Author:davidtslim | Publish date: Fri, 30 Aug 2019, 10:25 PM
Summary:
Ta Win Holdings Bhd is an investment holding company, which is principally in the business of manufacturing and sales of copper wires and copper rods. Ta Win is a leading Malaysian copper manufacturer listed on Bursa Malaysia with revenues in excess of RM370 million a year.
The demand for its products - copper wire and cable - is on the rise due to global digitisation, affecting many industries including infrastructure, transportation, and energy. (Copper helps reduce CO2 emissions and lowers the amount of energy needed to produce electricity. Copper is one of the best renewable resources. It is also one of the few materials that can be recycled 100% over and over again without a loss in performance)
Ta Win’s profitability is more dependent on the efficiency of their machines and cost control measures, not too much on the international copper price. The price of copper has varied from USD5600 to 6500+ per tons over the past 5 (reference price from LME, London Metal Exchange) while their past 12 months result still loss making. There is some effect on the fluctuation in copper prices to the company profitability but this is offset somewhat by back-to-back orders of the raw materials and products.
Through a local JV, Ta Win has made a move downstream into the high-margin cable industry with a patented formula to improve profit margin as downstream normally command a higher margin.
Ta Win is expanding its capacity (through new production lines) and is vertically integrating to attain higher margins.
Through an international JV, Ta Win has entered the Chinese copper market and the Malaysian copper recycling market.
By investing into new businesses with higher margins, Ta Win is positioning itself for a sustainable profitable growth (as new production lines have already commissioned in May 2019 and started commercial run in July 2019).
With new production lines, the Group’s total capacity could be doubled (increase to 2000-2200 metric tons per month from 1000-1200 tons - with higher margin from the new production lines)
Introduction
Renewable energy sources such as solar, wind, and hydro have become an alternative energy source of the energy market (including Malaysia’s strong push for renewable energy). The rapid growth of renewable energy in the past 5 years was prompted by the increasing costs of fossil fuels as well as their environmental impact issues. Copper plays an important role in these renewable energy systems. In fact, copper usage averages up to five times more in renewable energy systems than in traditional power generation, such as fossil fuel and nuclear. Since copper is an excellent thermal and electrical conductor among the engineering metals, power systems that utilise copper generate and transmit energy with high efficiency and with minimum environmental impacts.
Copper is among the Best Conductors of Electricity and Heat, so it is hardly surprising that about 60% of Total Copper Use is for these Applications
Electricity and Energy
Wire and Cables
Busbars (Busbars are robust conductors that function as electrical manifolds to distribute power from a single source to several users)
Transformer and Motor Windings
Electronic Equipment
Other Electrical Engineering Uses
Renewables
Solar Heating
- high heat conductivity, resistance to atmospheric and aqueous corrosion, ease of fabrication, mechanical strength and longevity offer strong advantages over any other material in solar heating applications.
Wind
- The primary use of copper in wind energy technologies is in the coil windings in the stator and rotor portions of the generator, in the high-voltage power cable conductors, transformer coils and earthing.
Photovoltaics (solar panel, refer to appendix No 2 and 3)
Copper forms part of the materials presently used for photovoltaic solar cells, in the technology’s cabling, earthing, inverter, transformers and photovoltaic cell ribbons.
Regarding the sustainability of renewable energy systems, it is worth to note that copper can be recycled 100 percent over and over again without a loss in performance.
Turnaround Story
Tawin has been in loss making position over the past 18 months (4 loss making quarters over last 6 quarters but already turned profitable with 8.1mil net profit in the latest quarter result released on 30 August). The reasons of loss making are due to the following reasons:
Existing old machines (more than 20 years) which incur higher costs associated with equipment downtime and maintenance.
Higher administrative expenses (one-off) incurred as a result of the fair value loss on derivative liability and the Group's on-going corporate exercise (completed this exercise in August 2019).
Thin profit margin due to their high cost of their copper raw material (cathode). If they can use recycled copper raw material in their production process, then their profit margin could be higher (due to lower raw material cost).
Four (4) Keys of turnaround
2.1 New Machines could contribute higher margin (no 1)
One of their strategies to turnaround from loss to profitability is by changing the old machines to newer and more efficient machines, which can accept recycled raw materials (or lower purity copper raw material). For this purpose, Tawin has proposed right issue and ICPS (irredeemable convertible preference shares) to raise RM35.8 mil (mainly to buy raw materials). This corporate exercise has been completed in August 2019. Let see the details of the right issue fund utilization as below (circular 2.1.6):
From the above circular, 2 new additional manufacturing lines with a total capacity of approximately 1200 metric tons per month has been setup. The total costs of these 2 manufacturing lines (including installation costs) is approximately USD1.7 million (or RM6.9 million based on exchange rate of 4.07). Personally I expect these two new productions lines will have higher efficiency and profit margin and the best thing is the has secured an off-take agreement to sell all the copper rod and wire products of this new production lines.
Remember their existing production lines total capacity is approximately 1000 tons (per month) with revenue per quarter of about 90mil. With the contribution of the new production lines, capacity could increase to 2000 tons per month with possible double up of revenue (higher margin from new production lines).
2.2 Cyprium Wire Technology JV (no 2)
Cyprium JV was announced in April 2019 marks Tawin first foray into the cable industry, a downstream venture in the value chain which normally command a double digit net profit margin. It will use innovative electron beam irradiation technology (patented) and it is part of the Company’s strategy to capitalise on new and viable opportunities complementing its existing business to drive growth. This joint venture is expected to be operational as of in 3rd quarter in July – August 2019 (Q3 could contribute)
With 80% ownership of the newly set up Cyprium Wire Technology SB, TaWin is the first and only Malaysian company to commercialize this technology. The competitive pricing and lead time as compared to foreign competitors are some key advantages of this downstream product.
