Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.

Friday, January 30, 2015

Texchem: Value of its Restaurant Business

I once took a look at Texchem Resources before because the group operates the Sushi King Restaurant chain but found out that it's not worth to invest in due to high borrowings and poor performance from other segments that dragged down the group's bottom line. 

Not until there was a article from TheStar last weekend that able to attract my attention again.

In short, below is the summary of the article, 

1) The group sold 28% stake of Sushi Kin Sdn Bhd to Japanese fast food restaurant giant Yoshinoya Holdings Co Ltd for RM102.2mils

2) Interestingly, the transaction values Sushi Kin at RM262.3mil. This implies that the remaining 72% stake Texchem holds in Sushi Kin is worth RM188.86mil, which is higher than the group's market cap of RM164mil. (Personally think that the calculation in the article was something wrong, but for sure the Sushi Kin valuation is higher than the market value of the group)

3) It's partner Yoshinoya, plans to open Yoshinoya Beef Bowl and Hanamaru Udon not just in Malaysia but also in other regional markets.

4) It will continue to grow its Sushi King chain to 103 outlets this year from the existing 89.

5) With the expansion of its restaurant business, he expects the division to contribute some RM300mil to the group’s topline in 2015 compared with RM150.9mil recorded for the first nine months ended Sept 30, 2014

Based on AR2013, the group's Restaurant Division operated a total of 87 restaurants, including 80 Sushi King restaurants, 3 Goku Raku restaurants, 2 Miraku restaurants, 1 Waku Waku restaurant and 1 Blu Med Restaurant.

Little did I know that the group also owns 51% of the famous Hong Kong Michelin-star dim sum restaurant, Tim Ho Wan chain in Malaysia and just opened its first restaurant in Mid Valley in November last year.

And they plan to open 10 Tim Ho Wan dim sum restaurants in three years.

To recap, the group has 4 business segments. 

Industrial - Contributed the most to the group's top line but only fetches around 1% profit margin didn't make it look like a good business

Polymer Engineering - Had been bleeding and eroded the group's bottom line for years. 
Food processing - Fluctuating and poor profit margin.
Restaurant - The only bright spot of the group

Perhaps the group will fare better if the group dispose its loss making business ...

Or its restaurant business will grow and become the core and breadwinner of the group?

Or out of sudden, other segments improve tremendously and make the group looks like a good deal?

Or its restaurant division grows bigger and big enough to be listed separately in order to unlock its value? 

Time will tell 

But its restaurant business looks interesting to me at this moment as I think Tim Ho Wan will have their own customers just like Dragon-I. 

Wednesday, January 28, 2015

Winning System: Cup with Handle Pattern

According to William O'Neil, every individual investor need to study and benefit from stock charts. It's not enough to buy a stock simply because it has good fundamental characteristic, like strong earnings and sales. A stock's chart must always be checked to determine whether the stock is in a proper position to buy. 

He analyzed the greatest winning stocks of the past and discovered that there were a number of successful price patterns and consolidation structures that repeated themselves over and over again. History repeats itself because human nature doesn't change neither does the law of supply and demand. 

One of the most important and recommended chart pattern by William O'Neil is the Cup with Handle pattern. 

Some of the key points highlight by William O’Neil regarding this chart pattern in his book are as below

Cup patterns can last from 7 to 56 weeks.

The usual correction from the absolute peak to the low point (depth) varies from 15-33%

A strong price pattern of any type should always have a clear & definite price uptrend prior to the beginning of its base pattern

 At least 30% increase in price in the prior uptrend, together with improving relative strength and a very substantial increase in trading volume at some points in the prior uptrend.

Bottom part of the cup should be rounded and give the appearance of a “U” instead of a narrow “V”.

Stocks that come straight off the bottom into new highs off cups can be more risky because they had no pullbacks.

Formation of the handle area generally takes more than 1 or 2 weeks and has a downward price drift, volume may dry up noticeably near the lows in the handle’s price pullback phase.

