Value Buy: Hirotako

Hirotako Holdings Berhad, an investment holding company, engages in the manufacture and sale of automotive components in Malaysia. It offers safety restraint systems, including seat belts, airbags, and steering wheels to original equipment manufacturers. The company also provides acoustic, thermal, and composite materials, such as noise dampers, sound insulation and absorption products, interior trims, and electrical components. In addition, it offers precision metal forming and machining components and services, including steering wheel, air compressor, shock absorber, and seat belt; components for electrical and ventilation fans; components for audio and video, air conditioner, washing machine, refrigerator, gas cooker, and television cathode ray tubes; and CNC machining components, such as steering and motor shaft.

Prospects

Hirotako Holdings Bhd is the only airbag manufacturer in Malaysia. Any vehicles which want to install an airbag (import/local) must go through Hirotako.

The company is building up its cash coffer which will be used for potential acquisitions. Currently, it has 47 million in cash or RM 0.28 / shares. Its operating margin is above 20%.

Hirotako’s performance relies on Proton’s and Perodua’s performance. Proton contributes about 40% to Hirotako’s revenue. Its other customers ­mostly for seat belts are Perodua, Toyota, Honda, Naza, Mercedes-Benz and BMW. Only Proton currently uses Hirotako’s airbags.

 

Hirotako’s reliance on the local automobile industry is due to the arrangement between Hirotako and Swedish company Autoliv AB, which prevents Hirotako from exporting its airbag modules to other countries. Despite this setback, there is room for growth. At the moment, less than 50% of the passenger vehicles sold locally is equipped with airbags. The increasing demand for safety features in passenger vehicles will benefit the group. Autoliv is Hirotako’s partner in Autoliv Hirotako Safety Sdn Bhd, in which Hirotako holds 51% equity. Autoliv Hirotako is the country’s largest seatbelt maker and also manufactures steering wheels. Also, Hirotako supplies acoustic products through its wholly owned subsidiary Hirotako Acoustic Sdn Bhd. Hirotako Acoustic is involved in the manufacture of acoustic and thermal control products used in automobiles. Hiratako has a technical tie-up with Swiss Rieter Automotive International AG for the transfer of technology.

 

Hirotako has been paying dividends of four sen per share. At the current price of 55 sen, the company has a dividend yield of 7.25%. It has P/E around 10, fully loaded with cash for acquisition, no debt, low Price/Book Value and actively buying back its own shares.

Value Stock:Advance Information Marketing (AIM)

Advance Information Marketing Berhad, together with its subsidiaries, provides customer loyalty management solutions and business process outsourcing services. It develops and offers loyalty and database management software applications and information technology infrastructure. The company provides integrated solutions in the management of customer loyalty services; procurement solutions through local suppliers and mail order programs; international outsourced procurement services; business intelligence solutions; integrated marketing solutions; contact center management solutions; technology infrastructure solutions; and contract manufacturing services for the manufacture of electrical products and home appliances. It has operations primarily in Malaysia, Singapore, and Brunei. The company was incorporated in 2004.

Prospects

Advanced Information Marketing Bhd (AIM) is acquiring a 25% stake in Customer Loyalty Solutions (Shanghai) Co Ltd (CLSS) for US$410,300 (RM1.44 million) to further expand the sales of its products to the wide consumer market in China. With the current state of China’s economy, there is a tremendous amount of opportunity for loyalty management services across all verticals.

The expectations of the average Chinese consumers had increased and they no longer were comfortable to patronise state-owned stores and unsanitary outdoor markets. This presents a unique opportunity for a loyalty services provider, who could help companies operating in China capture the loyalty of its humongous customer base. China is emerging as a viable location for business process outsourcing.

Aside from low labour costs, there was a growing population of skilled workers with the required linguistic skills, translating into potential contribution to the country and establishing itself in the field of loyalty programme management.