2.3 Increase export ratio (no 3)
Tawin has increased their local and export market ratio from 80:20 to 60:40 level in 2019. Their target is further increase this ratio to level of 50:50 to ensure that the company continues to grow and can have a more natural hedge of their currency risk.
2.4 Internal Operations Improvement (no 4)
Tawin has designed a capex plan to replace old machinery in order to improve efficiencies on electricity cost, labour cost, and maintenance cost.
Finally, let us go through the prospects of Tawin (last two quarters) as below:
Source: Report of 2Q2019 (released 30 Aug 2019)
Valuation – With a more efficient new productions lines, international and local JV, Ta Win has expanding into new markets and vertically integrating to downstream business to attain higher margins with a patented technology.
The estimated FY2020 (July 2019-June 2020) profit and fair value is shown in table below:
Estimated revenue (mil)
FY2020 (July 2019 to Jun 2020) (net margin) (mil)
FY2021 (July 2020 to Jun 2021) (net margin) (mil)
FY2022 (July 2021 to Jun 2022) (net margin) (mil)
Core Business
400
4 (1.0 % net margin)
6 (1.5 % net margin with new machine replacement)
6 (1.5 % net margin with new machine replacement)
TaWin Copper, International JV (new production lines with off-take agreement)
250
6.25 (2.5 % net margin)
7.5 (2.5 % net margin on 300 mil revenue)
10 (2.5 % net margin on 400 mil revenue)
Cyprium (local JV, downstream biz for automative)0
30 for 2019
3 (10% net margin)
4 (10% net margin on 40 mil revenue)
4 (10% net margin)
Total (mil)
680
13.25
17.5
20
EPS (based on 348mil shares base), ~30mil PA already converted (~7% PA share converted)
-
3.8 sen
5.2 sen
5.8 sen
6x PE (assume no further dilution as now PA no much discount now due to need to add 7.5 sen)
-
23 sen (considered 7% PA dilution)
21 sen (40% dilution)
23 sen (40% dilution)
7x PE(assume no dilution)
-
26.6 sen (considered 7% PA dilution)
24 sen (40% dilution)
26.3 sen (40% dilution)
8x PE (with 20% PA shares dilution) --> total share base = 411mil
-
26 sen (20% dilution)
34 sen (20% dilution)
28 sen (40% dilution)
37.2 sen (20% dilution)
Tawin-PA share conversion and dilution analysis
Total Outstanding Tawin-PA shares
417 mil (due to 30 mil already converted)
Conversion option
4 PA for 1 mother or 1 PA+7.5 sen
Assuming 40% of PA holders converted using cash of 7.5 sen+ 1PA (about 30-40% PA shares are in Management hand which are not likely to be converted in short term)
Company will receive 186mil X 0.075 = 14 mil cash (big cash position considering its small market cap
Ex-cash FY2020 PE (assuming company receive 14 mil cash from PA conversion) (To calculate the PE (ex cash), subtract Cash from the market value before dividing by earnings)
PE (ex-cash) = 3.9x (at 13 sen price and assuming 40% dilution from PA)
the warrant is expected to be out of money hence no dilution is expected in the next 12 months (unless price of Tawin can reach 20 sen).
Summary of the latest quarter result:
Tawin's new production lines started in May 2019 - on a trial run basis. Production will be ramping up gradually and better results should be shown in the new few quarters, starting next quarter Q3 2019 calendar year. With new production lines and better efficiency, it has started to show some improvements even in this quarterly result (Q2) (excluding the one-off disposal gain) as follows:-
1. Revenue went up by more than 20% compared to previous quarter. (Higher production)
2. Gross margin went up to 1.8% from 0.7% in previous quarter. (Better efficiency + lower cost of raw mat)
3. Lower admin expenses went down to RM1.5 million from RM3.2 million. (Better efficiency)
They're running a high revenue base with thin profit margin business. Should they further improve their efficiency and moving into higher margin products (which they have already started doing), from their existing 1% profit margin to 2% profit margin, the profit would have gone up by 100%.
Current Business
Core Business - 1% net margin
Venture into Higher Margin Products Business
Copper JV Business - 2.5% net margin estimated (started production in July or Aug 2019)
Cyprium cable downstream Business - 10% net margin estimated (started production in August 2019)
Risk:
Unplanned Machine breakdown
Escalated Trade war that affect the demands of copper internationally
Price Chart
Current price of Tawin is trading at near 52 weeks low (12 sen) and if they can turnaround in 2H of 2019, then downside is limited due to I expect is it likely to turnaround based on their new JVs (international and local) and internal efficiency improvement.
The new management taken over the company since end of year 2017 when tawin was still trading at 1.00 (after adjusted price still about 35-38 sen now).
One good example of successful turnaround play is MFLOUR. When Mflour proposing right issue, LA with free warrant time (Dec 2018), its share price dropped from RM1.1 to 45 sen, then after it turnaround in Feb 2019 and May 2019 results, its share price rebounded to above 60 sen.
(Mflour: Renounceable rights issue of up to RM165,085,617 in nominal value of 5-year 5% redeemable convertible unsecured loan stocks ("RCULS") at 100% of its nominal value of RM1.00 on the basis of 3 RCULS for every 10 existing ordinary shares of Malayan Flour Mills Berhad ("MFLOUR" or "Company") ("MFLOUR Shares" or "Shares") held as at 5.00 p.m. on 27 December 2018 together with up to 82,542,808 new MFLOUR Shares ("Bonus Shares A") on the basis of 1 Bonus Share A for every 2 RCULS subscribed and up to 82,542,808 free detachable warrants)
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest.
I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.