Although cups without handles have a somewhat higher failure rate, many stocks can advance successfully without forming a handle

The handle should also be above the stock’s 10-week moving average price line. Else, the failure rate is high.

A price drop in a proper handle should be contained within 8% to 12% of its peak.

There should also be at least some tight area in the price patterns of the stock under accumulation. (Tightness is defined as small price variations from high to low for the week, with several consecutive weeks’ prices closing unchanged or the previous week’s close on a weekly chart.

When the stock charge through an upside buy point from the handle (pivot point), the day’s volume should increase at least 40-50% above normal

The pivot buy point in the handle area occur at 5-10% below the prior peak. 

So, get it? 
Look through some charts and learn. Let's see whether you can spot the next cup with handle or not

Above post is abstracted from the book "How to make money in stocks" by William O'Neil. 

Monday, January 26, 2015

Chin Well: After Acquisitions ..

Bursa just approved the acquisition by Chin Well group on Asia Angel's 40% equity stake in Chin Well Vietnam plant. 

Along with the announcement, it also published the past years result from the Vietnam plant. Its contribution to the Chin Well group is quite significant. 

However, its result for the past 3 years was quite bumpy. Gearing also in the region of 0.2-0.35 with low level of cash balance. 

For Q1FY15, it marked a great improved performance with PAT 5 times higher than same quarter preceding year. Cash balance also increased as well as the borrowings. 

No wonder the group made the decision to acquire the remaining shares it doesn't own. 

Well, it's still a cyclic business. Have to keep monitoring as the products from Vietnam plant mainly exported to Germany, UK and US. 

I made a stimulation on the result by assuming Chin Well group owned 100% on Chin Well Vietnam plant for trailing 12-month period. I directly just used the net profit of the group since its bottom line does not need to attribute to minority interest anymore. 

No. of outstanding shares increased 10% as part of the conditions of the acquisition

As a result, net profit chalked up to around RM50.9 mils which give it a EPS of 17cents. 

Net profit margin increased to around 10%. 

Nothing change on its revenue, gross profit and operating profit. 

In terms of balance sheet, I used the amount in the latest Q1FY2015 balance sheet as a base. 

The total consideration of RM92mils is funded by RM39.15mils (New shares issued), RM8.3mils internal fund and the rest from borrowings (advanced by Asia Angel). The balance shall be satisfied within 2.5 years after the acquisition. 

Thus, I adjusted the amount by reduce its cash as well as increase its borrowings. Net borrowings further reduced to RM67mils with net gearing ratio increase to around 15%. 

ROE increase to 11.3% due to increase in bottom line while ROIC reduced to around 10% as a result of higher borrowings. 

In terms of valuation, both market capitalization and enterprise value also increased due to larger number of shares and higher borrowings respectively. 

PE ratio dropped to around 9 as the increase in net profit enough to compensate the increase in the number of outstanding shares. 

Earning Yield dropped slightly to 12% due to increase in borrowing and no change to its operating profit. 

I always view this acquisition as a positive move although the acquisition took place in the PE region of 10. 

Hopefully the performance of the Vietnam plant will keep on improving and contributed more to the group.

Besides, the consolidation of the Vietnam plant into the group also helps the group in better management position to manage its cash flow and operation.

Friday, January 23, 2015

Chin Well & Tong Herr Comparison

I guess it's time to make a comparison between Chin Well & Tong Heer. I have been dragging for too long to write a post regarding this matter. 

I compiled the trailing 12-month data for both companies using methods as below

Chin Well = AR2014 + Q1FY15 - Q1FY14 

Tong Herr = cumulative Q3FY14 + Q4FY13 

As written in earlier posts, both groups also enjoying higher demand from their products as seen from their better performance result since last two three quarters ago especially Tong Herr group. 

For the trailing 12 months, Tong Herr managed to record higher revenue than Chin Well but lower operating profit and net profit compare to the latter. 