AIM is collaborating with Japan to launch an online shopping website (www.viimall.com). This portal shall be offered to the clients as part of the value added service offerings of the company and to promote online transactions and member retention. This initiative is in line with the expected increase in internet users in Malaysia and around the world. The website allows the client’s members and consumers who purchase or signed-up for the IMAGE magazine to place their fashion orders directly via the online website. Eventually, this business model is targeted to reach a wider audience and supplier base.

AIM seeks to expand strategic co-operation and knowledge sharing with COLLOQUY business partners in North America, Europe and Japan into possible joint ventures. It has on-going business development in Indonesia in particular the financial services and retail sector.

 

AIM is trading at 0.290, P/E around 5, Dividend around 8%, large cash reserves for future Joint Venture. AIM recently proposed bonus issue on the basis of one (1) new ordinary share for every five (5) existing shares held on an entitlement date to be determined later. Read about its clients here

 

Value Buy:Pan Malaysia Corporation

Pan Malaysia Corporation Berhad, an investment holding company, engages in manufacturing, marketing and distributing confectionery, and cocoa-based and other food products primarily in Malaysia, Australia, Singapore, and Hong Kong. It also involves in operating departmental and specialty stores, and property investment activities. The company is based in Kuala Lumpur, Malaysia.

PMCORP is in the process of restructuring.Recently,it posted a positive net income compared to losses in the last few year.Currently trading at P/E around 5,the attraction of PMCORP comes from its assets. Its book value is at around RM 0.45/share.This gives a safety margin of over 50% at current price of RM 0.19.The cash level is at RM 383 mil while total liabilities is at RM 334 mil.This means by paying off its liabilities,investors will own some of the assets (properties,businesses,subsiadiaries and fixed assets) at half the value plus a clean balance sheet.

PMCORP should be trading at around RM 0.50 to RM 0.60 to avoid being a target of acquisition. Checkout its latest financial statement to view its subsiadiaries and assets.

 

Value Stock:Tomei Consolidated

Tomei Consolidated Berhad, an investment holding company, engages in the design, manufacture, and retail of jewelry in Malaysia. It also involves in the refining of gold and jewelry; rental of investment properties; and trading of diamonds and jewelry. As of December 31, 2006, the company operated 43 retail outlets and 1 retail kiosk under the brand names Tomei, T.H. Jewelry, and My Diamond. Tomei Consolidated was founded in 1968 and is based in Kuala Lumpur, Malaysia.

Prospects

Tomei Consolidated Bhd acquired the entire interest in diamond distributor Lumiere 2006 Ltd (LL06) for US$885,853 (RM3.1 million) cash (using internally generated funds) as part of its plan to acquire the Le Lumiere brand and gain entry into Hong Kong as well as promote the brand in new markets. The acquisition would also enable it to cross-market its own products into Lumiere’s existing marketing network. Hong Kong-based Lumiere distributes ‘Heart and Arrow’ diamonds under the Le Lumiere brand.

In Oct 2007, Tomei Consolidated Bhd (TCB) has granted trademark rights to China-based Monavi Jewellery Ltd for six months, subject to renewal, to tap into the Chinese market and position itself as a renowned jewellery retailer in China. The company hoped to make inroads in China with its “Tomei” Brand with the local expertise. Tomei said it would have the option to acquire up to 51% of the operation where the IP right was being used.

Recently, Tomei Consolidated Bhd entered into a joint venture (JV) agreement with Terengganu Incorporated Sdn Bhd to manufacture and market gold gift premium products and souvenirs via a JV company, Tomei TI Sdn Bhd under the brand name Terengganu Art.

Tomei currently trades at RM 0.74, P/E around 7, Dividend 6%, with Book Value of RM 0.80. In April 2008, its major shareholder Datuk Ng Teck Fong has been accumulating Tomei shares.

