Tuesday, 11 March 2014

YOCB- Is it normal or something fishy to you?

Yoong Onn Corporation Berhad(Yocb) has released its quarter result ended 31st December 2013. The revenue is quite flattish but  profit before tax was up around 29% compare to last year corresponding quarter. If we compare to immediate preceding quarter, revenue was up 9% and profit before tax was up 37.9%, quite a strong result achieved due to the festive season. Despite the good result, the inventories and receivables in the balance sheet are increasing. If you read my previous post on YOCB, this is the problem that i am worry about. 


As you can see



Quarter result ended 30th September 2013


Quarter result ended 31st December 2013
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Since FY2009 until now, the inventories and receivable are growing non-stop.




I have done some calculations to analyse the company's working capital efficiency from FY 2010 to FY 2013.


On inventories
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In FY2013, it takes the company roughly 196 days, or 6.5 months in order to clear off all the inventories(roughly 157 days in FY2010) . As you can see, the inventory turnover ratio has became lower and lower year on year. If you take a look on YOCB 2013 annual report, you will find out that most of the inventory held are finished products. I deemed this a bad signal as products will deteriorate. When the inventories piled up too much, it takes up more spaces in the warehouses and incur unnecessary storage cost too.




On receivables
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As you can see, it takes the company roughly 65 days to collect back the debts. Please be extra careful when the rate of increase in receivable is greater than the sales growth. When a company has its receivable outgrows its revenue, it might signify that a company is trying to boost up its revenue by selling more goods on credit. It is one of the famous financial shenanigans where a company trying to cheat the investors so that investors believe the company business has turnaround. In YOCB case, i believe the company is doing good and with its strong balance sheet and brand name , there is no reason that it will involve in this financial shenanigan.



On Payable
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I am not worry on payable side. Shorten of payable period is a good sign where the company ability to pay off the debts increase, however, lengthen of payable days could signify that the company has  better control of their money by delaying their payment while at the same time bring no adverse effect on their credit reputation.




Cash Conversion Cycle (CCC)

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As you can see, it is a clear uptrend on its cash conversion days. It takes around 229 days for YOCB to convert the inventories to sales and collect back the receivables, from around 171 days in FY 2010. The rate of increasing is surprisingly high for me.



Conclusion

It is understandable that the company is trying to grow the business but still I am very much concern of the non-stop growing of receivables and inventories. I have tried to compare the working capital between YOCB and Padini and  found out that Padini is way more efficient that YOCB's. I believe that is because Padini generated most of its revenue through its own outlet while YOCB is more dependent on consignment sales. YOCB should try to increase their working capital efficiency as inventories and receivables cannot be growing forever. At the time i am writing, the share price went up 7 cents to close at 1.22, or market cap of around 200M (11/03/2014) which is the all time high.




Thursday, 6 March 2014

Latitude Tree Holdings Berhad - Strong recovery of furniture industry?

Before we talk about Latitude Tree Holdings Berhad (LTHB), let's us understand about the furniture industry. In Bursa, we have few listed furniture companies, Lihen, LTHB, Pohuat, Homeritz and etc. As for LTHB, it exported 90% of furnitures to US and hence, the recovery of US housing market play an important role to determine on LTHB performance. There are few things that i think one should know about




1)The new home sales in US surged 9.6% in January, which is the strongest rate since July 2008. The unexpected good result had beaten the estimation of consensus. The supply of homes in relative to demand has dropped from 5.2 months(December) to 4.7 months(January) as the supply of new houses in the market remain unchanged, due to the lack of materials and unskilled workers. The potential hike on mortgage rate in US might dampen the housing market further as the borrowing cost increased.



fundamental analysis for amateur
sources from: ECONODAY


2)Despite the strong recovery of new home sales in January, the pending home sales in US showed only a marginal gain of 0.1%. The data on January has shown some stability on US housing market after the plunge of recent months. In US housing market, existing home sales constitute a higher proportion than new home sales. By looking at the data, it is understand that the housing market in US is still in a recovery stage which the sustainability has yet to know.


fundamental analysis for amateur
sources from: ECONODAY

3)The economy of a country is important to determine the income level of citizens, which will affect the housing market indirectly. In fourth quarter of 2013, US GDP grew in  2.4% annual rate, which is lower than estimation. Consumer spending plays an important part in US economy but the year end retails sales is not as good as assume. Bad weather in US is one of the causes.




