ORIENTAL FOOD INDUSTRIES HOLDINGS BERHAD VALUE EVALUATION

Oriental Food is a local manufacturer of confectionary and snacks. My attention is converged to the company’s snacking division line. Already known for its cheese balls which fill up the childhood for most people, its snack series come with a rather low price and guaranteed recipe. Although the snacking market is already filled up with popular international brand like Lays and Mister Potato, Oriental Food’s line market share has never deteriorated. Utilizing its position of cheap and unique recipe, it continually captures the taste and preference of fellow Malaysians. The group further extend their advantageous position by offering their products at a smaller quantity. With the already low price offered, it just get cheaper and reach extensive target groups than usual. The group has also done quite a splendid job by allowing plenty of factory visits for charitable organizations and schools. Marketing efforts are seen where the group seeks distribution channel through family carnivals by sponsorships. Capital expenditure is undergoing a rather inconsistent pattern as there is a high of annual RM14 million spending and there is zero spending on the other extreme. However, the chairman indicates that the group is focusing on innovating new products to defend their market share. As there will be large scale research and development going on, I don’t see the group’s cash reserve allows it with only RM15 million which is equivalent to only 1 year spending.

As mentioned above, the company is competing in a market where a lot of competitors are aggressively fighting for their own market share. ( Note that it’s not the word ‘increase’ I’m using, instead it’s FIGHTING) Promotion of lower prices are often held regardless of festivals or special events. Also, people’s awareness has increased towards their diet. With this trend going on, snacking business will be more difficult to survive with stricter monitoring of the food process. 

The operating cash flow is growing steadily with an annual growth rate of only 4.61%. ROA and ROE has rather poor performance. With the three poor quantitative indicators, the firm has still spaces of improvements. Filtered out of my list.

Stock: OFI Code: 7107

INTERNATIONAL BUSINESS MACHINES CORP. VALUE EVALUATION

As one of the leader of commercializing computers from personal use to super computer fit for giant corporate needs, IBM has established a very solid brand that is envied by many. Initiating its business mainly in hardware segments, the company spread its wing further to other ventures such as business solutions, city planning, cloud drive management and anything you could imagine when you start a company which requires information technology services. As an early innovator, IBM gains a lot of experience and come up with a very good company structure with specific task segregations and specializations as what we can see from its websites. This is why IBM is still standing strong despite the rise of various startups and dot com bubbles burst where its expertise is fit for the practical usage in many companies. IBM further put itself in a very advantageous position by opening branches all over to world where it can effectively expand its network and business opportunities. Throughout these few years, IBM future prospects seems eroded. To me, the potential is still there. Imagine even when Google conquer the IT world, practical business solutions are still needed to keep companies’ massive administrative tasks running. ( To me, wearing glasses and watches simply cannot replace the conventional method isn’t it? ) For IT company like IBM to fend off its workers, much research and developments are needed for innovation purposes. Opposing to traditional do it in your lab method, IBM welcomes more collaboration from other parties in carrying out more innovations where it is more efficient and cost saving.

When diversification is overly adapted, a company will lose its focuses and this will eventually invite unwanted disasters. Cost are reported rising in an explosive manners in various reports. IBM also sold their server business as less profitability is generated. These are all resulted from the company inability to manage such a diversity of products and services even with a large scale work force. As a matter of fact, IBM has been focusing much more on restructuring their cost and converging their business with several disposals along the way. 

Based on the 10 years cash flow, the company has generated a very steady growth of operating cash flow level with an annual growth rate of 15.27% which is astounding! Not to mention both ratios performing at a satisfactory level. Unfortunately, the ratio has dropped for almost 4% for ROA where it record a decline in net profit. IBM’s debt has been following a consistent pattern where they pay almost 80% of their debt at the respective year. This indicates a healthy financing practice. At the same time, the company is also maintaining its cash at level about $10 billion. As above strong suggestion for the business’s future prospect, the company intrinsic value is amounted at $196.13 (note that I used the high beta and after a 20% margin of safety) compared to the current price of $192.27. At time of writing, I am owning the shares of IBM.