Chin Well managed to control its profit margin very well, better than Tong Herr did. I guess their raw material cost is roughly the same. Higher value products and lower operating cost contributed to Chin Well's higher gross profit margin and operating profit margin. 

Both group also in net borrowing position. Tong Herr has higher net gearing ratio compared to Chin Well. However, Chin Well's net gearing ratio probably will become higher after the recent acquisitions. 

Cash conversion cycle for Tong Herr group is better than Chin Well. Chin Well mentioned they need to keep a considerable amount of inventory in order to deliver the products to their customers at the shortest lead time. 

Minority interest percentage of Tong Herr group is higher than Chin Well too. 

ROE and ROIC of Chin Well is better than Tong Herr although both companies also considered as mediocre based on the return performance. 

Both companies' free cash flow generability also quite good with FCF/Sales and FCF/Invested capital more than 5% with Chin Well recorded better.

In terms of currency risk, the strengthening of USD against RM had greater impact on Tong Herr compared to Chin Well. Both groups' borrowings also denominating in USD currency but Chin Well has higher portion of trade receivables and cash denominating in USD currency as hedge.

The impact is higher for Tong Herr in terms of percentage to the group's bottom line as Tong Herr's net profit is lower. 

Furthermore, Chin Well's exposure to EUR is serving as natural hedge to the exposure to USD currency since they're in opposite direction

It's noted that Chin Well also selling wire products apart from its core fastener segment. However, fastener segment contributed most to the group with around 85% and 96% respectively to the group's revenue and operating profit. Part of the revenue from its fastener segment came from its 60% owned Vietnam plant which soon to be fully consolidated after the acquisition end. 

Tong Herr has an aluminium extrusion plant in Penang apart from its core fastener business. In terms of contribution, fastener segment contributed around 70% to the group's revenue and operating profit. Although the aluminium extrusion segment contributed around 30%, but it's noted that Tong Herr only owned the extrusion plant for 51% only and part of the revenue from its fastener segment also came from its 50.01% owned Thailand plant. Besides, Tong Herr's associates, steel mill was still in red in FY2013 but managed to record profit in FY2014. 

Thus, if the demand of fasteners is improving, it will benefit Chin Well more as the contribution and PBT margin for its fastener segment are higher compare to Tong Herr. 

In terms of valuation, Chin Well PE ratio and DY are slightly higher based on trailing 12-month result compared to Tong Herr. Tong Herr may declared another dividend payment for the latest financial year due to better result. PBIT/Entreprise value ratio and FCF yield for both companies are roughly the same. 

I choose Chin Well because of its acquisition, higher margin for fastener products, improved production efficiency, higher value products contribution (DIY), new products from wire products, benefit from GST tax implementation, better growth prospect and lower exposure to currency risk. 

One thing to take note is the progress of the anti dumping duty imposed by EU. 

Thursday, January 22, 2015

Pintaras Jaya: A contract awarded finally

Pintaras Jaya just announced a contract being awarded today after such a long period of time without a new job order.

Job scope is to undertake diaphragm wall and bored pilling works for commercial and residential development project that worth around RM21.4 mils with a completion period of 12 months. 

With this contract, the group has around 4 job orders in progress after January. 

Hope to see more contracts being awarded soon which provide greater earning visibility. 

By the way, Econpile received Rm128.9 mils contract at the same time .. Hmmm different margin, different completion period. 

Wednesday, January 21, 2015

Winning System: CAN SLIM Part II

I was posting about the CAN SLIM method in my earlier post and the last alphabet "M" of the CAN SLIM is quite important. 

M = Market Direction

Learn to determine the overall market direction by accurately interpreting the daily market indexes' price and volume movements and the action of individual market leaders. 

This can determine whether you win big or lose. You need to stay in gear with the market. It doesn't pay to be out of phase with the market. 

A) To detect a market top, keep a close eye on the daily index.

