and Tangjung Langsat.

Also, the supply and demand of petrochemical products are dependent on market conditions.

Other noteworthy risk is currency fluctuation in particular RM/USD as raw materials such as naphtha are purchased in USD. Overseas transaction for the sale of LCT’s finished products are USD-denominated.

Objectives of the IPO

The main objective of the IPO is to finance capital expenditure to increase production capacity. Most of the funds raised in the IPO will be channeled to finance an integrated petrochemical facility located in Indonesia. The said facility will cost an estimated RM15 billion. The facility, once operational in 2023, will be used to boost production of olefins (feedstocks for the production of polyethylene). A total of  RM4.9 billion from the fund raised from the IPO will be poured into this project. The remaining balance of RM10.1 billion will be funded through borrowings.

Other projects (designated as TE3 Project and PP3 Project) being funded by proceeds from the IPO are enhancement of existing operations in Pasir Gudang. Those projects seek to boost production efficiency and capacity of polypropylene and olefins. Interestingly, the PP3 Project will utilise technology from LCT’s controlling shareholder, LCC. Commercial operation of PP3 is expected to commence in the second-half of 2018.

Financials
LCT profit and loss
LCT’s audited income statement from FY2014 – FY2016 taken from LCT’s Prospectus.

A glance of the above financial statement indicates that, in the last 3 financial years, LCT’s revenue may appear to be under pressure. However, the gradual decrease of LCT’s revenue is not attributed to lower sales volume of its products. In fact, sales volume has increased. The effect of low crude oil prices means that the selling price of LCT’s products are reduced thus affecting revenue.

On the flip side, gross profit and net profit increased tremendously despite lacklustre revenue between FY2014 and FY2016. Again, low crude oil prices contributed to an increased profit margin and earnings. In fact, EPS doubled from 35 cents, in FY2015, to 76 cents, in FY2016.

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Cash Flow Statement

 

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Balance Sheet – Part 1
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Balance Sheet – Part 2

The overall cash flow is healthy. LCT experienced better cash flow generated from its operating activities in FY2015 and FY2016 thanks to an environment of low crude oil prices. In FY2016, the company was investing heavily to boost efficiency and production. On top of that, a negative cash flow in financing activities, in FY2015 and FY2016, indicates that debts were pared down. As at the end of FY2016, borrowing (short term) are at RM75 million. That only accounts to 0.9% of shareholders’ equity.

Dividend policy

The company proposes to pay around 50% of net profits every year. If all things being equal at the end of FY2017, dividend of 50%, from an EPS of 76 cents, would translate to a dividend of 38 cents per share. At a share price of, say, RM8.00, that would translate to a dividend yield of about 4.75%. This decent dividend yield may be ideal for a dividend play.

Potentials

Potential for growth can be seen from LCT’s commitment to capital expenditures which will increase production and improve production efficiency. This will contribute positively to its earnings down the road.

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Capital expenditure up until 2021
Conclusion

Before I conclude, lets look at the downside risk associated with LCT. Those risks are:

  1. Volatility of crude oil prices.
  2. High crude oil prices.
  3. Competition.
  4. Market conditions.

At this current time and the foreseeable future, I believe that:

  1. Crude oil prices are and/or will be less volatile (within the range of USD50 – 55 per barrel).
  2. Crude oil prices are relatively low to its high of USD100 per barrel in 2014 and the current market condition will remain as a new normal, inevitably with the rise of electric cars and investment in renewable energy
  3. Until RAPID comes online in 2020, it is safe to say that competition dynamics between existing petrochemical players will be somewhat similar and unaltered.
  4. There is a general optimism and consensus that the world’s economy, including Malaysia, is heading for better times. I expect demand for petrochemical will rise in light of better economic prospect.

Further, LCT is entering the IPO with strong financials – a cash reserve of about RM1 billion, positive cash flow and coupled with low borrowing debts. If market conditions remain the same, there is much room for growth for LCT.

Parting thoughts

To wrap up, I want to say that I find it admirable that LCT is getting the needed technical and technological support from LCC, its controlling shareholder, especially in the upgrade of its existing plants in Johore. This reminds me of the uncanny resemblance of the support CSC Steel Holdings Bhd received from its parent company, China Steel Corporation of Taiwan.

If you need to know more of the IPO (and you should), please have a read the IPO prospectus which can be found here.

Important timetable 
  1. Opening of IPO application – 16 June 2017
  2. Closing of IPO application – 28 June 2017
  3. Balloting of application – 03 July 2017
  4. Allotment of IPO shares to successful applicants – 07 July 2017
  5. Listing date (tentative) – 11 July 2017

Do hit the like and share buttons on my Facebook for updates on the IPO.

