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