- Heavy volume without further price progress up, price index is either flat or down. (Distribution)

- Spread from the average’s daily high to its daily low may little wider than on previous day.

- The general market will always turn down 2-4 weeks later after 4-5 specific distribution days over a period of 4-5 weeks.

- A lot of trading but no real price progress.

- Laggards can’t lead the market higher. This is simply a matter of weak leadership trying to command the market. If the best ones can’t lead, the worst certainly aren’t going to do so for very long. 

B) To spot the bottom of the stock market

- A rally attempt begins when a major market average closes higher after a decline that happen either earlier in the day or during the previous session. This trading day considered as Day 1.

- Example: Down 3% in the morning but recovers later and closes higher, or down 2% and rebounds the next day

- Look for “follow through” with a booming gain on heavier volume than the day before, usually occur between 4th – 7th day of Day 1.

- Example: index up more than 1.5% gain and volume is higher than average daily volume recorded previously.

- Eliminate sudden spike of certain index stocks that create false follow through.

- Then, begin buying high-quality stocks with strong sales and earnings. 

C) Initial bounce back is feeble

- Index advance in price on the third, fourth and fifth rally day but on volume that is lower than that of the day before. 

- Average makes little net upward price progress compared with its progress the day before.

- Market average recovers less than half of the initial drop from its former absolute intraday high

- When you see these weak rallies and failures, further selling is advisable. 

Above post is abstracted from the book "How to make money in stocks" by William O'Neil. 

Monday, January 19, 2015

AP Oil International: Company Analysis Part II

After studied the financial statements of the group, next will be the segment reporting. 

The group successfully converted into manufacturing based from trading oriented during the early days as seen from their revenue contribution. 

Currently, manufacturing division contributed the most to the group in terms of revenue and operating profit. While the gross profit margin of the group is stabilized at around 20% throughout the years, but operating profit margin for the manufacturing division showed a downward trend. 

For trading division, raw materials such as base oils, additives and chemicals used for the group's manufacturing plant constitute the bulk of the group trading segment.

Franchising segment consists of international licensing and franchising scheme for the group's two lubricant products brand names, "SinO" and "AP Oil". Bulk of revenue comprised sales of raw materials to the group franchisees for producing lubricants under the brand names. Drop in revenue in FY2013 was due to slowdown business activities in Bangladesh due to political instability. 

Majority of the group's revenue go to local but part of the sales to Singapore included marine lube delivered to foreign vessels at Singapore ports as well as specialty chemicals sold to Singapore-based multinational companies and subsequently re-exported to other countries

It was followed by Vietnam and Bangladesh. Sales to Vietnam was done through the joint venture with AP Saigon Petro while sales to Bangladesh was mainly through franchising. 

AP Oil group basically managed by a group of family. 

Ms Lau is one of the founders of the group and she is the spouse of Dr Ho who is the chairman and managing director currently. And their son currently also the group deputy CEO. 

Their total shares holding of the group is around 50%. The top 20 shareholders are holding around 72% based on AR2013. 

For the 6 months result end June 2014, the group recorded higher revenue but slightly lower net profit. The drop in gross margin was due to higher portion of trading activities. 

One thing to note is the cash dropped a bit while trade receivables increased a lot.

Another thing to note is that the group adopts US dollars as functional currency while the financial presentation here is in Singapore dollars. A 10% strengthening of USD against SGD will have some impact on the group performance. 

So to me, overall I can say that AP Oil is a fundamental good and stable company. You would not expect a tremendous growth of its business based on its historical record. 

In terms of valuation, the most attractive point of AP Oil of course is the cash on hands. 

Based on AR2013, the group had SGD26mils cash on hands which equivalent to 16cents cash per share while the current share price is SGD0.21. 