Exchange: NYSE Stock: IBM

KAMDAR GROUP BERHAD VALUE EVALUATION

Kamdar is a department store which bring in different concept for the local shopping experience. Aside of conventional products like casual wears, Kamdar also provide varieties of fabric for clothing and decorating uses. This has become a one stop shopping center for most of the housewives (This is where most of the male individuals suffer waiting and giving comments.) As I did evaluations for several garment manufacturer and trader before, I discover that Kamdar present its products in a way that fits middle and lower class needs where everything comes with a very low margin and thus push up the sales volume at the same time providing products with the moderate quality. Compared to other department stores, Kamdar put a very heavy emphasize on selling its fabric which is displayed in a very big portion of its floor space. As there are not much value added process like logo printing, packaging and clothing designing, this enables Kamdar to manage its inventories at lower cost without doubt. In order to expand its distribution network to reach more consumers, the company opened several branches across different states in Malaysia. Therefore, most of Kamdar’s capital expenditure goes to opening these branches for maintaining revenue level.

As purchase of garments and fabrics is a highly seasonal affected, customers flow will only increase when there’s festivals or huge sales promotions. Therefore, business will strive for a certain period and drop to bottom at another time. This causes a major cash flow problem where the company’s cash is stuck with the inventories for a very long time and lower the ability to order up to trend products. Aside of that, operating and maintaining department stores will lead to a very high cost. When stocks are mark up with very low margin, increasing overhead will slice the company’s profit lower. Recently, it is reported that there is substantial amount of unapproved cash withdrawals from its subsidiary where it reflect the company’s internal control is weak. This incident, however doesn’t deteriorate the fact that Kamdar’s ability of generating future earnings and hence it might be opportunities to buy it at fair price.

Although there is positive indication, the company’s operating cash flow is undergoing an extreme fluctuations for the past ten years. For evaluation purpose, I will eliminate 2012 to smoothen the cash flow annual growth rate calculation which is 12.14%. As for returns on assets and equities, it is quite weak and shows inefficiencies for ten years straight. I have no reason to go further after interpreting these basic data. Filtered out of my list.
Stock: KAMDAR Code: 8672

NTPM HOLDINGS BERHAD VALUE EVALUATION

Tissues branding like PREMIER, COMPACT, ROYAL GOLD have long penetrated the market shelf space.  These products aim for their respective markets such as common household sanitary use, toilet use and quality use which has established a very strong branding image and awareness among the public for a long time. They are all originated from NTPM Holdings which is located in Penang. Recognizing the opportunity of turning low cost pulps into tissue products from China, the company is born with multiple product mixes including rolls, boxes and pocket tissues. As human civilization evolves, hygiene plays a big part when it comes to our daily routine. Therefore, use of tissue will remain resilient in the next decade regardless of the scientific breakthrough (I mean, people still need to wipe their sweat and clean their mouth even if there’s a robot helping them right?) Recently, competitors from Indonesia have started to join the competition. Even Malaysia’s giant retailer such as Giant and Tesco do not miss out the party. However, NTPM’s Compact branded rolls which are known for its thick and solid content is far enough to fend off these emerging competitors. As the company eventually diversify into personal care products, capital expenditure has been increasing. For year ending 2013 alone, capital expenditure is amounted at RM50 million which consumes 70% of the company’s net income.

Hygiene problem is highly encountered by undeveloped and developing countries which originate from water source and living cultures. Use of tissue is inevitability important for hygiene purpose. But, human awareness towards environmental issues are getting higher than before. Consumption of tissues is not environmentally friendly after all (Although Malaysian’s awareness towards this issue if far from preparation, the evolution will eventually come where people decrease the use of disposable sanitary products, but the timeline is still vague for me). Diversifying into personal care where there is a lot of existing competitors, I don’t see there’s too much of growth potential in the future unless the product mixes are somehow undertaking different innovations and strategies. But yet, I don’t see any at the moment.

