Meng Teck is an author, investor and entrepreneur.
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Before you continue reading,please read & understand the disclaimer carefully,
I am obliged to tell you,as of the time of writing,I am holding shares of this company.
L&G is an investment holding that is comprised of 3 businesses, the property development business,education business and oil palm business. The revenue of the group is mostly contributed by the property development business(~90%) whereas the education business and oil palm business each contribute about 5% to the revenue. Therefore,it is appropriate to say that L&G is a property development business.
In my opinion,the success of property development businesses depend largely on the location of the land that the company has and the management’s ability to evaluate, acquire and to develop these lands into premium housings or office buildings. Therefore, the criteria I’ll be looking for in a property development company to invest in will be, competent management and strong financial position. Other than having a huge size and branding. it is rather difficult to differentiate oneself from its peers in this industry.In this aspect, I do not feel that L&G has a lot of advantages over its peers.
What interests me in this company is its management. The current managing director is Mr.Low Gay Teck. Mr.Low was appointed the Managing director of L&G since 2008 under the influence of Mayland,which is the major shareholder of L&G with 16.94% shares,but prior to that,Mr.Low was the managing director for Mayland. Upon reading through the annual reports and I found that Mr.Low has had 25 years of experience in property development and project management. Interestingly, if you look at the earnings per share of the company, you will realize that the group’s earning has been on a steady growth rate since year 2008 (where Mr.Low took over) and the Return on Equity has also been increasing steadily. A Return on Equity of more than 15% signifies a competent management(The company is having ROE of 17% as of 2013). If we compare the ROE against its peers, this company is doing better. According to an interview with Mr.Low that was published in Nanyang Newspaper, the company’s tremendous improvement over the past five years was mainly contributed by these factors;
1) Emphasizing focus on their core business,Property development.
2) Rallying the enthusiasm of employees
3) Fully utilizing the resources of the company,especially the lands on premium areas.
4) Constant effort to reduce debt
5) Setting a clear long-term vision
6) Restructure of management
If we compare the earnings per share of the company over the past five years, the eps has increased 187% from 2.56 in year 2009 to 7.35 in year 2013 or an annualized growth rate of 23.5% every year! However,if you compare the eps of year 2008 and before it,the company has been making very little money and sometimes even losing money. Don’t you think that an experienced management that is able to turn a company from loss making to profit making with double digit growth rate in just 5 years , knows what they are doing?
Now that we have covered on the management, let us check their financial position, as of 31 December 2013. The company has a cash ratio of 1.60. This means that the company is cash rich. Not only will this company be able to pay off all its liabilities, it is also in a ready position to take on good opportunities that arise thus ,further increasing the shareholder’s wealth. The total liability of the company compared to the asset is in the ratio of 1 : 3.66. This signifies that the company is in a strong financial position. What this means is that we wouldn't have to worry too much about the company when there is crisis or similar problems because the company is likely to thrive in those conditions.
The revenue has been growing at a double digit pace across the years. The revenue grew from only 37 million in 2009 to 216 million in year 2013 which is an increase of 5.8 times or an annualized growth of 42.3%. This kind of growth rate is amazingly high. However,the managing director has said that the growth rate were principally due to the land resources that was purchased at a low price long time ago. In the annual report,it is also said that the current increase in profits and revenue were principally derived from our property division, led by the successful completion of the 8trium,and the two on-going development projects namely The Elements@Ampang and Damansara Foresta. Besides these projects, the company is also involved in a Joint Venture in Melbourne,Australia named Hidden Valley and also a resort building project. The managing director also said that income in the near future will be good due to an amount of unbilled sales (The amount stated by different media contradicts). However, moving forward, the growth rate may not be as high anymore as they have run out of good lands to develop but then again,the management has been actively planning to increase its recurring income through renting activities. The possibility of the company moving towards the direction of becoming something similar to Real Estate Investment Trust (REITs) is not denied by the management. What we can conclude here is that the management is now planning ahead and thinking about creating value for the future which is good sign.
Now that we have covered on the management,financial position and growth prospect of the company, it’s time to see if it is the right price to buy. In an interview with Mr.Low conducted by Nanyang in April, Mr.Low expressed that he thinks the stock is undervalued (when it was trading around 45 cents) and is worth collecting in small amount. How many times have you seen a managing director telling everyone, ‘Buy my company,its UNDERVALUED!”