 

Swee Joo Berhad : A VALUE BUY

Swee Joo Berhad, an investment holding company, provides container shipping and related services primarily in Malaysia. The company operates vessels of various sizes that provide liner services between peninsular and east Malaysia in addition to regional routes that cover Thailand. It is also a box operator regional routes that cover Ho Chi Minh in Vietnam, Jakarta and Surabaya in Indonesia, and Singapore. Swee Joo also offers transportation and haulage services; containers warehousing, handling, repairing, and washing services; and shipping agency services. The company was incorporated in 1997 and is headquartered in Kuching, Malaysia.

Prospects

Swee Joo Bhd is transporting crude palm oil (CPO) and related products to China, India and Indonesia. The company is in expansion trail and planned to invest RM500mil in more tankers and container vessels in the next few years to expand its fleet. Currently, the group plans to add one or two vessels to transport logs from Papua New Guinea and Solomon Islands to China and Vietnam in view of the strong demand.

The group now owns 34 vessels, comprising a 7,000-tonne chemical tanker, 15 container ships, 10 general cargo ships and eight support vessels, which ply domestic, intra-Asean and international routes.

Swee Joo at RM 1.13, P/E around 7, and directors are accumulating more shares since a few months ago.

Read more about Swee Joo over the here!

    

 

 

Value Stock Highlight: COCOALAND

Cocoaland Holdings Berhad, an investment holding company, engages in manufacturing and trading processed and preserved foods, fruits, and other related food stuffs primarily in Malaysia. The company also engages in the wholesale and retail of processed and preserved foods; and the manufacture of fruit juices. Its products include chocolates, cookies and wafer, nuts, candies and gummies, snacks, and soft drinks and jellies. The company is based in Kuala Lumpur, Malaysia. Cocoaland Holdings Berhad is a subsidiary of Leverage Success Sdn Bhd.

Prospects

Cocoaland Holdings Bhd has set-up a plant in Fujian province in China under a 50:50 joint venture (JV) to produce its popular Lot 100 fruit gummy products. Cocoaland is one of the few gummy manufacturers in Asia. In the JV, Cocoaland Industry Sdn Bhd, signed an agreement with China’s La Bi Xiao Xin International Co Ltd. 

The JV company, Coco (Fujian) Food Industrial Co Ltd, would involve US$5 million (RM17 million) in investment and start production in August 2007. Cocoaland will be responsible for manufacturing and its partner will look into distribution and marketing. The investment is fully funded via cash. It is expected that the earnings from the China operations coming through for the 2008 financial year and subsequently, the full impact can only be felt the following year.

La Bi Xiao Xin is a unit of Singapore-listed China Lifestyle Food & Beverages Group Ltd. It has more than 17,000 retail outlets under the La Bi Xiao Xin brand and annual revenue of over 500 million renminbi (RM221 million). The distribution network is large and perhaps in the future, Cocoaland may own 1% of China’s Market through the JV.

Cocoaland is at RM 0.61,has a low P/E of around 8 compare to the industry standard, P/BV of 0.90, Dividend Yield 6%. Check it out yourself ! 

 

 

 

 

MCMC vs Astro plc

MCMC released a public reprimand yesterday to barred Astro barred from increasing the number of channels until it improves its services to the satisfaction of the Malaysian Communication and Multimedia Commission (MCMC). MCMC has also given Astro a deadline to comply with the Multimedia Communications Act 1998.

Let’s analyse this news at a different point of view with facts and figures:

Astro’s license was issued in 1997 under Telecoms Act and Broadcasting Act. This Act was abolished and replaced by the newer Act namely, Multimedia Communications Act 1998. Logically saying, Astro currently was not governed by any Act and thus it is a free media until it join the new Act. MCMC tries to lure Astro to accept the new Act by extending Astro’s license from 2017 to 2022. This is only additional 5 years extension. Will it be able to lure Astro to take the rope and tight itself?

We know what agenda which constitutes the new Act. The new Act wants to control Astro, just like how it controlled Media Prima, STAR, NST, THE EDGE and other media/press. MCMC is afraid of Astro since it has grown from nothing to big giant, just like Airasia compares to MAS. Let’s think logically for one moment, after 2017, does Astro need license anymore to protect its business? Astro has able to build its brand in majority of the minds of Malaysians. Since its inception, it spent billions in branding and marketing to strengthen its position in Astro. This effort eats into the revenue of Media Prima and now the government wants to use the law to tight down Astro.