As for operating cash flow, the company record an annual growth of 5% for the last ten years. It’s rather a low cash level compared its EPS. As for both of the ratios, it turn out to be satisfactory return for assets and equities. Prior to the company’s expansion plan, a lot of financing resources are needed. Drawdowns of loan has also scratched the figure averaged at RM30 million. Not to mention current liabilities ranging near RM100 million. Possessing cash amounted to RM30 million at the same time, the firm is kind of over leveraged to me. With price of RM0.85 that is almost the double of previous year’s figure, my calculated intrinsic value shows a number of RM0.588 which is far from the market price. It will be on a very long upward trend although it is somehow overvalued. The fact that the possession of its economics nature superiority is undeniable which still makes the company one of my top watch list.
Stock: NTPM Code: 5066

MAGNI-TECH INDUSTRIES BERHAD VALUE EVALUATION

Magni-Tech is one of the counters that catches my heavy attention. Aside of playing its role as packaging business, the group further ventures into garment manufacturing industry as well. A combination of both decreases the risk of company from enduring too much risk. Looking in deeper, packaging business has accounted for 20% of the group’s revenue where most of the businesses’ clients are venturing in non-cyclical business such as food, healthcare and beverage. Thus, it ensures that the company will generate a portion of steady revenue. As for the garment manufacturer segment, most of its revenue is generated from export markets. Different from other garment manufacturer, Magni-Tech doesn’t emphasize on marketing and building the brand of its product. Instead, it fill up orders for garment trading companies who wish to outsource their production line. Thus, Magni-Tech itself is more on business to business transactions. With an average annual capital expenditure of RM5 million(it is barely about 1% of the total revenue), the amount is minimal enough as it is spent for increasing the company’s operation efficiency rather than continuous innovation for survival purpose which is a good thing.

As the company generates big amount of its revenue overseas, this exposes the company to a very high foreign exchange loss. ( I don’t do the Maths but based on news about Malaysia Ringgit’s depreciation in 2013& 2014 2^nd quarter, it is scary enough to estimate it.) Also, instead of the company’s ability to cushion its impact in case of global financial crises, its garments sectors are still depending on the international market on a large scale. Finally, its vulnerability is further defined by its holding of investment securities (not subsidiary and associate, just mere investment purpose) is worth a whopping RM22 million which is about 25% of its total fixed assets. I’m not saying the company is a speculator, but with such an amount of investment with the company’s nature (as garment& package manufacturer and trader), the risk is there.

With its 10 years operating cash flow, things are looking good as the company undergoes a healthy upward trend. Returns on asset and equities surpass the bench mark of 7 and 15% respectively. For 6 consecutive years, no drawdowns of loan have been made (This is remarkable as it includes 2008& 2009). Up to date, no short term and long term loans are recorded in the company’s balance sheet. What’s more is the company cash reserve is positioned at RM50 million (as at 2013 April 30). It is currently priced at RM2.70, compared to its intrinsic value of RM2.4( I set the margin of safety 25% for the risk I’ve mentioned). It is slightly overprice but still itis a counter full of potential.

Stock: MAGNI Code: 7087

LONDON BISCUITS BERHAD VALUE EVALUATION

London Biscuits Berhad is a confectionary conglomerate which hold its presence in Malaysia food industry. It is well known with its comprehensive cakes production line. Different from other snack manufacturers, London Biscuits focuses half of its resources towards the manufacturing and innovating of cake. This enable the company to operate with the advantage of very large economic scale as most of its plants and machineries are dedicated for single major type of product.  As the market is getting competitive than ever, existing conglomerate are fighting for their own pieces of pie, not to mention the entry of foreign products. Price war is often seen via promotions in different markets for this kind of products. In order to capture some market niche, the company has especially apply for the use of Disney characters trademark to distinguish their products from their competitors. This enables London Biscuits Berhad to leverage on Disney’s strong branding which is well established via media industry. Unfortunately, this kind of strategy cannot last long as consumer will eventually ignore the original brand with their mind positioning influenced by the package.

In my very own observation, consumers in Malaysia prefer crackers rather than cakes some of the time. As crackers consumption of the same price can last longer, it is more worthy than purchasing cake products. Thus, it eventually push down the sales of cake products. Also, cost of producing cakes are a lot higher as they need to undergo more procedures of manufacturing compared to other snacks which further heightened the cost. Tin box package is often used with crackers which ultimately makes it convenient for storage and also treated as a gift upon special occasions. This small difference leads to tremendous purchasing behavior in the end.

