FRASER & NEAVE HOLDINGS BHD Value Evaluation

Fraser& Neaver originally found in Singapore is manufacturing beverage and dairy product. With a strong brand building in the past, F&N has established a lot of reputation in terms of its product lines such as isotonic drink 100 plus which is used to sponsor countless outdoor events and gain tremendous popularity. Aside of its own production, F&N go a step further by acquiring Nestle’s Dairy line in Thailand to own the right to produce all kind of canned milk to expand its possible market expansion via Indo-China route. In addition of strong branding and product line, F&N  has also decreased external pressures from strong competitor by adapting to its acquisition strategy. At the same time, the barriers of entries are high enough to stop potential competitors from emerging as high capital is needed for all the plants and machineries. In F&N case, the company owns almost RM1 billion worth of plants and equipment with an average annual investment of over RM200 million which is a gigantic amount.

In any industry that is related to dairy product especially canned milk, F&N company encounter the risk of defame due to milk scandals which might result corrections in short term. Also, with a huge export business, although F&N is able to leverage on its order size, dealing with different regions means more credit transaction and hence lack of smooth cash flow. Competing in an aggressive industry, marketing campaign is a much and must be held in the most innovative and extravagance ways which consumes almost 35% of the company’s gross profit annually.

With the company’s extreme cash fluctuations, we take EPS as our profitability reference this time. Taking out 2010 and 2011 where the company undergoes restructure and disposed its subsidiaries, the EPS is growing steadily throughout the 8 years with an annual compounded rate of 5.44%. Both ratios are also up to satisfactory level. With intrinsic value estimated at RM5.47 after 15% Margin of Safety, the company is seen to be overvalued by the market in a huge margin. It is a great company to purchase in with the matter of time. 
Stock: F&N Code: 3689

GUAN CHONG BERHAD Value Evaluation

Guan Chong Berhad is the Malaysia’s sole largest listed cocoa bean manufacturer. Venturing into industry which specializes in cocoa products, this company has a lot of potentials and untapped market due to its MONOPOLY position regionally. Being able to operate based on its economic of scales and ever increasing production, cost is easily spread among its large scale production. Also, being in the industries for decades, Guan Chong has been breeding and improvising its cocoa seeds with a lot of trials and errors. In terms of time and effort consumed to produce the best seeds, others will find it hard to cop up with Guan Chong.

Staying in this industry with commodity as major basis of raw material, the companies need to place a lot of capital to purchase contracts in order to secure the price of raw material in the future in a market which is full of fluctuations. At the end of the day, purchases of these contracts might result in speculative practices by the management which might deteriorate investors’ investment. Also, the industry is also extremely volatile to global crisis as shown in the drop of revenue during the 2009’s.

Cash flow result from operating activities faces an extreme fluctuation in the past ten years and even down to negative figure. Although we can get both ratios at a satisfactory level, cash flow in the company itself is very doubtful. Based on the CF adjustments on 2012 alone, write down of  inventories value loss in derivatives make up RM7.6 million. Instead of the reported earning, it can be seen that gain on derivative is also added into the company's income statement. Despite the company's business nature of trading cocoa, it turns out that its board is more of a speculation of the raw cocoa by using different derivatives. This under cover issue may result in great loss for the investor. Also, drawing of loans amounted to RM160 million indicates that cash flow in the company is rather poor. It is only worth investing if it is priced below RM0.7 which is its book value.

Stock: GCB Code: 5102

DUTCH LADY MILK INDUSTRIES BERHAD Value Evaluation

Dutch Lady, a company which major in manufacturing in dairy products since 1988 has been building its prestigious branding with outstanding products ranging from baby use to the consumption of regular family. With its deep blue packaging, its product lines are easily recognizable compared to others. As to the quality of products, the company obtains various recognitions from ISO, HALAL and trusted brand awards which reflect the Dutch Lady firm stand in the market. When I come across Dutch Lady’s products, I realize that it breaks its consumable milk line into fresh milk and ordinary milk with lower price. In order to obtain more market share, it provides options for consumer to choose. In terms of capital expenditure, the company doesn't incur any R&D costs which is probably being bear by its the parent company Frint Beheer IV BV who owns over 50 percent of Dutch Lady Berhad’s shares. Therefore, Dutch Lady is able to benefit from all the research facilities without using their own capital.