With that amount of money, it translates into

Net current asset value (NCAV) = SGD 0.20
Graham Net-Net Working Capital (NNWC) = SGD 0.18
Enterprise Value Multiple = 1.9 or earning yield of 53%

While the group may not look so attractive to me, but I will keep it in my list to see whether simple & defensive valuation like NCAV and NNWC workable here :)

Friday, January 16, 2015

Winning System: CAN SLIM part I

I just finish read the book, How to Make Money in Stocks (4th Edition) by Willim J.O'Neil.

He created a winning system in good or bad times, namely CAN SLIM system. The system combines fundamental and technical part to screen companies & buy it at the right time. Each letter in the CAN SLIM systems stands for one of the seven basic fundamentals of selecting outstanding stocks. 

The system helps to identify companies with strong fundamentals - large sales and earnings increases resulting from unique new products or services and then buy their stocks when they emerge from properly formed price consolidation periods. 

C = Current Quarterly Earnings per Share

Quarterly earnings per share must be up at least 18-20% or more - the higher, the better. They should also be accelerating at some point in recent quarters. Quarterly sales should also be accelerating or up 25%. 

Compare EPS to the same quarter a year earlier, not to the prior quarter to avoid any distortion resulting from seasonality. 

Omit a company's one time extraordinary gains. 

A = Annual Earnings Increases

There must be significant (>25%) growth in each of the last three years and a return of equity (ROE) of >17%. If return on equity is too low, pre-tax profit margin must be strong

For turnaround stocks, look for annual growth rate of at least 5%-10%, two straight quarters of sharp earnings recovery. 

N = New Products, New Management, New Highs

Look for new products or services, new management, or significant new changes in industry conditions that able to drive the company move forward. 

S = Supply and Demand 

Shares outstanding plus big volume demand. Any size capitalization is acceptable in today's new economy as long as a company fits all other CAN SLIM rules. Look for big volume increases when a stock begins to move out of its basing area. 

Select companies with low outstanding number of shares. Easier to push up price since the supply is low. 

Choose entrepreneurial management rather than caretaker. 

L = Leader or Laggard

Buy market leaders and avoid laggards. Choose among the best two/three stocks in the respective field or industry.

Avoid sympathy stock. It refers to a laggard stock that traded cheaper to leader stock will not enjoy the valuation given to the leader stock. 

Always, without exception, limit your losses to 8% of your cost, given that you bought your stocks precisely off sound base. (Consolidation area)

I = Institutional Sponsorship

Buy stocks with increasing sponsorship and at least one or two mutual fund owners with top-notch recent performance records. 

It takes large source of demand (Institutional investors) to push up the price. 

Avoid over-owned by institutions as it's probably too late to climb upwards. 

M = Market Direction. 
I will have another post for this as this section is quite long

The system is different from the conventional fundamental approach. 

The philosophy of the system is to buy the stocks when they're on the way up in price, not on the way down. And when you buy more, you do it only after the stock has risen from your purchase price, not after it has fallen below it. 

Buy stocks when they're nearer to their highs for the year, not when they've sunk so low that they look cheap. 

Pay less attention to a company's book value, dividends and PE ratio. Focus more on important proven factors such as profit growth, price and volume action and whether the company is the number one profit leader in its field with a superior product. 

Lastly, you also have to acquaint yourself with charts to buy the stocks at the right time after it came out from the consolidation phase. 

Above post is abstracted from the book "How to make money in stocks". I find it quite interesting on the system but I think the figure need to be adjusted a bit in order to suit KLSE counters as I don't think the annual EPS growth must be at least 25% for 3 consecutive years. Furthermore, the company must be the leader of the industry. All this while, I always think of the growth of the market leaders are quite low or stagnant. Need to further study a bit. 

Wednesday, January 14, 2015

AP Oil International: Company Analysis Part I

AP Oil International Limited, is a one stop solution provider for lubrication needs. It manufactures and markets lubricants and specialty chemicals products to some 20 countries.