Let’s put ourselves in two situations.

Scenario 1: One morning, you and your family switch on the TV and there is no Astro anymore. Astro Malaysia has to be shut down because of intense control and pressure. So, Astro in Malaysia has to be shut down but Astro will still continue its service in our region. How do you feel?

Scenario 2: You and your family switch on the TV and there is no TV3, TV2, TV1, NTV 7, 8TV, TV9. How do you feel?

My analysis on the situation:

1. MCMC really cannot do anything to Astro because it is not controlled by any Act. The old Act has been abolished and Astro has yet to migrate to the new Act.

 2. MCMC can only bark at Astro using newspaper and free TV to tarnish Astro’s image. But this will not affect Astro severely because it has monopolised 40% of households in Malaysia considering Malaysia has 5.5 millions households. In another words, the brand Astro lives in at least 11 million Malaysians’ minds (5.5 million households x 40% x 5 person per household). It is not impossible to ask the 11 million subscribers to ban Astro.

3. Media Prima and Telekom will start IPTV. But this type of business requires huge start up capital, attractive and new contents, and cheap subscription fee. It is a very risky venture/to come in and fight with Astro. How do you convince a 5 year Astro subscriber to shift to IPTV? What type of programme does IPTV can offer to its customers when almost all content has been monopolised by Astro? IPTV need at least 10MB broadband (Please read my previous post on Astro) but our country internet penetration is only 12% currently. How many subscribers can you steal from Astro to achieve economies of scale? Unless IPTV can offer pornography (but this is against the Act), it cannot beat Astro.

4. If Astro does not want to comply with MCMC’s request, what the government can do? Of course we can charge Astro using Sedition Act and National Security Act but this would be too obvious and not so popular when Malaysia still has a low Foreign Direct Investment.

I’ve been an Astro subscriber for almost 10 years. If compare with TMNET and Streamyx, Astro’s service is relatively better. I wonder why MCMC did not reprimand TELEKOM for its bad service. I want to quote from a Minister, ”KALAU TAK SUKA, JANGAN TENGOK LAH” !   

 

 

 

  

 

KLSE Security Analysis:Owner Earnings

After applying criteria for analysis recommended by various books,I have created a checklist before buying any stocks in KLSE.Starting from now,I will elaborate on these criteria under KLSE Security Analysis title in the future.To understand these criteria,you should have medium level of understanding of financial statement.This part has to come from your own initiative.No pain,no gain! 

One of the most important criteria in my analysis is to calculate ‘owner earnings’ from a business.This criteria is recommended by Warren Buffet in his letters to shareholders and has been summarized under a book written by Warren Buffet himself and edited by Lawrence Cunningham entitled ‘Lessons for Corporate America’.Make sure you buy 2007 edition. Owner earnings concept is very useful analysis to gauge what the company has left for its shareholders.Rising share prices does not necessarily means the company has added value for its shareholders.When company earns X from business,it can choose to reward its shareholder by paying a dividend or retaining those earnings and reinvesting them to increase the underlying value of the company. If the company employes this earnings efficiently, over a period of time, the company’s underlying value will go up and cause the stock’s price to increase.

This differs from the view most investment professionals hold. They might have a CFA but they don’t consider earnings theirs until the earnings are paid out via dividends. One good example of owner earnings is the stock of Warren Buffett’s holding company, Berkshire Hathaway, Inc. In the 80s,it traded at US$500 a share. Today, it trades around $76,000, and it still never paid a dividend. The increase in the market price of the stock came from an increase in the underlying value of the company, caused by Buffett’s profitable and efficient reinvestment of Berkshire’s retained earnings.If a company believes it can profitably employ the earnings at a rate of return that is better than the investor could get, the management should keep the cash. But most company keeps on feeding shareholders with ’sweet’ dividend to attract traders. This act is detrimental for long term shareholders and the business but good for traders.When company suddenly declares juicy dividend,a value investor should look further.