4) In year 2013, US furniture import had increased 1,974 Million Dollars, as compare to year 2012. For your information, US is world major furniture import country, and China is his largest trading partner, follow by Vietnam and then Malaysia. Recently, the labor cost on China is going up, and hence it provides Vietnam and Malaysia's furniture manufacturer an opportunities to grow their market share. Despite that, Vietnam and Malaysia furniture industry are known as lacked of skilled workers, and the production cost of both countries are raising due to the implementation of minimum wages.



5) The competition in furniture industry is very intensive, especially from the China side. China is the largest furniture producer and largest furniture exporter in term of value in the world.

fundamental analysis for amateur
sources from http://www.slideshare.net/ClarionGermany/03-csil-alessandratracogna

fundamental analysis for amateur
sources from:http://www.slideshare.net/ClarionGermany/03-csil-alessandratracogna

As you can see from above chart, Vietnam and Malaysia are still a small market in the industry in term of production and exportation.




Conclusion

In my humble opinion, the furniture industry is showing sign of improving follow by the recovery of US housing market, albeit there are still a lot of uncertainties. I think that for those furniture companies which are able to survive throughout the 2008 crisis, they will enjoy a huge pie of cake, if let say US housing market come back strongly. Another issue to take note is, the orders for local furniture companies are increasing, which is a good leading indicator of US housing market recovery? Nevertheless, it is still early to judge.



Next, i will be touching on furniture companies listed in Bursa, and why my pick on LTHB.

Thursday, 27 February 2014

Padini- Finally it came back to the limelight again?

Padini Holding Bhd has just released its quarter result ended 31st December 2013 which is highly anticipated by many as i believe investors can't wait to monitor its performance.



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Analysis for the quarter alone compare to last year corresponding quarter, revenue has up 12.7% and net profit has up 48.4%. According to the report, the increase of revenue are due to the strong sales of brand outlets. At the same times, the same store sales growth (SSSG) for the quarter reached more than 30%. It is tremendously strong growth, given the competition arise from foreign brand especially in Klang Valley area. A slight increase of gross margin coupled with the increase of revenue drive the net profit growth. Having considered that current quarter is seasonally strong quarter due to festive season, the performance is still out of my expectation.




Valuation

Padini closed at 1.78 today (27 Feb 2014), with its net cash of 24 cents and last 4 quarters (L4Q) earning per share (EPS) of 14.69 cents, it is trading at cheap valuation.

To get the actual price we are paying by buying Padini shares, we take 1.78 to minus the net cash per share of 24 cents and we get 1.54 dollar per share. Divide it with L4Q EPS, we got a PE of around 10.5. For a company with strong brand name and solid growth, it definitely worth more for me.

Let's have a look on its PE range throughout this few years.

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As shown, PE of around 14.5 is the highest (without taking the net cash in consideration), personally i think market will give Padini a higher valuation than what it is trading now.



Future Prospect

From the report, 3 Brand Outlet stores and an additional Padini Concept Store have added in current FY 2014. The coming months until the end of this financial year, the management is planning to add another 3 Brand outlet stores and 2 Padini Concept Store. After the rationalization of subsidies by our government, the living cost has increased and consumers are more willing to delay their purchase on discretionary items. The focus on growing Brand Outlets with the purpose to bring in value in design and price to consumers help to grow the business. I would think that the management are trying to keep themselves remain competitive to fight with the foreign brands, while at the same time creating value to shareholders with their consistent dividend payout. Under the section "Commentary on Prospect", the management said that "These new openings together with changes made in the past year to merchandise development and pricing strategies would go a long way to improving the Group’s competitive abilities." 