Appendix:
Factory visit Photo
New production lines, international JV (Trial Run in May and June)
Production of Old production lines (still running)
Block diagram of Vertically integrated production flow with involvement of new machine which can use recycled copper
Overview and Outlook of the Copper Wire Industry in Malaysia
Copper wires’ uses include, among others, power generation, electricity transmission and distribution as well as telecommunications. Some of the main E&E products that require copper wires include motors, cables, transformers, inductors, generators, consumer electronics, electromagnets as well as elevators and escalators. In Malaysia, the copper wire market grew, in terms of sales value, from RM2.7 billion in 2013 to an estimated RM3.3 billion in 2017, at a compounded annual growth rate (“CAGR”) of 5.1%. Meanwhile, the volume of copper wires consumed in Malaysia grew from 117.7 metric kilotonnes in 2013 to reach an estimated 143.5 metric kilotonnes in 2017, at a CAGR of 5.1% during the period. PROVIDENCE forecasts the copper wire market size in Malaysia to grow, in terms of sales value, at a CAGR of 5.6% between 2018 and 2020, reaching RM3.9 billion in 2020. PROVIDENCE also forecasts the consumption volume of copper wires in Malaysia to grow at a CAGR of 5.1% between 2018 and 2020 to reach 166.7 metric kilotonnes in 2020.
Malaysia’s exports of copper wires increased from RM1.6 billion in 2013 to RM2.7 billion in 2017, recording a CAGR of 14.0% during the period. China is among the top 5 export destinations of copper wire from Malaysia alongside India, Australia and Singapore. In 2017, Malaysia’s exports of copper wires to India, Australia, Singapore and China constituted 52.1%,15.3%, 8.9% and 3.7% of total copper wire exports in Malaysia. Malaysia’s exports of copper wires to countries in Southeast Asia (comprising Singapore, Brunei, Thailand, the Philippines, Cambodia and Myanmar) comprised 16.9% of total copper wire exports in Malaysia in 2017.
Author:davidtslim | Publish date: Fri, 21 Jun 2019, 6:25 PM
PANTECH is an One Stop Centre for Pipes, Valves & Fittings (PVF) to support fluid transmission requirement of customers at their demand levels. It is a major PVF solutions provider to both the upstream and downstream segments of the oil & gas industry.
Pantech’s performance is correlated to the oil and gas industry as a whole. Pantech Group serves the oil and gas industry through two complementary core divisions.
Trading Divisions - The Trading division trades, supplies and stocks high pressure seamless and specialised steel pipes, valves, fittings and etc, mainly in Malaysia. The close locale to Pengerang in the Southeastern region of Johor facilitates an even more rapid turnaround for the RAPID project. The Trading arm contributed sales (57% of the group's total) as well as the operating profit (66%) in FY18 ended February. Pantech has SWEC code with Petronas which can serve as agent for foreign company to supply their products to Petronas or its subsidiaries (https://www.petronas.com/join-us/be-our-partner/our-licensing-registration)
Manufacturing Division - The Manufacturing division has plants in Malaysia and UK, producing a standard and customised range of pipes and fittings of diverse materials such as carbon steel (21,000 mt p.a.), stainless steel pipe (16,500 mt p.a.), nickel alloys and etc. Some of the items produced include elbows, tees, reducers, stub ends and end-caps that comply with international standards. UK-based Nautic Steels which was acquired in 2013 for RM45m produces copper nickle and nickel alloy pipes and fittings (800 mt p.a.).
Petronas group posted a stronger set of 1Q19 results with core PAT (profit after tax) of RM12b (+37% QoQ), driven by higher sales volumes, a weakened Ringgit and lowered costs. Petronas is expected to increase its capex commitment of >RM50b for 2019 (versus 2018 capex of RM46.8b). Key beneficiaries of an increased Petronas capex to include fabrication players (e.g. MHB, SAPNRG), drilling players (e.g. VELESTO, SAPNRG) which will directly or indirectly benefited Pantech (PVF and galvanized pipes supplier and manufacturer).
The average capacity utilization of the two local Malaysia plants at around 90% in FY18, while UK’s Nautic Steels at 65%. PANTECH expects to raise the capacity of the two Malaysian plants by 15% over the next two years. In December 2016, the Manufacturing segment started operations on its first hot-dip galvanising plant which is also claimed to be the biggest in southern Peninsular Malaysia. The operations held via Pantech Galvanising have passed the loss making stage and the average capacity utilization rate of the plant was 50% in FY18.
Malaysia imposed 16% safeguard tax on galvanized steel from China and Vietnam from March 2019 to 2024 that will benefit Pantech in 2019 to 2024: Reference below:
Earnings throughout the last five financial years have grew the shareholders equity every year which the NTA increases from RM0.55 as at the end of FY13 to RM0.79 at 2Q of FY19. The financial position has also improved considerably as their net gearing slowly reduced from 0.60x at the end of FY13 to 0.33x at the mid of FY19.
Improving Export Markets - The export market has been strong for the Manufacturing division throughout the year, with export sales being the main contributor to overall sales increase. The Manufacturing units in Malaysia have seen exports increase by an aggregate of 60% compared to the previous financial year. While Malaysia remained the principal market at 60% of total revenue despite increased export sales in FY2018, Pantech's products are now present in 68 countries. (reference Annual report 2018)
10. Consistent and Sustainable Revenues and Profits in the last 5 years - Maintenance contracts of RAPID once completed will be a good avenue of income. As it stands, maintenance contributes about 40% to Pantech Group’s revenue from the oil and gas sector. Being in this industry, maintenance works are essentially perpetual as they are critical in ensuring safety and optimal operations.
11. Beneficiary of Local Upstream CAPEX - Petronas had committed to an increased capex of >RM50b for 2019 (from RM47b in 2018), of which ~RM30b will be for upstream, after it focused much of previous years’ capex on downstream. I reckon the increased upstream capex will be invested on the development of oil and gas new fields.