 If you have attended any AGM before, you will be suprised how most shareholders react when the management announces its dividend policy.For me,unapropriate amount of dividend is like a ‘bribe’ to shareholders to blind them from seeing the management incompetencies and failures.Hence,value investors must really make sure the dividend policy is suitable for the business.Rising dividend amount does not always mean good. In addition,dividend is taxed!

In KLSE, it is common for some security analysts to assign a higher target price to companies that pay a high dividend than to those that don’t. This is true even when the company that is retaining all its earnings is an infinitely better enterprise. Maybe the analysts’ brains are controlled by directive from the top. Value investors should check the quality of management by what it does with its earnings. If it retains them, does it profitably employ them, or does it squander them on dreams of grandeur? By analysing the history of the management performance, we can come to a conclusion whether the underlying businesses will create consistent earnings to allow make its shareholders rich.So, how does an investor calculate owner earnings?

1^st , check the ‘cash from operations’ under the statement of cash flows. See whether cash from operations has grown steadily throughout the past 6-10 years. If it has steadily growing, then you can go further.

2^nd, calculate Owner earnings = net income + amortization and depreciation – normal capital expenditures. If owner earnings over the 6-10years,then it is a good indication. Owner earnings adjusts for accounting entries like amortization and depreciation that do not affect the company’s cash balances. So, owner earnings can be a better measure than reported net income. If you want to be more conservative,you can go on to subtract from reported net income:

• any costs of granting stock options, which divert earnings away from existing shareholders into the hands of new inside owners

• any “unusual,” “nonrecurring,” or “extraordinary” charges

• any “income” from the company’s pension fund.

3^rd, calculate the growth of the owner earnings. If the growth of owner earnings is around 7% or more for the past 6-10 years, the company is a stable generator of cash, and its prospects for growth are good.

But is owner earnings foolproof? It’s not a sole determinant for business of course! For example, when a growth stock is investing heavily in new venture/market, the owner earnings will certainly plunge to negative territory due to losses or charges. If the company has good management and experience, the owner earnings will recover and value investors who hold on through the painful period will be richly rewarded. Investors may also use owner earnings to compare companies in the same industries to gauge their strengths and weaknesses.The value of the business can also be estimated by forecasting future owner earnings and bring them back to present value. This value may be used to check with the calculation of value using Free Cash Flow. More criteria will be introduced under this section. So, stay tune!       

What is Free Cash Flow?

Cash flow statement is a more reliable source than balance sheet and P/L. Businesses pay all its bills and expenses using its positive cash flow. Whatever left for growth and value is free cash flow (FCF). Let’s me explain FCF using an example Company X. Company X spent RM 100,000 for advertisement for its products. It received RM 400,000 from revenue because customers paid for the products. RM 200,000 (50% of revenue) is spent by the company on utilities, salaries. RM 400,000 – RM 300,000 = RM 100K left in the bank at the end of the year. How to calculate the final FCF? RM400,000 of revenue, RM300,000 of expenses that required cash, RM 50,000 of depreciation deduction. (No real cash involved but for tax purposes).  Taxable income is RM 50,000 20% of corporate tax for RM 50,000 is RM 10,000. So, Net income is RM 40,000 But, Net Income is not Free Cash Flow To calculate the actual free cash flow, use revenue and subtract any cash expenditures and add back depreciation. RM 400K – RM 300K – RM 10,000 = RM 90,000 For Company X, free cash flow would be RM 90,000 even though net income reported to shareholders was RM 40,000. The company use RM 90,000 to grow its company further. Let’s repeat the last operation. Company X spent RM 100,000 for advertisement for its products. This time, the company needs to borrow RM 30,000 from bank. It received RM 400,000 from revenue because customers paid for the products. RM 200,000 (50% of revenue) is spent by the company on utilities, salaries. Finance cost is RM 3000. (Assumption) RM 400,000 – RM 300,000 – RM 3,000 = RM 97K left in the bank at the end of the year. Again, we deduct another RM 50,000 for depreciation; Taxable income RM 47000. Tax is (RM 47000 x 20% = RM 9400). Net income is RM 37600; free cash flow is RM 87,600 Why did the net profit decrease? The company did not generate enough cash to maintain and grow its earnings. Do you check how much FCF your company is making? My point is, without increasing FCF, a business cannot survive for long. It must keep on depending on borrowings to fund growth. If Company X makes a Revenue of RM 600,000 due to market monopoly and branding, it will not need to borrow to fund its growth anymore. Remember,growth needs money. And Cash is King.