Based on its cash flow, recent figure incurred by the company is lower than it is 10 years ago. It is understood that this company undergo several acquisitions in the past. However, buying into companies that eventually suck up your cash, I don’t think it is worth it. Worse, return on both assets and equities are astonishingly low, which reflects the company poor deployment their resources. With its poor quantitative performance, I will filter this company out from my list. 
Stock: LONBISC Code: 7126

A Short Glimpse to "Essays from Warren Buffett"

1 month ago, a close relative of mine recommended me to this book of “Essays from Warren Buffett”. After “Intelligent Investor” and “Security Analysis”, it grants me a new perspective of evaluating stocks especially where they mentioned, figure on the balance is taken as a beginning, not at end. True enough, skepticism is a must for every investor if their decisions making are aimed for a very long time frame. Well, I will just highlight matters that will bring a lot of impacts (sometimes only for me but not you). I hope this can serve as your summary for the whole book. Better, if my writings can make you to pick up the book to authenticate my summary. (Talking about skepticism)

On diversification: Less diversification allow you to focus fully on your portfolios while making serious considerations upon buying stocks of your own choice. To me, this diversification must be spread to other class of assets such as commodities, real estate, paper assets and business. (Rather than MAS or AIRASIA, they are still paper assets) Venturing into different class of assets at different points of economy cycles grant you the biggest security of your investments against economic vulnerability.

Outstanding business determinants: Product itself, management, competitors and debt levels (cash flow management). These are also known as the moat of protecting a business from different kinds of threats.

Price Vs. Value: Price is what you pay, value is what you get. In the stock market, this two is often mixed up. Value is in term of book value( shown in the balance sheet as total assets minus liabilities) and intrinsic value (take in accounts of the company’s future prospect). Comparing these with the market price is a must.

On junk graded bond: Seemingly attractive with their high yields, it simply cannot cover the possibility of you losing your total principal invested in this kind of investments. Investing in paper assets (partial ownership of certain companies) takes a lot of common sense. Even loan sharks apply the theory better than corporate sometimes. ( If you know what I mean)

On retained earning: Company must consider about their ability to utilize every 1 dollar they retained to reproduce 1 extra dollar of profit. Failing to fit in this requirement, it is often better for the company to distribute their earnings rather than keeping it.

On stock splits: It is a movement that will attract short term speculators which bring more fluctuations to the market price. A true company will focus on increasing value for its existing shareholders.

On Goodwill: There are two kinds of goodwill which are accounting and economic. Accounting goodwill is calculated based on the purchase price minus net asset of its subsidiary. This kind of goodwill will undergo annual amortization for certain number of years which appear in income statement as expense. Secondly, it is the economic goodwill that represents the brand name and patent. This kind of amortization cost can be ignored because there is a very huge possibility that it will be reflected in a higher price if it is truly a splendid company. Well, that’s all for the first part.

KHEE SAN BERHAD Value Evaluation

Khee San is Malaysia’s largest manufacturer of sweets and candies. Its products undergo a very intensive marketing strategy where we can witness its existence in different level. From small retail markets to mobile retailers and giant markets, we are able to purchase its products for either small or large quantity where it shows that the firm possess an excellent distribution channel. In terms of the company’s size and its well-developed product mixes, they have far surpassed their competitors. Although it is not as dominant as Wrigley the famous chewing gum ever existed, its chewy candy possess the potential to compete with Wrigley’s (It’s just my personal taste and preference anyway). With the company’s momentum picking up, acquisitions of new plants and machineries were done in recent years to increase the production efficiency to replace the obsolete ones. This indicates that the business nature itself need not much capital expenditure for a long time. Furthermore, with such excellent product mixes, the company is able to retain the market’s preference for a long time until its cash flow is able to finance further product discoveries.

Unfortunately, the market is flooded with a huge variety of candies and gums that put Khee San in a situation where there is no regulated competition. In other words, ability to raise price is quiet low when it comes to such stiff competition. Also, as Khee San is now an associate of London Biscuits Berhad, its future intrinsic value will never be in a good position ( No offence, but figure indicates that London Biscuits’ track records is quite weak). If there is any magic combination for these confectionary that lead to a possible food industry evolution, my view might be changed.

According to the operating cash flow for the past ten years, it undergoes a mild fluctuations. The cash level was low until 2012 where it enjoys sudden boost. No consistent upward growth is shown. Also, both ratios are not showing satisfactory results where it is significantly below standard. In my opinion, this company fails to show values consistent to the growth of future earnings.

Stock: KHEESAN Code: 6203