12. Pantech is the ONLY locally owned pipe supplying company under the “Petronas Framework Agreement” - PANTECH provides pipes, valves and fittings not only used for the transportation of oil and gas, but also for the engineering and construction (E&C) phases of the fields (e.g. used as topside structures and jackets, subsea platform pillars, etc). “Petronas Framework Agreement” is to promote more local content, should there be any such ruling.
13. Positive outcome from DOC. (The US Department of Commerce (DOC) has cleared Pantech Group Holdings Bhd's wholly-owned subsidiary Pantech Steel Industries Sdn Bhd (PSI) of circumventing the antidumping duty (AD) order on butt-weld fittings from China. As a result, PSI will immediately commence shipments of its carbon steel butt-weld fittings to the US once again. This is expected to have a positive impact on the group's revenue and profit going forward,. The carbon steel plant utilisation remains low at 30% as the suspension of exports to the US earlier.
14. Management of Pantech has been generous in dividend payout over past 11 years with dividend yield of 4.5% in FY2018 . Total dividend paid over past 10 years is 35.5 sen (average 3.55 sen per year). The chart below shows the dividend payout records of Pantech.
15. Valuation - with higher orders from Oil and Gas players (like Sapnrg and Velesto more contracts have been secured in 2018 and 2019), higher export contribution from manufacturing division and possible US anti-damping uplift for its shipment and future US export, it estimated that EPS for FY2020 (Mar 2019 to Mar 2020) could in the range of 6.8 sen to 7.5 sen. Based on PE9x to PE10x, fair value for Pantech could be in the range of 61 sen to 75 sen. (the price is supported by low price-to-book ratio: 0.61x and high dividend yield of 4.5%)
16. Risk:
Rising labour cost (foreign workers levy and min wages increment in 2019)
Crude oil plunge
Petronas reduces capex.
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest.
I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.
Appendix:
1. Information about Pantech: Certifications and Accreditation.
2. Actually Petronas is in the top 30 shareholders (no 26) of Pantech as show in their 2018 Annual report. Pantech may has some advantages in securing orders from Petronas capex or related order as it is their registered vendor.
If you buy it while he is front running it, and before the article, sure profitable.
After, well you need to understand its a gamble, so sensing when the story turns and getting out before everyone else is key.
This is a goreng article after all. The best kind, which are weaved selectively with threads of the truth.
23/06/2019 11:45 AM
Icon8888I don't see what is wrong with this article
So your articles are factual and truthful and all his are goreng ?
23/06/2019 1:20 PM
kcchongnzDavid Lim's articles are always factual and come with detail analysis and certainly beneficial here. They are without doubt much better than many articles which often appear as "Top articles" in this i3investor forum, which are mostly, if not all, without any substance and purely for "goreng" purposes.
Readers here should appreciate good sharing from writer such as David Lim. But of course each has to do his own finding and analysis.
23/06/2019 2:04 PM
probabilityJon still did not give a precise definition differentiating investing and speculation
WL LeeTalk talk talk so much, 5k article lar, investment lar, ended up with another article telling investor that he already quit his RCECAP, his so called biggest position (I assumed he is highly confident with the stocks).....Crazy kid. Why quit after holding for so long and not earning any bucks? RCECAP been hovering around that price range for so long.
Posted by Choivo Capital > Jun 23, 2019 11:45 AM | Report Abuse
Thats untrue 3iii.
If you buy it while he is front running it, and before the article, sure profitable.
After, well you need to understand its a gamble, so sensing when the story turns and getting out before everyone else is key.
This is a goreng article after all. The best kind, which are weaved selectively with threads of the truth.
>>>
I can appreciate your second level thinking.
23/06/2019 6:42 PM
probability3ii makes return above bond level by 0.1% and he claims he is the ultimate 'investor'..lol!
23/06/2019 6:43 PM
Huat5828This article is equipped with facts...many thanks to the writter who has put up much effort.
23/06/2019 8:47 PM
Jason Toshi HoThe brands that are submitted by Pantech. These are the big ones, the seamless steel pipes used for o&g processes. Nautic Steels (UK) Kobe, NSSMC, Sanyo (Japan) Posco (Korea) Schoeller Bleckmann (Austria) SMST (Germany) Tubacex (Spain)
In my humble opinion, I find the sentence below and highlighted in black to have a misleading connotation that seems to imply that Pantech will have a monopoly with Petronas. This is far from the truth.
Make no mistake, pantech is just another trading house which added a manufacturing arm and a loss make hot dip galvanizing process which is at 50% capacity.
The trading of the above brands last this year did around 387 million will the manufacturing arm dropped a lot to 222 million. In a nutshell they did 607 million which is slightly lower than last year of 614, but with better margins which is pbt 61 million Vs 58 million last year.
Really profits are around 48 million with 15 million in dividends.
Here is the issue, 2 years ago they did 479 million with 29.7 million in net profit.
Basically the main reason for growth was due to turnaround process and PIC which will be completed soon.
Will there be further growth in the future for Pantech?
If you think carefully, trading houses carry other peoples products, meaning they are only able to complete supply in localised areas, aka export future is very limited. There will be appointed agents in other countries with licenses and heavy competition.
Aka major growth for trading is only in Malaysia market. After pic is complete any other major projects coming up? For replacement schedule how long do you think all these heavy duty seamless pipes last? Do you think it is a disposable product which need constant repair like aircon and chemicals? Or is it a structural process with long replacement cycles?
And if we go into manufacturing, Pantech is a butt weld fittings and long bend manufacturer which had a drop from 266 million to 222 million in revenues.
In the end local or no local Petronas is going in a different direction.
There is a perfectly concrete reason why investors are only willing to pay 8.74 PE for Pantech.
There is no economic or business advantage to a company that is only a trading house and a Manufacturing that does 6% PBT on specialized goods.
If there was something unique about Pantech, it would have grown much further, captured much bigger market share. As it is, evaluate the risks of the company, with another hidden bomb that can occur at any time.
