KAWAN FOOD BERHAD Value Evaluation

Kawan Food Berhad produces mainly frozen food which is easily found in retail markets. As all of the company’s products are Halal, it is meant to target a large portion of market share worldwide. Compared to other frozen products, Kawan Food Berhad adopt continuous innovations to diversify its product line and creates more possibility to satisfy the consumer’s taste and preference. In terms of branding, names like Kawan and KG pastry dominate most of the refrigerator in the retail markets which reflect its popularity indirectly. With the fast pace life style nowadays, low fat frozen food like Paratha capture the taste of urban folks pushing the sales to next level. Throughout years of innovations, search of low cost production method and application of Halal license, barriers of entries are heighten which decrease the entry of potential competitors. However, recipes of these pastries are rather easily imitated by others.

As 60% of the company’s revenue is generated from overseas, this increases the company exposure to series of international events. Market shares in certain emerging region are also difficult to penetrate as local manufacturer possess cutting edge cost saving factors such as labor and raw ingredients. 

According to the cash flow in past ten years, factoring out 2005 and 2006, the annual growing compound rate is 7.89% which is above average but not resilient enough. With decreasing profit, return on both ratio has decreased as well with ROA on the sidelines while ROE is below standard expectations. Cash management is also deploying a conservative utilization which is beneficial at times of global uncertainties. My calculation of intrinsic value after 10% margin of safety is 1.82 which is basically not far from the RM1.8 level. It is an average and conservative company.

Stock: KAWAN Code: 7216 

JERASIA CAPITAL BHD Value Evaluation

Jerasia Berhad is an apparel conglomerate which consists of manufacturing and trading activities. Owning a series of highly branded product mixes, Jerasia distinguish itself among the competitors in terms of target market where they aim for the middle and upper society. This is in conjunction with the change in trend among the youngsters where product’s brands are being highly emphasized to reflect their status and ability. Despite of their luxurious price tag, from my point of view, their ability to set up unique display windows and the brand along is able to attract a lot of customers. (Not to mention the crowd which the company can attract if they hold any kind of sales. When there is ordinary brand with discount, consumer will see it as stock clearance while discount of luxury brands means that they can get something of higher value with lower price. [It’s logical nowadays]). Moving on, capital expenditure is not vital for survival purpose. Instead, large amount of the company’s gross profit goes to other expenses (which I think is mainly regarded with marketing cost). Barriers of  entry by government is quite high as establishment of manufacturing factory in the third world country like Bangladesh (due to their low cost advantage) has been quite a serious issues for the locals recently.

Manufacturing workers working condition which are long ignored by the industry player occurred to be a very serious threat to the business recently. Poor working condition and collapse of factory building lead the locals to protest against discriminating wages and human right issues. Indirectly, cost of goods sold in the future will be affected. Also, changes of trend is a very high cost as the company need to recalibrate with their suppliers, workforces and marketing departments after every certain period.

With an extreme trend shown by free cash flow after operating activities, we can see that the company is yet to recover its cash level before the world financial crises. It never incur negative cash flow in the eight years until 2012 and 2013. Looking into both ratios, the efficiency level in deploying its assets and equity is also quite low although there are improvements as compared to before. Overall, the company is yet up to expectation at the moment.
Stock: Jerasia Code: 8931

HWA TAI INDUSTRIES Berhad Value Evaluation

Hwa Tai Industries Berhad appears to be another company which specializes in biscuits and cakes manufacturing and trading field. Venturing into this industry for two decades, the company has obtain countless awards and international recognition. Also, the company is able to obtain shelves spaces as its product lines can be easily found in almost every market be it a small or large market. One of the features that enables Hwa Tai to outstand from its competitors is its popular assorted biscuits where it can be packaged as hampers, as gifts for visitations or just any regular snacking for people from all walks of life due to its flavor diversification. Another advantage reflected by the firm is its low capital expenditure where annual purchase of plant and equipment is not more than RM1 million in aggregate. In other words, its capital expenditure is not more than 1.5% of its total revenue which is EXTREMELY low. Again, reputations and recipes built up by Hwa Tai for decades have captured the demand of consumers which is able to fend off overseas competitors in a good way. Potential competitors will find it hard to penetrate the barriers as well.

Recently, Federal Government of Malaysia decided to pull back RM0.30 worth of subsidies per kg of sugar which makes up a big amount of biscuit manufacturing cost ( unless there is a no sugar biscuits recipes developed). At the same time, seasonal uptrend of palm oil prices drive up the cost even higher which is a disadvantage to the industry as a whole (although it is temporary and we can average out the trend), not to mention the minimum wages of RM900 set in Pennisular of Malaysia, all this rocks are set to be huge challenges for the company and it will be interesting to see how the management is able to manage it. Despite all these challenges, I find the profit margin is quite low in the past. There’s certainly a huge space for improvement here.

Based on the operating cash flows, extreme fluctuations were shown for the past ten years which does not fulfil our ‘consistency’ criteria. However, with its strong quantitative factors support, I believe the company will be back on the right track in the future to realize its high ‘potential’. In short, it is definitely not in my watch list for the moment.