Some brief history. The group started as lubricant distributor in 1975, ventured into manufacturing in 1981 and listed in 2001. It acquired A.I.M Chemical Industries in year 2000 to expand into specialty chemicals who operates a chemical blending plant providing toll blending and contract manufacturing.  

The group has R&D facilities to provide customised lubricants for specific needs of customers and improve operational efficiency of cost effectiveness.

Application for its lubricants are automotive, industrial and marine industries. Did you encounter any of the lubricants produced by the group before?

The group currently operates 6 manufacturing plants. (3 for lubricants and 2 for specialty chemicals). Two lubricants plants are equipped with terminals and a private jetty.

Acquired a lubricant plant with a fully equipped laboratory through established 30:70 JV company, AP Saigon Petro in Vietnam in FY2008. The plant has an annual production capacity of about 25,000mt, products being distributed through Saigon Petro's network of about 400 petrol stations and exported to neighbouring countries.

Revenue of the group throughout the year was in upward trend but not a smooth one and dropped significantly in FY2013. Net profit was in the region of SGD4-5mils for the past 5 years.

Gross profit margin was between 15-25% while operating profit margin and net profit margin were in the region of 7%. Typical chemical manufacturer with single digit profit margin.

Dividend for the past 4 years were 0.5 cents. No increase no decrease. Payout ratio was below 20%. 

The group is in net cash position ever since FY2009.

As in AR2013, all cash, receivables and payable are denominated in Sg Dollar. 

Cash balance is so high that it contributed around half of the group’s total assets. In addition, the group liabilities mainly contributed by the shareholders’ equities, in the region of 80%. Thus, all the invested capital comes from the shareholders themselves. 

Current ratio is also high at 4 to 5 times. The group balance sheet is so strong that able to survive any potential crisis and also make any acquisitions when opportunity arises. 

The group's operating cash flow was quite strong throughout the years. In the mean time, the group only need very minimal capex expenditures yearly (~1mils). Capex/Sales ratio was less than 3% yearly. Thus, depreciation is also low accordingly.  

So, it’s not hard for the group to generate positive free cash flow year and year.

FCF/Sales was good. Averagely >5%.

Net cash flow from operation/net profit also more than 1 for the past 3 years. Very genuine cash generation from its revenue

So what to do with the positive FCF every years with the dividend payout still <20% and no borrowings? 

Keep in the bank and waiting for opportunity. 

AP Oil's control on its inventory, trade receivables and payables has been quite stable at which the cash conversion cycle recorded was between 35-55 days. It takes less than 2 months for the company to convert its products into cash through sales. 

In terms of returns, ROE was above 10%, dropped to 11.7% in FY2013 due to lower profit recorded. If breakdown using DuPont analysis, assets turnover and equity multiplier had been quite stable due to stable growth of its shareholders' equities and assets. Thus, the performance of ROE highly depends on its profit margin. 

ROIC was quite high throughout the years, it recorded 34.3% in FY2013 which is far higher than its cost of equity which is a good thing as it generated value to its shareholders on paper. 

AP Oil seem like a good fundamental, sound and stable company. Will evaluate more on next post.

Monday, January 12, 2015

Scientex: Email Exchange with IR (01/15)

After the group released its first quarter report for FY2015, I dropped an email to their IR for some enquiries. They replied back and seem like the strengthening of USD may do more harms than good to the group. However, the increase in production capacity, decline in raw material price and higher margin should help to can the loss in foreign exchange

Below are the details of the email. 

1) Operating profit margin from manufacturing segment dropped from 6.12% in Q1FY14 to 4.59% in Q1FY15. What is the reason behind for this drop in operating profit margin and is it temporary?
A: 1Q15 operating margin drop was mainly due to product mix in the manufacturing segment, where we adopted a market penetration strategy to gain market share in the consumer packaging sector in South East Asia. In the broader sense, we foresee this to be a temporary phenomenon. On the whole, we see continued strong demand in the region.