Business Analysis:The Scuttlebutt Approach

Scuttle butt approach in investment was popularized by Philip A. Fisher.In his book,’Common Stock,Uncommon profit’,Philip explained that an investor can get better view of a company by interviewing its competitors and vice versa. Information about a company should be obtained at from employees, customers and clients.One should not ask its management because the management will paint the outlook with beautiful colors since it involves conflict of interest. To perform scuttlebutt, one must have a good network with many people in various industry.By socialising with these contacts,one can get a better picture before putting his hard earned money into the business. Sources of information are competitors,vendors,customers,professors and employees. Reading news from research houses and newspaper is not adequate because these sources have filtering system. The research houses and media act like the advertisers of public listed companies rather than helping the investors to understand the business.They are paid to do so.Scuttlebutt approach helps investors to obtain confidential information and ‘insiders’ information’.Of course,the investors must be very good with his communication skills to indirectly dig more information from these sources.Remember,knowledge is power!What are the basic information which an investors should look for? I highlight the questions below.

1. Do these companies have products with market potential to increase sales for at least several years? Your target company may be harvesting profits currently, but it may lack long term potential. This question can help you discern the company’s prospects (and yours).

2. How effective is R&D in relation to its size in each company? Looking at the financial ratio between total R&D expenditure and total sales is a popular but crude way of thinking about R&D commitment. Such ratios can be misleading. When evaluating a company’s R&D efforts, it is just as valid to inquire about market research as technology research. So, find out how the company investigates (and develops) its market.

3. Can you describe the sales organizations of these companies? Information about the sales operation is seldom discussed in financial reports of public companies. Fortunately, this information is easily obtained using Scuttlebutt. Of all aspects of a company’s activity, the most well-known to sources outside the company will be the sales organization.

4. How would you compare these companies’ profit margins? Sales are of value only when they lead to profits. You want to find out what the target company is doing to maintain or improve profit margin. Scuttlebutt can give you a glimpse into a company’s profit future.

5. How would you describe the way these companies treat employees? Within an industry, it is generally known that there are “decent” companies. It is also generally known that there are companies that “burn up and discard” people. Senior management is often blind to its own reputation, but others will see it clearly.

6. How would you compare depth of management? A small company can do extremely well under an able autocrat. What would happen if that key person were no longer available?

7. How would you compare these companies’ cost analysis and accounting controls? It is not difficult to churn out reams of accounting information. The tough questions are, how valid and useful is this information, and how effectively does management act on it? The Scuttlebutt method is helpful here in revealing significant problems that won’t necessarily appear on the balance sheets.

8. How would you compare the integrity of management? Without breaking laws, there are ways in which senior managers can benefit themselves at the expense of customers, employees, and stockholders. Such managers are generally known within their professional communities. The only real protection against being abused by such managers is to avoid getting involved with them.

It can be very difficult to obtain the information you need about a privately-held company. Scuttlebutt gives you access to the professional assessments and opinions of people who know a company. It’s not perfect information. However, by cross-referencing the answers you get to the questions we have outlined, you can form a picture of your target company. Scuttlebutt helps you combine your judgment with that of industry insiders to draw reasonable conclusions.