Reference:

  1. http://www.thestar.com.my/business/business-news/2017/06/16/lotte-chemical-titan-to-raise-rm5pt92b-from-ipo/
  2. LCT’s IPO Prospectus
  3. https://www.nytimes.com/2017/05/25/business/energy-environment/oil-opec-shale-renewables.html
  4. http://www.thesundaily.my/news/1602125
Thoughts

Who’s afraid of P2P financing?

Dear Readers

My last article, Who’s afraid of mutual funds?  did stir up curiosity about mutual funds and their decent yields compared to stock picking in the stock market. The apparent lack of investment knowledge, amongst Malaysians, is quite troubling especially when Malaysians are enduring higher inflation after fuel subsidies were scrapped.

Inflation is your biggest enemy. It seeks to undo all the wealth that you have accumulated. The only resolution against inflation is investing and I hope that this blog serves to disseminate investment knowledge which will be acted upon.

Today, I will be talking about P2P lending. Just so you know, this post is about my first-hand experience in P2P lending, as your worthy guinea pig.

What is P2P lending?

P2P lending or peer-to-peer lending means the coordination of a group of people (either individuals or legal entities) to pool in money (crowdfunding exercise) for the sole purpose of lending the said pooled money (or principal) to a borrower.

illustration-handing-dollar-sign-to-hands-getty_573x300
Credit: Bankrate

In exchange, the borrower (usually a business seeking short-term financing) promises to repay the principal, and on top of that, the interest, over a set period of time.

Your investment return is the interest on the principal.

Most, if not all, P2P lending operators run an online platform.

Is P2P legal in Malaysia?

In case you are wondering, yes, P2P lending has been legalised in Malaysia. These P2P lending operators have been given the go-ahead, in 2016, by the Securities Commission.

What are the potential returns?

The rates are as competitive as those offered by institutional lenders on the premise that the lending is unsecured.

Unsecured lending is where a lender lends without the need for a borrower to offer a collateral as security. Because there is no collateral, the interest rate is relatively higher than the interest rate offered by lenders for secured lending. Of course, other factors are also taken into account in determining the interest rate such as:

  1. the credit worthiness of the borrower;
  2. nature of the borrower’s business (a business in a high risk industry would be offered higher interest i.e. technology industry)

From my observations, the interest rate is within the ballpark of 10-14% per annum. It is relatively higher than most conventional debt investments such as bonds, debentures and fixed deposits (but junk bonds may offer surprisingly good returns).

What are the risks?

The main and obvious risk is the risk of default by the borrower.

Other risk may include the P2P lending operator going under which may be more of an inconvenience or nuisance rather than a risk of a loss to your investment. This is because the pooled funds are segregated and held entirely by a trustee appointed by the P2P lending operator.

What does a P2P lending operator do?

The P2P lending operator establishes a platform to accommodate both, lenders and borrowers. For example, a business, in need of a lending, may approach the P2P lending operator. On the other hand, a P2P lending operator actively promotes its platform to investors so that there are sufficient  members to fund the lending.

When a potential borrower has fulfilled the credit requirements and is given the green light, the P2P lending operator will invite members, on its platform, to crowdfund the lending. Only after the crowdfunding has reached its intended target, the borrower is able to draw down on the lending.

For example, should a potential borrower requests for a lending amount of RM1 million, members would have to pool in their money to reach the said RM1 million mark. That must be done within a certain period of time which is predetermined by the operator. Only after the funding achieves the intended RM1 million mark would the fund be lent to the borrower.

If the fund fails to achieve the targeted RM1 million, within the predetermined period of time, the P2P lending operator may extend the crowdfunding time.

Investors also give an authority to the P2P lending operator to pursue debt recovery should a default arises.

What are the disclosures provided by P2P lending operator to members?

Like any regulated investment, the P2P lending operators are obliged to disclose the risk associated with the investment and also pertinent information about the borrower which includes:

  1. The terms of the lending (the amount of the lending, whether the borrower pays in monthly installments etc)
  2. The nature of the business of the borrower.
  3. The entity that owns the business (whether it is a company, partnership or sole proprietor)
  4. A background of the borrower (whether it is solvent, involved in litigation or blacklisted by any credit rating agencies)
  5. A summary of the directors of the borrower, if applicable.
  6. A past 3-year and current year financial report of the borrower (Profit and Loss and Balance Sheet).
  7. Bank account statement (monies in the bank account(s) of the borrower).

However, information which can identify the borrower’s identity remain undisclosed.