12. Pantech is the <ONLY locally owned pipe supplying company> under the “Petronas Framework Agreement” - PANTECH provides pipes, valves and fittings not only used for the transportation of oil and gas, but also for the engineering and construction (E&C) phases of the fields (e.g. used as topside structures and jackets, subsea platform pillars, etc). “Petronas Framework Agreement” is to promote more local content, should there be any such ruling.
23/06/2019 10:01 PM
Jason Toshi HoObviously, that is not to show that the anti dumping plan was permanent, buy it serves to show why the revenue dropped so suddenly, and what the uncertain future will be for Pantech.
A simple thing. If China cannot export to USA anymore, where will it flood the markets next?
probabilitysifu Philip is open...3ii i super closed
23/06/2019 10:31 PM
Jason Toshi HoEvery investment decision is based on a set of assumptions. The less assumptions you need to make about an investment the clearer the possibility of it coming true.
How possible that Pantech will lose money? Obviously very low, as the management is competent and in an industry that has a niche requirement where price and quality and dependability converge.
How possible will Pantech increase its long term margin to +15% pat? Again very low. It is the nature of trading industry to have lower margins. Worse, once Petronas has tasted and used more lower cost discounts for products in their projects, it will be very difficult to charge then higher prices next time.
How possible is it for Pantech to increase its revenue by 10% or more next year? It is quite possible due to manufacturing picking up the slack from trading arm next year.
How possible is it for Pantech to double it's revenue by 100% or more next year? Impossible. It doesn't have another IPIC in the horizon, the competitors and market is becoming more competitive and streamline, and they don't have the factory space.
Businesses usually follow a consistent trajectory in the long term. Especially brick and mortar businesses. By comparing the trajectory of similar businesses you can have a more POSSIBLE idea of what will happen in the future.
Still miracles happen.
For me, I fully agree with Pantech valuation right now, and in fact believe that Pantech should be selling at a lower price than currently. Especially when management has said that business next year will continue to be "challenging".
probabilitykey factor that made Pantech who they are now is because they were able to source quality Pipes, valves and fittings at extremely competitive price from China and market in south east asia...local presence...
if they could venture similarly to vietnam...or indonesia with similar strategy...then the expansion will be phenomenal...not sure they can do that...else current valuation appears fair i guess..
they need not depend on PIC...as they have other huge process industry (veg oil & chemicals) with recurring need for their products...
23/06/2019 10:47 PM
Icon8888Philips method is based on certainties (actually only perceived certainties, if you ask me)
In that article, I called it Angler
And I also talked about Drift Wood (what you can't see doesn't mean it won't happen in the future)
So all methods can work, nobody can claim to have monopoly of wisdom
That is all I want to say
23/06/2019 10:48 PM
Jason Toshi HoI prefer to think with facts. PCHEM has stated their revenue drop will recover next quarter and is due to schedule turnaround, thus is temporary not permanent. US dumping on East Asia is also a temporary and not a systemic issue. Plus when the PIC get completed the revenue will increase.
The led upgrade of streetlight is definitely true, as my subcon package of pan Borneo is using led 12m highway led bay( maincon have not awarded it to Success but instead to IQ group) Success has not won any major contracts and so far has no major announcements of any. But what is apparent is this qoq drop 88% and yoy 32% for success.
But of course, what you say can happen and success may win all 800,000 streetlight upgrade tender in Malaysia. Hopeful, but unlikely.
I try to keep an open mind all the time.
But I don't need to buy 6/55 toto to know that chances are I won't win lottery in this lifetime. >>>>>>>>>>>
Why do you buy pchem ? The pertrochrm industry is facing overcapacity due to US dumping on east Asia and new plants completed
It is the same logic
23/06/2019 10:49 PM
probabilitysifu Icon...i always love to be angler..
what a brilliant summary:
.....
Angler tries to look into the future. Driftwood is of the view that it can thrive without knowing too much about the future (take care of the downside and the upside will take care of itself).
Surf Rider does not predict the future. For them, THE FUTURE IS ALREADY HERE.
23/06/2019 10:51 PM
soojinhouI'm with Icon8888. Long term hold strategy can make money, weaving in and out of stocks can make even more. And that's not based on TA, but purely FA. And the reason is simple, great stocks don't come cheap, and strong growth are often priced in. However, cheap stocks tend to see massive rerating when business climate changes in their favor. The point is to lose small, but win big. Whereas long term hold on good quality companies requires the company to rerate to ridiculous valuation, like QL at PE 50, to generate big return. I don't have the talent to pin point which company will be the next QL, I'll stay with being a cheapskate. And Choivo, being the real dick that you are, when you post, you are the most sincere person in the whole universe, when other posts, they are all front running. Shit head like you deserves the hate you get.
23/06/2019 10:56 PM
Jason Toshi HoI have never said other methods can work, as I am certainly the first one to say I have tried everything in more than 25 years of investing tragedy.
The only thing I can say is my method give me the least amount of stress, and the highest margin of safety in putting large capital to work.
Many roads lead to Rome. I just go there via the most comfortable method.
Some choose to fly Concorde high risk high reward. Some choose to go by bus low risk low reward. My method of there is such, is to evaluate risk, opportunity cost, cost of capital and then weigh it versus possibility of profit.
In other words, I look at how much money I can lose first, then decide how likely am I to make a profit.
For Pantech, it is more a case of opportunity costs for me. I don't think I will lose money with Pantech. But future returns compared with my other investments define my imperfect knowledge of the future.
Simple mental model, if I had 2 stocks to choose from Pantech versus PCHEM, if I had to hold longer term with borrowed money from ahlong( where being wrong results in death), which would I rather hold? PCHEM or Pantech. Fate of the universe on the line.
I think we both know the answer. Especially when I have no way of knowing how three market will fluctuate for Pantech short term.