Stock: Hwa Tai Code: 8478

HUP SENG INDUSTRIES BERHAD Value Evaluation

Ever tried HupSeng’s Ping Pong biscuit together with a hot chocolate drink? It’s truly a classic combination and this is how I get to know the brand which I believe is one of the Malaysia’s all-time favourite crackers! Hup Seng has been manufacturing all sorts of cookies, biscuits and crackers for decades. As a repetitive winner of numerous consumer products, it is obvious that HupSeng possess a strong foundation of branding and popular product mixes which ensures the position of HupSeng in the market. As recipes of most products are well produced, the firm spends not much on capital purchase or even research and development (averaging to RM6-8 million annually), thus the firm accumulates a lot of cash which is able to finance any further expansion and acquisition in the future. As 87% of the company’s total revenue is generated from Malaysia, we can see that there is still a lot of opportunities for HupSeng to grab in the future with such a strong cash flow position.

With the current market flooding with all sorts of products, the competition has become stiffer than ever. This also includes competition especially from China with low price advantage who wants pieces of the market pie. Also, raising of utility rates and fuel costs put a heavy burden on the industry as a whole.  Furthermore, taste and preference changes accordingly to regions. Although there are overseas opportunities, it is a difficult mission to satisfy all kind of consumers’ need.

Looking into the company operating cash flows, it manage to climb amid of fluctuation during the initial years. Both ratios are also performing splendidly as shown in the table. The company did not go for further leveraging for the past ten years which proves that the company is able to gradually sustain on its own without much gearing which reduce a lot of risk at the same time. With my calculation of RM4.13 intrinsic value after 10% margin of safety, the price now is well above its value.

HOVID BERHAD Value Evaluation

Hovid is involved in one of the Malaysia’s pharmaceutical manufacturer industry. One of the products that has earlier set up Hovid’s image is its herbal tea product line Ho Yan Hor where it is suitable for all kind of consumers. As an early producer of herbal tea pack, the company further diversifies into product lines which include supplements and all kind of agents. Barriers of entry are very high as there is tight government regulatory and millions worth of patents to be rented. Recently, confirmation of generic product’s patent expiry has allowed the firm to produce this new kind of drugs where it results in significantly lower cost. According to the company’s annual report, it has applied for the use of this kind of drugs in several countries where it gains an unfair competitive advantage ahead of other competitors to prepare themselves for the change of traditional drug to generic based products. In the chairman statement itself, we can gain full insights and detailed future directions of the company where it shows that the board and management has full knowledge and control of its plan. This is especially important when we expect future earnings growth for certain company where the management can develop highest value of skills to strive higher. 

Again, survival and outstanding in pharmaceutical industry is almost mission impossible. With Malaysia aiming to become country with high income before 2020, introduction of minimum wages policy has driven the company cost to climb and slash the margin. Also, capital expenditure is very high where the company spends a lot of capital on patented and non-patented drugs. Research and development is vital to stay on the competition’s track where large portion of funds will be utilized. Also, producing patented drugs also means that the competitors are also doing the same. Therefore, strong competition still awaits Hovid in the future.

Cash flow from operating activities faced extreme volatility during the past ten years. Even worse, the recent cash is at a lower level than ten years ago. Although both ratios are up to satisfactory level, it has not been consistent throughout the past ten years which is lack of stability. There is a moderate amount of money averaged RM3.5 million spent on capital expenditure which is minimal. In recent years, the company fulfilled its obligations by gradually paying off all the loans drawn few years back. Although there are no dividends for few consecutive years, I can see that the company is having a positive restructure based on its cash management.  Where intrinsic value is irretrievable, gauge of book value is ([223680-37807]/762080=RM0.244) where the market price is still higher at RM0.335.
Stock: Hovid Code: 7213

GUINNESS ANCHOR BERHAD Value Evaluation

Guinness is another well-established listed brewery manufacturing company which possesses lots of upside potential and expansion opportunities. In terms of its product mixed, one of the most favored and unique products that are offered is Shandy with least Alcohol content where it is suitable for the light drinker. In discovery of market expansion, targeting of light drinker is one of the most strategic ways to fight for additional market share. Also, the parent company itself is also well known with the sponsoring of “The Guinness World Record” record book which gains tremendous amount of popularity worldwide via television broadcasting and published annual record books, even non-drinker realize the “Guinness” brand of the “World Most”. As for capital expenditure, the company need not rely on research and development for survival purpose however in every beverage industry, the most common ways to expand is to acquire another company or brand in order to decrease the number of competitors and strengthen its front line where huge expenditure can be incurred sometimes. Brewery industry requires heavy capital investment as well as unique brewery recipes which makes it hard for others to enter.

Similar to Carlsberg, brewery industry find it hard to expand in a large scale in a Muslim-dominated environment due to religious and political pressures. As fierce competitions are going on and companies are fighting for shelves spaces in retails and restaurants, strong marketing campaigns are deployed to sustain and increase the company’s market shares where it consumes almost 40% of the gross profit portion from the company annually.

Operating cash level in the past ten years appears to be climbing steadily where the company is performing healthily. Both ratios are also far beyond the standardized level where the company is efficiently employing its fund and assets to produce profit. Management of cash in the past was fine except for 2013 and 2012 performance where RM350 million worth of additional funds are collected and the dividend distribution is increased to the range between 200% and 300%. It is especially unhealthy when company used borrowed fund to issue dividend. Hence, it is not a good pick at the moment. 

Stock: GAB Code: 3255