2) The group made a provision for unrealised foreign exchange loss of approximately RM5.0 mil in Q1FY15. Which currency is that and why the management concluded that the group will experience a potential loss? What are the precaution steps to be taken to prevent such circumstance from happen again?
A: Most of our loans are in USD which works as a natural hedge for our export sales in USD. For the moment there will be no change to this policy.

3) With the recent drops in crude oil price which directly reduce the chemical material cost, to what extend the group is benefit from this? Does the group foresee requests from customers to reduce the selling price due to the drops in material costs?
A: For consumer packaging, we typically deal with manufacturers who sell to end-consumers, and contracts are negotiable annually. Therefore Scientex will benefit from improved margins in this segment. As for selling price reductions, there is more value-added components involved (e.g. printing, slitting, bagging) which enhances our overall margin.
For industrial packaging, the price adjustments are done monthly, and there are fewer value-added functions compared to consumer; so the margin increase isn’t as substantial.

4) Is the group's management on inventory FIFO type? Any time lag between commodity price and the group's material cost?
A: Typically FIFO, and the time lag is minimal.

5) Regarding the weakening of RM against USD recently, I checked back the foreign currency sensitivity analysis in AR2014, page 117. The statement is as below,

" (iii) The Group’s sales less cost of sales and other items of expenses denominated in USD during the financial year ended 31 July 2014, offset against the Group’s exposure in USD in the statement of financial position at the end of the reporting period for a 3% change in foreign currency rates. A positive number below indicates a profit where the Ringgit Malaysia strengthens 3% against the USD. For a 3% weakening of the Ringgit Malaysia against USD, there would be a comparable impact on profit or loss, the balances below would be negative."

For a 3% weakening of Ringgit Malaysia against USD, there will be impact on loss of RM2.59 mils on the group's net profit after taking consideration of all the group's sales, cost of sales, other expenses and borrowings that all denominated in USD currency.
Is my interpretation correct? Understand it's just an estimation.
A:  Yes.

Let's say RM will weaken around 10% against USD in FY2015, the estimated loss is around RM8mils on the group's net profit based on the foreign currency sensitivity analysis in AR2014. 

It's roughly around 5.4% loss ( RM8/RM148) on the group's net profit in FY2014. 

Is it acceptable for you? 

Friday, January 9, 2015

Luxchem Corp: Study the Effect of Crude Oil Price

It’s noted that Luxchem Corp. has 2 segment divisions, namely trading and manufacturing. With the recent drop in crude oil price, it prompt me to look at some sectors that will benefit from the decline in oil price.

Obviously, Luxchem is one of them.

Luxchem does not manufacture nitrile, it sources the chemical from Zeon Chemicals of Japan and supplies nitrile to glove producers. I do not have any info of any local competitors who supply the same chemical to the industry and also which glove producers are their customers. However, Kossan for sure is one of them due to their close relationship. 

For its trading department, the management once said that their product selling price depends on the material price they bought plus certain margin. When the raw material price changes, they can adjust the selling price of their products. But to me, said is easier than done, it’s not easy to transfer the cost to the customers especially when competition takes place.

I tried to find some linkage between crude oil price, USD/MYR rate and Luxchem’s sales for the past few years. Below are historical price chart and Luxchem data. 

Financial year of Luxchem is at the end of December.

Year 2008: Crude oil price started the year at USD90, up till USD140 at mid before crushed to USD45 at the end of year. USD increased from 3.10 to 3.7 peak. Revenue increased 10% compared to year 2007.

Year 2009: Crude oil price started the year at low USD45 and rebounded to USD70 before moving up gradually to USD75-80. USD dropped 3.7 to 3.2. However, revenue was down closed to 8%.

Year 2010: Crude oil price was quite stablished, hovering between USD70 to USD90. USD dropped from 3.3 to 3.05. Revenue up 31% with sales from local increased tremendously.