>>>>>>>>>>>>>
So all methods can work, nobody can claim to have monopoly of wisdom
That is all I want to say
23/06/2019 11:03 PM
SsleeDear all, It is a great pleasure to be able to read the different open minded view and investment philosophy presented by many sifu in this Davidtslim blog post. This should be the way forward without name-calling or being the real dick like choivo or closed mined like 3iii. Thank all for the sharing
23/06/2019 11:55 PM
Ricky YeoI think there should be a definition what does 'good' sharing, analysis means? What defines good from bad? Is it the length (the effort) of the writing, the factual/non-factual ratio of the writing, the lucidity of the writing, or something else?
My definition of good writing is accuracy of judgment, because it leaves no room for argument. In this case, the writing cannot be good or bad because author predicts 68 cents a year from now. So only then can the writing be judged on whether it is good or bad. But one can infer on previous predictions to find out the accuracy.
24/06/2019 8:21 AM
Jason Toshi HoRather than saying long term hold, I prefer the word long term monitor and ignore noise. Weaving in and out of stocks is a great strategy, but it works best when deploying small capital. With Pantech at 400m market cap, using 1% or 4 million to weave in an out could be far more difficult than one would think. Even with gkent I'm only using 1m of margin for my more speculative investment which I plan to see the results within a few years or so.
For small sums, I do agree. I used to do it quite often in the 90's where I could get 50-100% profit in a few stocks over the course of a few months/weeks/days. It was very exciting. The stress and depression from not understanding the underlying risk of my stocks and watching the rise and sudden crash of major stocks with wonderful accounting and seemingly good business fundamentals made me revaluate my understanding of margin of safety deeply.
As munger puts it, if we identify wonderful businesses, we just need to concentrate on those with growing addressable market and how much higher it will go up in the future, and identify if the price and is fair.
If we buy a fair business, not only do we need to know if we are buying it at a wonderful price, we also need to contend with cut loss, business deterioration, middle of the pack mentality, new competition.
I can appreciate that thinking. Why go jump over 7 foot poles when in the long run 1 foot poles work just as well. That is what I have learned. If I can find something with 90% chance of making 20% money, it is far easier and more comfortable than buying something with 50% chance of making 100% money, especially when you factor in compounding and access to deploy large capital.
Either that or I am lazy.
>>>>>>>>>>
Posted by soojinhou > Jun 23, 2019 10:56 PM | Report Abuse
I'm with Icon8888. Long term hold strategy can make money, weaving in and out of stocks can make even more.
24/06/2019 8:23 AM
soojinhou"Rather than saying long term hold, I prefer the word long term monitor and ignore noise. Weaving in and out of stocks is a great strategy, but it works best when deploying small capital."
I can't argue with that. While I have agility now, it will be eroded over time IF capital continues to grow. If I have what you have, I probably will not be as agile. Having said that, I've expanded to 3 geographical markets to maintain agility even with a much enlarged capital, ie, I am forced to spread out my capital wider to maintain the same investment strategy. For the capital size that you have, your strategy should serve you better.
24/06/2019 8:42 AM
Ricky YeoThe kind of measurement an investor use determines his strategy. Long-term return is the measurement that most investors use, but it is a bit like P/E ratio, there are many area when long-term return can't measure.
As an example, an investor making 13% return over 10 years vs another making 15% over the same period of time. Now everyone would want to be the latter than former. But what if the 15% is achieved with a cumulative of high stress 500 hours (over 10 years), whereas 13% is achieve at less than half of those hours with little to no stress? Which would you prefer? Now that is interesting. Is it worth it to get all the extra stress to achieve 2% outperformance? There is no right or wrong, but something to think about.
Hence, on top of having a long-term return as a measurement, one should also measure their return on invested time (ROIT). Just like ROIC and its CAP (competitive advantage period) differentiate quality from mediocre companies, ROIT gives you an idea how much dollar are you generating for every hour you have invested in. And as a benchmark, it should be people who invest in index fund and spend 0 hours studying investing. If index fund investors can get 10% return long-term with 0 hours invested, an active investor that can achieve 13% spending 250-300 hours are wasting their time just to get that 3% outperformance.
24/06/2019 8:44 AM
Jason Toshi HoMy definition of good writing is something that make you think and allows you access to new mental models in attacking a problem.
In investment there is no such thing as no room for argument because essentially we are always predicting the future. It can always go in any direction.
As Howard marks puts it, doing investment analysis is to prepare all the likely possibilities for the future performance of a company and we base the analysis on what we think is the most likely one. Most times the analysis with the least assumptions will come true. But other times other possibilities may turn out instead, which makes investing so interesting.
I like David's article because his presentation of facts and analysis is very concise aka numbers= view of analysis. He doesn't extrapolate so much or make huge jumps in assumptions like choivo or Calvin tan.
He presents it in a less biased way ( which I fault myself especially on stocks which I have a position as I feel the need to defend myself from uneducated "attackers". But these days I find it is easy to differentiate investors who have done their research versus those who are just trolls like stockraider who are not in it to learn something new but to just push the point across.
In fact I think he is very accurate in the depiction of Pantech. It is a fair company. With conservative growth expectations.
>>>>>>>>
Posted by Ricky Yeo > Jun 24, 2019 8:21 AM | Report Abuse
My definition of good writing is accuracy of judgment, because it leaves no room for argument.
24/06/2019 8:46 AM
soojinhou2-3% outperformance is too pathetic haha. If one can get 10% outperformance with stress and work, ie 20% cagr, vs 10% fire-and-forget with zero effort, it can mean the difference between being comfortable and being filthy rich in the long run.