 Recent milk scandals from the China’s milk scandal which reports thousands and thousands of milk contamination has shaken the milk manufacturer industry. Moreover, the industry is burdened more with the Fonterra Milk Scandal which exports milk formulas to most of the dairy products manufacturers worldwide.

Based on the FCF for the past ten years, cash flow from operating activities for Dutch Lady has been increasing in a steady manner. More surprisingly, it is able to withstand the global financial crises and march upwards. As for the ratios, it is both up to standard which reflects and efficiently managed company. With good cash management, future earnings of Dutch Lady is no doubt going to climb in a steady pace. With its intrinsic value estimated at RM43.38 after 15% margin of safety, the current price has fully reflected its value.

Stock: DLADY Code: 3026

CYCLE & CARRIAGE BINTANG BERHAD Value Evaluation

Cycle Carriage is one of the Malaysia's largest dealers for Mercedes-Benz vehicles in which mass promotions and advertisements can be seen on newspaper daily. Although there are many dealers out there, we believe that Cycle Carriage is able to leverage on its purchasing ability and providing the best prices and services altogether and in turn generate increasing revenue. However, there are more emerging luxury vehicle brand which are competing for their respective market shares in Malaysia which threaten Cycle Carriage’s position.

In order to stand their way out, fierce marketing campaigns are held which increase their distribution cost in recent years. In a worse scenario, the company may need to hold more promotions in years of crises and push their margin further down. For luxury goods, the cost of sales alone is consuming high portion of the revenue already. Therefore, not much profitability can be expected. Also, recent announcement of government’s NAP policy has confirmed that prices of overseas automobile will gradually decrease for 30% in 5 years which will cause the consumers to adapt wait and see approach where in short term, revenues for the dealer may decrease.

According to the free cash flow, the company's performance has been deteriorating throughout these ten years. Furthermore, ROA and ROE has not appeared to be satisfactory which reflects the company low efficiency. Therefore, there is lack of potential for the company to generate stable growth in the future. Talking about dealership, will Cycle Carriage strive its way up in terms of cost management and less capital expenditure? I am looking forward to it.

Stock: CCK           Code: 7035

Talking about Federal Reserves Measures, how will it affect you?

Tapering of Fed’s quantitative easing measures has been a hit in worldwide news nowadays. Investors worldwide have mixed views about the tapering and some even see it as a threat while Japanese stimulus incentives show no sign of stoppage. This reminds me of a very famous economist with the name of Sir. Richard Duncan. Spending much of his early life in south east Asia particularly Thailand during his early age, he witnessed the Asian financial crises 1997 and after that dot com and housing bubble crashes. Based on his experience, he came out with his hit selling books titled “The New Depression”.

Well, his concept of New Depression starts where value of gold is no longer tied with the supply of dollars during the 1970’s. This allows the society to operate by leveraging on credits and loans almost unlimitedly as there are limitless dollar supply. As compared to era before 1970’s, the concept is very different from capitalism where entrepreneur earns a decent profit, save a portion of it and spend the rest on expansion which is quite conservative. However, nowadays, business finances its expansion in a very large scale that they rely much on third party aid which cause a gigantic bubble to expand whether the company is making profit or not which is also known as “Credidism”.

As there is no limit to the supply of money, US society spends a lot and lot of money on import goods particularly Japanese products. At the same time, Japan is generating an awful lot of revenue and climbs the way up to one of the world largest economy. Eventually, all the dollar flowing into Japan caused a bubble and that bubble has popped for more than 20 years where Japan has been facing deflation ever since. Of course, this is only one of the scenarios of bubble. My main point here is, the world is not operating like it used to be in the past. Our economy now is only stable provided we are being supported by some kind of forces. After each bubble burst, government needs to bail these companies that are too big to fail. Without these financial aid, the economy can no longer stand on its own. Imagine if US allows AIG to fall, it will affect thousands of constructions, borrowers, lenders, policy holders that drive the force behind the glamorous economy. The world simply cannot survive anymore without government aid.

Why am I posting this where it seems unrelated to value investing? Because evaluating individual companies are not enough anymore where the world is changing in a lightning pace. Therefore, tapering measures today might result in more stimulus tomorrow. Recognize the policies and take more advantage into your purchasing timing when you read another news about tapering next time! I wish you to strive in your investing journey folks!