Year 2011: Crude oil price was little bit fluctuating, gone up to USD115 from USD95 in the beginning of year, then dropped back to USD80 before end the year at around USD100. USD stabilising around 3.0. Revenue up around 25% with sales mainly from local. 

Year 2012 & 2013: Crude oil price was stabilising and forming a convergence between USD88 and USD108. USD stabilising around 3.1 before moving up to 3. 3 at year end. Revenue for 2012 & 2013 remained flat.

The relation is not that direct since it still involved other factors (Sales growth, new markets etc). But one thing for sure is the gross profit margin is in declining mode throughout the years. Up to Q3FY2014 this year, the gross profit margin dropped to around 7.1%. 

When breakdown into segments, the operating profit margin of the trading segment was declining.

Perhaps there was entry of new competitors that eat into their market share

Perhaps the group cannot pass over the cost to the customers

Perhaps the group locked down or signed mid term contract with the suppliers/customers for a certain fix price. 

I have really no idea about that. 

For the manufacturing department, raw materials such as petroleum based styrene monomer and glycol are used to manufacture unsaturated polyester resins (UPR) and they are subjected to oil price.

Above operating profit data were taken on external sales which eliminate the inter segment sales.

For manufacturing segment, it’s easier to observe the effect of the crude oil price changes. Operating profit margin was at the highest at year 2009 & 2010 when the oil price was in USD42 (beginning of 2009) to USD90 (end of 2010) per barrel while USD also dropping from USD3.70 (beginning of 2009) to USD 3.10 (end of 2010). Both work in favour for the segment.

For year 2011-2013, the gradual increase in USD currency rate and crude oil price cause the operating profit margin dropped to around averagely 10%.

Moving forward, the crude oil price may not have much significant effect on the trading department, albeit I foresee their operating profit margin will keep on declining.

Perhaps, will we see the return of 15-20% operating profit margin from the manufacturing segment next few quarters?

The increase production capacity in year 2014 may help too.

 So, perhaps Luxchem, a good buy? 

Wednesday, January 7, 2015

Homeritz: FY2014 annual report update

Homeritz just released its FY2014 annual report last week. So I take time to update my data base and also update in my blog here. 

I guess everyone knows how good the company is. 
Revenue increased 12.6% and net profit increased 33% compared to FY2013. 

3 years of positive and improving free cash flow
FCF/invested capital is more than 30% for the last 3 years, even recorded 54% in FY2014. That is awesome. The cash generability is just too good. 

Net cash position all this while
Cash conversion cycle less than 100 days
ROE ~23
ROIC ~45

What more can I say? 

In terms of valuation, PE of 9.4 may not sound like a good entry point. I think Homeritz has the highest PE among the industry. Didn't really find the info

However, but using enterprise value multiple valuation which include its debt, excess cash, minorities and using operation profit as denominator, the earning yield is still 16%, which far exceed the WACC of 10.9% I calculated. 

Due to its strong cash flow, FCF yield is good at 11.3% currently. 

P/B ratio is 2.1 which I think is unsuitable to use to evaluate manufacturing companies.  

Base on AR2014, more than 99% of the group's sales were from exports. Weakening of RM against USD may do them a favour, but I think the group also purchase the raw material in USD too. 

There was a new customer who contributed more than 10% of the group revenue. So the 3 customers contributed around 36% of the group revenue. 

Base on the foreign currency risk sensitivity analysis as displayed in AR2014 which focus on the effect of currency changes on the group financial assets & liabilities, the 5% strengthening of USD against RM will increase their PAT by around RM779k. 

Both Fong Siling and Koon Yew Yin also in the boat. Somemore, using margin account. 

Looking back, the share price once dropped to somewhere around RM0.68 during October sell-down which provided a good opportunity to accumulate such a good and stable counter. 

But I didn't make the buy call. 
It's always easier to look back on the history share price and think "what if .."

Homework not done properly. Mental and emotion also not ready. It's not easy to buy when there is a sell down. Experience needed :)