Through my calculation,the forecast-ed current diluted (due to ICULS) EPS is 10.12. I simply took the 9 months cumulative eps of 7.59(diluted) and multiply it by (4/3). If we take this EPS and compare with the price,we can get a PE(Price/Earning) of 5.63.
This means that there is still room for the stock price to move up even if the eps is constant and not growing. However, as we have covered earlier that the future prospect of the company is positive. Then we have to answer this question of why the PE of the company is so low when the company is doing so well? I believe that the market has not been able to follow the growth rate of the EPS and therefore, the growth in price lags the growth in EPS. More importantly, I think the market is worried about the prospect of property development companies, especially when property prices has reached a peak and sales of properties has started to slow due to cooling measure. In fact, many famous investors including Mr. Koon Yew Yin, founder of IJM, are not optimistic on this industry. (Which is very reasonable) . However, At the price of 57 cents,I believe that the share is still a very good buy. In my opinion the share is worth at least, PE*EPS (8*10.13) = 81.04 cents at a PE of 8.
But given the growth rate,strong financial position and competent management, I believe there should be a premium of at least 20% to buy this share from me in the short term (within 2 years).
Therefore,my short term target price for this share is 97 cents which is a 70% difference from the current share price. In fact, if we were to use the PE/Growth ratio, taking the growth rate at only 16%,the PE should be 16 which means that this share is worth 1.62. But I will just stay conservative and go with the 97 cents.
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Hup Seng Industries Bhd (5024)
Hup Seng Industries Bhd is an investment holding company listed in Bursa Malaysia (Malaysian stock exchange) that is famous for it’s Hup Seng Cream Cracker. The group consists of three companies,namely,Hup Seng Perusahaan Makan Sdn Bhd,Hup Seng Hoon Yong Brothers sdn bhd and Incomix food industries sdn bhd.
I’m sure you have seen,if not eaten one of those yellow packet of hup seng cream cracker. I’m a fan of the cream cracker personally and have stacked up a supply of their cream crackers in my dorm.
In order to understand the business model,let us delve deeper into it’s business model
Hup Seng industries bhd in it’s nature is a food& beverages industry holdings. This is a pretty good industry to be in if you have a strong brand(refer Nestle). This is because this industry is recession proof. What this means is that during times of depression, the profits and revenues of the group will only be affected slightly. In fact, in some cases, it may even increase the revenue of the group as people are trying to cut living costs. What do you do when you try to cut living costs? Try to eat less outside right? Would Hup Seng cream cracker come to your mind as a cheap food to fill your stomach?
Secondly,this business does not require high maintenance cost. It does not have to compete to update to the latest technology by changing it’s equipment every few years against it’s peers as the only thing it has to do is to maintain it’s quality and expand it’s retail coverage. For example, Milo(from Nestle) has been around for so many year and yet,the same recipe is used till today.
Even though strictly speaking, branding is not categorized as a competitive advantage,however, I believe that it’s strong branding would be beneficial to the company in the long term as it doesn’t have to spend so much money retain it’s existing customers.
(I believe it is safe to say it is a market leader in the biscuit industry in Malaysia though I did not check it’s market share of the product)
Being in the food and beverages industy also means that it would be a little difficult for it to expand overseas (though it is trying to penetrate Indonesia by building a new plant there), this is because human’s taste preferences changes according to demographic).
Because it also lacks a strong competitive advantage, it would be easy for competitor to come in. Confectionary companies from china has already started to come in as it’s competitor, even with it’s strong market presence, no doubt some part of the revenue will be stolen.
Overall, I believe the business model is good and this particular group is doing pretty fine in Malaysia.
Now that we have got a rough picture of the business model, let us take a look at it’s management.
Upon due diligence,this is the type of management that I love. The directors have a large stake in the business (>55%). It is basically a family run business, I would call them the Kerk family. If you investigate further, you will find that some of the directors have been actively acquiring share of the company in year 2008-2009. This shows that the management has strong confidence on the business and believe that the shares are undervalued. However,please bear in mind that the acquisition is done during 2008-2009 when the PE is around 5-6.