CCM DUOPHARMA BIOTECH BERHAD Value Evaluation

Commencing its business as trading pharmaceutical products, CCM stage its game to manufacturing drugs by obtaining license from the government. As there are many patents involved in manufacturing drugs, the industry find less competitors. However, emergence of strong competitors recently in the market has made the competition tougher than ever. As most of the people purchasing decisions of pharmaceutical products depend largely on the effectiveness rather than pricing, it won’t be a problem for CCM to adjust their price. In terms of branding, the company has few well established products such as Thompson cough reliever and Chewes kids' vitamin which gain the loyalty of its customers’ base. Based on its cash flow statements for the past ten years, there are no acquisitions of any subsidiary nor associates where the company generates its growth mostly internally which are different from other pharmaceutical company’s expansion strategy.

As the company ventures itself into an industry that adapts automation process, recent rise of utility rate will hugely affect the company’s margin unless the company adjusts its price. 

Based on the graph, the company has been performing on a gradual upward trend for the past ten years. Although there is a sharp decrease during 2011, it quickly recovered to the level before 2010. Both ratios are up to expectations as the company has been performing efficiently. From what I see, the company is adapting a very conservative strategy where the growth is steady and minimal risks are bared. Overall, the company performs well and possesses the potential to grow steadily in the future.

Stock: CCMDBIO[S] Code: 7148

CARLSBERG BREWERY MALAYSIA BHD Value Evaluation

Carlsberg has been a well-established brewing company for a long time. Being able to penetrate into different markets, the green label Carlsberg has become a popular branding among consumers. However, faceoff from its powerful competitor such as Guinness Anchor Berhad, it is difficult for it to fight for beer market share in such an intense market. However, one thing good about brewery industry is that they need not much research and development expenditure to survive in the market. On the other hand, acquisitions of subsidiaries may exhaust much of the company’s cash reserve. With clubbing and pub industry on the grow in Malaysia, demand of alcoholic beverage is on the rise as well which in turn guarantee the future earnings of brewing manufacturer.

As alcoholic substance may be abused and misused, government monitors the distribution closely and imposes heavy duties at the same time to curb the demand of alcoholic beverage. This makes the industry having hard time in expanding their business in Malaysia. Also, recent import of cheap brewing products from Thailand and Indonesia has further slashed the market share of local established brewing company.

Based on the ten years cash flow from operating activities, although there are fluctuations in between, we can see that Carlsberg find its way up in slow but steady pace. Both ratios are up to satisfactory as not much capital expenditure is required to support the business manufacturing line. Judging from its cash flow statement, Carlsberg maintains a high cash level for several years which indicates a good cash management. However, price earning at 19 is considered high which means the company is overbought. The company potential has been realized.
Stock: CARLSBRG Code:2836

BRITISH AMERICAN TOBACCO Value Evaluation

British-American Tabacco(BAT) is one the world largest tobacco manufacturer penetrating more than 60 markets worldwide. With such a gigantic network, the company is able to leverage on economic scale upon manufacturing all the products. This put BAT ahead of its competitors in terms of company size and cost saving advantages. Despite launches of e-cigarettes products, the adaptation of traditional cigarettes is still maintained and hence no harms are done by technological advancement to the industry. Aside of that, not much innovations are needed for the tobacco industry in order to survive. Furthermore, BAT controls heavy-weight international brand such as Pall Mall and Dunhill which have well established brand positioning to the existing consumers. This leads to repetitive sales and directly contributes to the company’s revenue.

From the paragraph above, I evaluated the ability of the company to generate growing revenue in the future. When we change our perspective to the humane side, we know deep down that smoking is harmful to not only our own body but also to the surrounding including mother nature due to minorities’ addiction. Hence, the company need to spend a tremendous amount of money in corporate social responsibility each year to recover the damages by smoking.

According to the free cash flow in the past ten years, the current year level is lower than 3.42 level in 2003. With strict government regulations, cigarettes prices are deemed to be increased year by year where it should reflect a higher cash inflow but instead, failure to raise cash inflow is a big concern to me. Besides that, the company includes RM400 million worth of goodwill inside its balance sheet representing 30% of total assets where it is not impaired for even a single time in the past ten years. Surprisingly, book value to current market price is (60.8/1.31=46) where to me, it is extremely overpriced. In short, this company is operationally fine but I don’t see too much good through its financial performance with substantial movement within the cash flow.
Stock: BAT Code: 4162