Conclusion

So far i think Padini is doing well to compete with the foreign brands, it seems that they can do well in the future too. One good part for retail business is, when you have been growing your business so well in a place, you stand a foothold where when the competitors came in, it might takes a long time for them to catch you up. Another things is, Padini has been partner with AEON to grow their business, you would not be surprise to see Padini Concept Store when you went to AEON. However, i have seen no sight of  Uniqlo, Debanhams or H&M appearance in AEON, probably because of their different strategies or retail model? With that, i think it is not easy to catch up with Padini's pace in Malaysia retail market. While the business is growing well with good prospect, and the valuation is cheap for me, i would think that Padini is quite attractive now. 








Sunday, 16 February 2014

V.S Industries- World Top Electronic Manufacturing Service Provider - PART 2

V.S Industries is enjoying a growing electronic manufacturing services (EMS) market due to the increasingly outsourcing of those multinational company to their partner in southeast Asia. This trend is an great opportunity for V.S to increase their market share. In an interview with TheEdge, V.S managing director, Datuk Gan Sem Yam stated that " For a company that provides supply-chain services and fully integrated contract manufacturing services to companies such as Panasonic, Sony, Canon, Mitsubishi, Kenwood and Dyson, V.S has yet to reach its full potential."

Business Risk

1) One of the factors that drives on V.S profit growth is the growing demand of consumer electronic products, and the switching trend to outsource the manufacturing services to southeast Asia companies. With that, the consumer spending power might determine the performance of V.S. The possibility of European countries revival will keep the demand growing. However, if the economic is not doing good or remain uncertainty, consumers will delay their consumption which directly affect the orders for EMS providers.

2) As an EMS provider, V.S had to allocate some portion of money as capital expenditure (CAPEX) to cope with the growing of technology in order to remain innovative and competitive enough in EMS industry. Besides that, V.S has to spend to increase their capacity.In annual report 2013, V.S states that extensive research and development will be carried out with their key customers to meet the evolving trend of the industry. V.S aims to establish higher-value added manufacturing processes in their operation while keeping the cost at an optimized level. Due to the high CAPEX consumption, we can see that free cash flow generated by V.S is not consistent.

fundamental analysis for amateur
If V.S does not spend on CAPEX, they will not able to cope with the rapidly growth of technology and hence, left behind of their competitors. Its business nature is quite capital extensive i would say.


Management

As when we discuss about the management of a company, i would like to take a look on its dividend payout. With the growing of earning per share, the management are being generous. The total amount of dividend payout are increasing year on year except for year 2013. V.S has a solid dividend payout history, and never did any cash call after its listing. Besides dividend, the company had been doing share buyback very often.


fundamental analysis for amateur

Share buy back is a very positive sign for me. It signifies that the share are cheap and having good potential in future. It is an alternative way to compensate shareholders besides dividend. On top of that, the management are confident on the company prospect.


fundamental analysis for amateur




As you can see from the table above, the directors of the company are holding substantial amount of shares. It is a good sign for me too as the management will try to do their best as to maximize the wealth of shareholders. Inabata & Co. Ltd held 10.34% of indirect stake on V.S Industries. Inabata emerges as the shareholder of V.S since 2006 and had been accumulating the shares. Inabata is the supplier of resin for V.S and i believe this relationship will create better synergies.

Valuation

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Since 2010 to 2013, Price/earning ratio had been standing at the range of 5.2 to 10.2. If we are calculating the PE ratio with last 4 quarters EPS, the PE ratio we get is around 5.4, which is at the bottom of range. Having considered at its business risk, and looking on its future prospect, i will still think that the current valuation is rather cheap.Besides that, V.S is trading below its book value.


Conclusion

In short, I would think that V.S industry is involving in an unexciting industry as the CAPEX requirement is high, but somehow the management is capable enough to grow the company. The business will continue to remain tough, added by the implementation of minimum wages and others expenses hike. V.S is currently trading at market capitalization of around 274 Million. It  is a company that provides manufacturing services to big multinational companies like, Dyson, Sony, Panasonic, etc, doing business in a tough industry but the managements able to grow the business, been actively buying back its own shares, and trading at cheap valuation. If the macroeconomic factors turn in favor of V.S and the switching trend of EMS to southeast Asia persists, i have a gut feeling that the market cap might be doubled at least.