24/06/2019 8:49 AM
Ricky YeoYea 10% outperformance can justify the right amount of stress lol
24/06/2019 8:53 AM
Lukey_GreekIt's a natural progress to move to Philip's way of investment when you have big capital. If you have 100m, 10% gain a year is equivalent to 500% return for someone with only 2m capital. Why waste so much time to filter,understand & chase the new good stocks? Warren Buffet cant apply the same approach like junior warrent when he was young.
24/06/2019 7:53 PM
Lukey_GreekHigh growth normally only happend to small company, cos their base is small. & it comes with high risk due to their small base.
Dear all, It is a great pleasure to be able to read the different open minded view and investment philosophy presented by many sifu in this Davidtslim blog post. This should be the way forward without name-calling or being the real dick like choivo or closed mined like 3iii. Thank all for the sharing
>>>>
SSLee
The risk of buying poorly performing companies is the permanent loss of capital, though the price may look cheap. I observed that you have a lot of examples of these.
3iii
25/06/2019 7:21 PM
SsleeDear 3iii, Thank you for reminding me that I used to have some poor performing stocks in my portfolio. I am learning, keep an open mind and eager to learn from all you included. But at least I read the annual report, find out from the board what went wrong and I also use reasons and ready to present the fact and figure to put forward my point. No matter how good you are, please keep an open mind and do not simple dismiss anything because of your prejudice. Thank you
25/06/2019 7:39 PM
ruby20Always been a fan of davidlimts, his cresbld writeup was my fav. However, his writing on aturmaju / ARBB, where he got trapped by the tricks of shady businessmen doing shady deals, put a slight dent to his otherwise good record with me. In KLSE, being gullible to all publicly available information can be your biggest downfall.
Posted by Sslee > Jun 25, 2019 7:39 PM | Report Abuse
Dear 3iii, Thank you for reminding me that I used to have some poor performing stocks in my portfolio. I am learning, keep an open mind and eager to learn from all you included. But at least I read the annual report, find out from the board what went wrong and I also use reasons and ready to present the fact and figure to put forward my point. No matter how good you are, please keep an open mind and do not simple dismiss anything because of your prejudice. Thank you
>>>>>
:-) ... because of your prejudice.
SSLee
Just to enlighten you. I do not dismiss any stock recommendations or suggestions based on prejudice. I usually will find the time to have a look at the recommended stock. I will also often read the annual reports of not just one year, but a few years of the company when I find it enticing, to understand its business better.
For example, I read into Pentamaster's annual reports of a few years and discovered how the major shareholder and owner was very creative in coming up with new ideas in the earlier years but to no avail. A particular year, he came up with a machine to recycle used gloves. Unsurprisingly, this failed miserably. Then, two years ago, it found its niches and because someone brought this to my attention, I studied it in depth and well ... its performance the last 2 years or more, have been superb.
The most important thing in investing is to have the right philosophy and method. Then the discipline. Also, you need to be hardworking, ploughing through your checklists for the companies you wish to invest in. Note, I mentioned a check list.
There is no prejudice in the way I look at stocks. I study the quality of their businesses. This is paramount. This criteria must be satisfied. Then I study the quality of its management. Only having passed these quality filters, then I will look into its valuations. If I have rejected many stocks, it is not because of prejudice, it was because they did not satisfy my selection criteria and got rejected based on my checklist.
Perhaps, you have a prejudice against high quality good growth company.
:-)
3iii
26/06/2019 4:28 PM
stockraiderThis 3iii like to talkcock alot loh....!!
If u buy base on quality of business and overpay like case of warren buffet on heinz, u will lose money too loh...!!
The best investment strategy is still invest base on huge margin of safety like what recommended by ben graham , as it is highly defensive loh...!!
Insas is one of the best example & the most defensive Margin of safety stock, as per ben graham investment criteria loh....!!
In conclusion for investment approach undervalue buy and overvalue sell loh...it is that simple base on taking advantage of Mr Market mah...!!
Posted by 3iii > Jun 26, 2019 4:28 PM | Report Abuse
>>>>
Posted by Sslee > Jun 25, 2019 7:39 PM | Report Abuse
Dear 3iii, Thank you for reminding me that I used to have some poor performing stocks in my portfolio. I am learning, keep an open mind and eager to learn from all you included. But at least I read the annual report, find out from the board what went wrong and I also use reasons and ready to present the fact and figure to put forward my point. No matter how good you are, please keep an open mind and do not simple dismiss anything because of your prejudice. Thank you
>>>>>
:-) ... because of your prejudice.
SSLee
Just to enlighten you. I do not dismiss any stock recommendations or suggestions based on prejudice. I usually will find the time to have a look at the recommended stock. I will also often read the annual reports of not just one year, but a few years of the company when I find it enticing, to understand its business better.
For example, I read into Pentamaster's annual reports of a few years and discovered how the major shareholder and owner was very creative in coming up with new ideas in the earlier years but to no avail. A particular year, he came up with a machine to recycle used gloves. Unsurprisingly, this failed miserably. Then, two years ago, it found its niches and because someone brought this to my attention, I studied it in depth and well ... its performance the last 2 years or more, have been superb.
The most important thing in investing is to have the right philosophy and method. Then the discipline. Also, you need to be hardworking, ploughing through your checklists for the companies you wish to invest in. Note, I mentioned a check list.
There is no prejudice in the way I look at stocks. I study the quality of their businesses. This is paramount. This criteria must be satisfied. Then I study the quality of its management. Only having passed these quality filters, then I will look into its valuations. If I have rejected many stocks, it is not because of prejudice, it was because they did not satisfy my selection criteria and got rejected based on my checklist.
Perhaps, you have a prejudice against high quality good growth company.