Be sure to understand the associated risks in this type of investment before pursuing any crowdfunding exercise.

Any tips to ensure maximum gain and minimum risks?

Do not put all of your eggs in one basket

There are usually a few crowdfunding exercises a month.  Say, if you have RM5,000, split your investment into 5 portions and invests them in 5 different crowdfunding exercises. That way, if one defaults, you will not lose all of your investment as illustrated below:

1 crowdfunding exercise x RM5000 x 10% per annum = RM500

5 crowdfunding exercises x (RM1000 each x 10% per annum) = RM500 (but risk of losing all of your investment is spread out)

From the illustration above, you stand to gain the same amount of return but your risk is substantially mitigated.

Be selective. It’s your money, after all

Read through the borrower’s financials, especially for the borrower’s cash flow statement and its ability to service short-term debt. It the cash flow is too constraint, move on; don’t attempt to take the plunge and hope for the best. A casino is where you should be if you want to indulge the latter.

What are the fees involved?

Generally, the P2P lending operator will get a 2% cut from your profits. Hence if the interest rate is 10%, you will effectively get an 8% return.

Any tax implications?

As much as we all hate to pay tax, unfortunately, the returns from P2P lending is taxable as it is considered by the good people of the Inland Revenue Board as interest income.

What P2P lending operator on which you are basing this article?

I am subscribed to Funding Societies Malaysia. There may be other better ones out there.

I suggest that you subscribe to more than one P2P lending operators for regular crowdfunding exercises. However, please do your research as fundraising exercise may differ from one operator to another.

My final thoughts

P2P lending is one of the most innovative ways of fundraising. It benefits individual investors, seeking good investment returns, and also borrowers, seeking for competitive borrowing interest rates.

Like all investments, there is an inherent risk of a loss. However in this case, be prepared to lose all of your investment if a borrower goes bust. On top of that, the issue of taxation may arise.

Nonetheless, with effective risk management, i.e. do not put your eggs in one basket, and research, P2P lending may be viable over the long run especially for those who can’t stomach the volatility of the stock market.

Do share this post and subscribe to learn to let your money work harder for you!

Reference

  1. http://www.thestar.com.my/business/business-news/2016/11/04/sc-issues-p2p-licences/
  2. http://www.theedgemarkets.com/article/special-report-six-p2p-lending-operators-malaysia
Analysis

Analysis of CSC STEEL HOLDINGS BHD

Dear Readers

CSC Steel Holdings Bhd (“CSC“) announced, on 22 February 2017, that it has approved a 10 cents final dividend and, on top of that, a 4 cents special dividend. This brings the dividend to an aggregate of 14 cents.

Do note that the dividends will go ex on 28 June 2017.

csc-steel-holdings-bhd_v2_3

CSC’s shares has been depressed since the start of the year. It has been hovering around the RM2 mark giving the 14 cent dividend a dividend yield of about 7%. Very high indeed.

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Dividend pay out in itself should not be a sole reason for one to purchase a stock. The company must also be fundamentally strong and has good prospects.

Though I am not too concerned about CSC’s fundamentals (as you will find out later), CSC’s prospect hinges on a couple of externals factors which are beyond its control: the price of steel (or its derivative, iron ore) and the health of the economy. This makes CSC’s stock very cyclical in nature thus it may be an unsuitable candidate for a solid dividend play. In good times, dividend may be bountiful but on the flip side, dividend may be scarce.

Introduction

CSC is a holding company of which its subsidiaries are in the business of producing cold rolled steels, pickled and oiled steels, hot dipped galvanised steel  and pre-painted galvanised steel or colour coated steel.

Cold rolled steel coils have applications in the manufacturing of home appliances, automotive, commercial drums and furniture.

Pickled and oiled steels are used as automotive parts and strapping structural materials.

CSC is also marketing and selling products from galvanised steel and pre-painted galvanised steel as roof truss, roofing, wall cladding,  under the brands RealZinc and RealColor.

A major shareholder of CSC is China Steel Corporation of Taiwan. CSC benefits from the supply of steel, equipment, technology and management from China Steel Corporation of Taiwan.

Abour 80% of its revenue is derived from the local market and the rest, from various markets overseas.