The average annualized ROE for the past 5 years(from 2012 backwards) is 16.26% signifying good business model and good asset management.
Net profit margin has been inconsistent but a faint uptrend is observed.
Year 2008 - 7.3
Year 2009 - 12.6
Year 2010 - 10.7
Year 2011 - 7.7
Year 2012 - 13.1
It is explained in the annual report that the net profit margin is increased by cost cutting exercises which can be proved by the significant difference between the profit growth vs revenue growth. To be honest, the revenue growth has been slow. Having profit growth more than revenue growth is a very good sign of excellent management.
How about the group’s financial health? Is it in a lot of debt?
This group’s financial position is very beautiful. It is in a net cash position. It literally has NO DEBT. It has total cash of 80 Million versus a total liability of just 51.7 Million which consists of mainly deferred tax liability. This justifies why the group is so generous in it’s dividend giving exercises.
Dividend per share is also fluctuating but on an uptrend year on year
2009 - 12.75
2010 - 12
2011 - 25
2012 – 30
2013- ytd 25
Now that we known the business a whole. Now comes the price. Imagine the company as a product, you have seen what it can do,how wonderful it is, you got hyped up and you would love to own it. What’s the next question? Yes. What’s the price?
Let us discuss about the EPS…Eps has been fluactuating with a faint uptrend as well.
Kindly refer: http://klse.i3investor.com/servlets/stk/fin/5024.jsp
Therefore, it is difficult to predict what the earnings will look like in the future and difficult to calculate the growth rate. This makes it slightly undesirable as a precise evaluation is very difficult to be determined.
However, what we can measure is the Price over earning (PE ratio) as of now. It can be noticed that the PE ratio of the company has always been around 9 – 11. However,due to the recent surge of the share price, it has already become more than 20. In fact,it reached as high as 8.30/.30 = 27.67 before the share split and the bonus issue.
The catch = Share split and bonus issue:
Yes, the company recently exercised a share split of one ordinary share of 0.50 cents to 5 ordinary shares of 0.10 each and a bonus issue of 1 share of ordinary share of 0.10 for every 3 shares owned. Both having the same ex-date of 02.04.2014. This explains the sharp drop of the share price on the chart. I believe it will dilute the EPS by a factor of 5 * 1.3333 = 6.6667 if not mistaken? . Therefore, the adjusted EPS will be 30/6.6667 = 4.5 cents per share.
(I believe the recent surge in share price is also due to the rumors of this share split and bonus issue..those people are buying on rumors and selling on news)
At the share price of 1.22 as of 1:47 PM 4/18/2014. The adjusted Price over earning will be 1.22/0.045 = 27.11. The Price over earning is now at it’s historic high compared to the ratio of around 9-11 previously. Usually high PE is justified by predicted high growth rate. Will the growth rate be over 27.11%? if so,then the PEG will be less than 1 which will make this stock more attractive,however, I do not see any facts that can support this statement. Is it due to the construction of the new plant in Indonesia? Do you think this growth rate is sustainable given the record of fluctuation in EPS?
This share has come under my radar once, but was put aside due to the high valuation.
What we have found out so far that this company has an excellent business model with strong branding, management with a big stake in the company with wise asset management, it also has very strong financial position which will come in handy shall the China’s credit crunch issue aggravate( if you believe that bull market and bear market takes turn theory, we are actually nearing the end of the bull market (6 years since the sub-prime crisis),bulls usually run for around 6 years before the bear come again.). It is safe to say that this is a quality company. However,I find it difficult to justify the high evaluation of the company. In fact, I will only pay 0.72 per share for the company at most which is a PE of 16 after taking into account the strong cash position and the branding.
The ultimate question is this, Is Hup Seng Industries Bhd at the share price of 1.22 (adjusted PE= 27.11) and adjusted dividend of 23/6.6667 = 3.45 (which yield you 2.83%) or being more optimistic, 30/6.6667= 4.5 (which yield you 3.69% at most.) a good buy given it’s fluctuating nature? I leave this question to you. ( I did not calculate the Net Asset per share value,I believe it is around 0.25 per share (adjusted with share split and bonus issue))
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