Financials
DATA 2016 2015 2014 2013 2012 2011
REVENUE (RM’000) 1,035,197 1,017,137 1,048,469 1,141,727 1,126,994 1,206,148
PROFIT (RM’000) 68,689 54,602 (21,266) 29,350 28,008 29,551
OPERATING PROFIT (RM’000) 73,730 61,505 (25,739) 30,766 29,906 31,064
SHAREHOLDERS’ EQUITY (RM’000) 808,551 769,251 728,523 776,186 773,098 771,767
DEBT (RM’000) 67,164 60,769 63,186 63,291 74,480 74,517

RATIO

DEBT TO EQUITY 0.08 0.08 0.09 0.08 0.10 0.10
OPERATING PROFIT MARGIN 0.07 0.06 N/A 0.02 0.02 0.02
OCF RATIO 2.24 1.39 -0.02 1.90 1.50 0.07
PROFIT MARGIN 0.06 0.05 N/A 0.02 0.02 0.02
EPS (CENTS) 18.63 14.75 (5.72) 7.89 7.5 7.9
EPS (ADJUSTED) CENTS 18.63 14.37 -5.6 7.64 7.37 7.78
DPS CENTS 14 8 3 7 7 7
DIVIDEND PAY OUT 0.75 0.54 0 0.88 0.93 0.88
P/E 11.54 7.39 0 15.71 15.84 16.79
ROE 8.51 7.00 0 3.80 3.60 3.80

As indicated in the table, top line growth was on a downtrend between FY2011 and FY2016. Despite that, bottom line growth was rising during the same period. This is due to the drop of the production cost as a result of lower raw material cost and an increased of production efficiency. EPS saw a substantial increase from 7.78 cents, in FY2012, to 18 cents, in FY2016.

With the increase in EPS, dividend pay out also increased. In fact, CSC has a policy of distributing 50% of its profit as dividend.

The increase in dividend does not hurt it financially because CSC has zero borrowings. On top of that, CSC is sitting on a mountain of cash reserve of over RM190 million as per its Q1 FY2017 report. Cash flow is also a breeze.

The growth outlook of Malaysia in 2017 is more optimistic than in 2016. First quarter GDP growth stood at 5.6%. This effect has seeped through the steel industry as witnessed by the surge in CSC’s net profit from RM6 million, in Q4 FY2017, to RM16 million in Q1 FY2017. That’s an incredible increase of 166% in net profit.

EPS growth rate is about 18% (as indicated by FT) even though I am of the opinion that EPS  growth rate is not sustainable owing to CSC’s flat top line growth which has been consistent from the past years.

Further, there is limited room in which an efficient production can contribute to an increase in profit margin, EPS or ROE without diminishing returns. Premised on that, I reckon that CSC growth rate would be in the vicinity of 2% based on sustainable/organic growth (without any borrowings).

Notwithstanding that the group strives to achieve cost-cutting measures with a RM26 million capital expenditure, in 2016, on production equipment which will improve the quality of its products and the efficiency of the production line. I hope to see the investment being fruitful for the rest of FY2017.

Conclusion

I like CSC for:

  1. Strong support from its major shareholder, China Steel Corporation of Taiwan. The bond is so strong that China Steel Corporation of Taiwan supplies materials to CSC.
  2. Strong cash reserve and zero borrowings means the group is resilient even when economic conditions are unfavourable.
  3. Dividend pay out policy of at least 50% of profits.
  4. Efficient production and quality products.

CSC is unappealing because:

  1. Cyclical nature of the steel industry (although that could be a positive point depending if you are buying the shares at the top or bottom cycle)
  2. In the mercy of external factors beyond its control such as price of raw materials and dumping schemes.
  3. Lacking growth catalyst (top line earnings have been flat).
  4. Retaining its market share from the onslaught from Chinese steel imports may pose a challenge. In April 2017, the government announced that it is implementing import levies on Chinese steel products to safeguard the Malaysian steel industry. I noticed that this anti-dumping measure does not encompass the steel coil segment but only includes steel concrete reinforcing bar (rebar) and steel wire rods & deformed bar in coils (SWR & DBIC). Given that scenario, CSC would be in a tough position to compete with Chinese steel imports in the near future.

Ultimately, if you are looking at a dividend play, this looking like a solid counter.

Disclosure

I do not own shares in CSC.

References
  1. http://www.thestar.com.my/business/business-news/2015/06/17/csc-steels-revenue-down-8-in-fy14/
  2. http://www.cscmalaysia.com/brandBrochure.asp
  3. http://www.thestar.com.my/business/business-news/2016/10/01/putting-the-steel-back-in-steel-industry/
  4. http://www.theedgemarkets.com/article/definitive-safeguard-duties-imposed-imported-steel-products
  5. https://markets.ft.com/data/equities/tearsheet/summary?s=CSCSTEL:KLS
  6. FY2016 Annual Report
  7. http://www.federalgazette.agc.gov.my/outputp/pub_20170413_P.U.%20(B)%20191.pdf