Author:davidtslim | Publish date: Wed, 15 May 2019, 5:47 PM
1. STRAITS INTER LOGISTICS is one of the licensed bunker operators in Malaysia (the only listed bunker player in Bursa & Singapore). Straits is one of the leading bunker operators in Malaysia with an estimated 33% of the legal market share (refer Maybank report). Its main business in the oil trading and bunkering business (both MFO & MGO, refer to appendices for what is bunkering mean)
2. Strait’s growth in the bunker business in Malaysia mainly through acquisitions (55% of Tumpuan Megah Development in Sept 2018 for 35.8m). This TMD acquisition enable them to grow its capacity by 1200% (from 1m litres to 12m litres capacity) and also widen its geographical reach to nine ports in Malaysia (previous 0 port, now got permit to access 14 ports) and diversify its customer base.
3. Why Straits is attractive? It is due to Straits is in a good position to capture increasing marine gas oil (MGO) market (one of the marine fuels).
4. What MGO market is increasing? Two reasons, first is rising O&G activity in Malaysia and second is International Maritime Organization (IMO) 2020 global marine fuel Sulphur cap. Malaysia MGO demand in 2019 is expected to increase by 40%.
5. IMO 2020 will enforce a new 0.5% global Sulphur cap on marine fuel content from Jan 2020, lowering from the present average 3.5% limit of the MFO. The effect of IMO 2020 0.5% Sulphur cap may cause demands of cleaner marine gas oil (MGO) to increase. MGO is more costly initially than the marine fuel oil (MFO) used by the majority of ships today. Ships can also continue to purchase MFO, but install ”scrubbers” to reduce the output of Sulphur Oxides (install scrubber leads to downtime & space limitation).
6. Currently Straits operate 624m litres of MGO loading annual capacity and revenue and gross profit should improve on greater demand for its MGO. MGO is more costly than MFO which lead to higher profit margin. FYI, Straits also provide bunkering services for MFO through its subsidiary and also trading of MFO. They also have international market coverage like Hong Kong, China and Taiwan through acquisition of Banle.
7. The profit of FY2018 result increases more than 50% YoY (record high) on the back of strong revenue. Sustainable growth on the arising demand for MGO product especially in years 2019-2020.
8. Strong performance in 2018 was due to: i) increase in revenue (only reflected in Q4), ii) profit margin improvement, iii) consolidation of results of newly-acquired Tumpuan Megah Development, TMD)
9. EPS dropped due to the enlarged share capital for the acquisition of TMD (116.5 million shares issued).
10. Sturdy balance sheet, with net gearing of 0.26x which remain comfortable. Negative cash flow due to cash on delivery to vendors of MGO.
11. Aggregate profit guarantee of RM10.0 million for FY19 and FY20 from 55% stake in Tumpuan Megah Development, aggregate profit guarantee of USD1.65 million for FY19 and FY20 from 38% stake in Banle Energy International Limited
12. Future profit and revenue growth drivers come from:
·Increase deliverable tonnage capacities through acquisition of vessels or chartering third parties’ vessels (increase capacity to enlarged 12m litres, 12x expansion). The additional capacity is allocated for the MFO, as a vessel generally consumes 9x more MFO as compared to MGO.
Capture the untapped oil bunkering market in Malaysia (Market size for Marine Fuel in Singapore is about RM80.0 billion in 2017, while Malaysia market is estimated about RM20.0 billion (Straits’ max capacity at RM1.2 billion revenue where still got big room of revenue growth from FY2018 result)
Broadening geographical coverage - Tap into Banle’s existing sales and marketing networks (existing customers in Hong Kong, China and Taiwan)
Expanding the logistics services - To offer additional inland transportation services to the existing customers from oil bunkering services (to acquire 35 trucks by end of 2019)
13. Total Capacity: 9 vessels with 12.0 mi litres, based on RM2.00 per litre for marine fuel and 4 loadings per month, it will be able to generate a total revenue of RM1.2 billion per year (assume close to 100% capacity utilization).
14. Valuation: Show growing profit for past 4 quarters results when they started to venture to bunker & oil trading businesses in 2018. I expect the revenue and profit growth for bunker to be continue in FY2019 with estimated revenue of 500-550m, assume net margin of 2.0-2.5%, estimated net profit = ~10-14 mil, --> Estimated FY19 EPS = 2.2 sen. Fair value of Straits can be summarized in the table below:
PEx (EPS 2.2 sen, 14 mil)
Fair value
12x
26.5 sen
13x
29.0 sen
14x
30.8 sen
The justifications on Strait should worth PE of 12x-14x are as below:
·Riding on improving Malaysia upstream O&G sector outlook (About 70% of its customers currently consists of OSV service providers which include marine vessels such as offshore oil rigs, drill ships, LNG tankers, tugs and barges. Latest PETRONAS Activity Outlook for 2019-21, there is an acute rise in demand for OSVs.)
· Positioned to capture the growing demand with a total of 9 vessels with total capacity of 12.0 million litres to further expand the bunkering business and its geographical coverage.
· A leading and licensed bunker operator in Malaysia (estimated 33% of the legal market share with big room to grow as tighter enforcement on illegal bunkering is expected to improve government tax collection)
· Strong demand of its higher margin MGO product due to implementation of IMO 2020 regulation (demands of MGO starting to increase from 2019).
15. Risk
Increase in illegal oil bunkering operation in Malaysia
Oil price plunge and slowdown in Malaysia Oil and Gas upstream activities
16. Listed logistic companies (not direct peers) simple comparison
Maybulk –Operation still loss making in recent quarter and has been continuously suffer loss for past 4 years (if strip off disposal gain and reversal of impairment, negative PEx, market cap 595 mil.
Syscorp (Shin Yang Shipping corp) – PEx 55, market cap 353 mil
Straits – high revenue growth, trailing 12M PEx 39, forward FY2019-20 PEx 10.9 (based on estimated EPS of 2.2 sen), market cap 156mil (based on 24.0 sen).
Appendices:
1. Bunkering services refers to the provision of marine fuels to ships, as well as other ocean faring vessels, such as oil tankers, container vessels, cargo vessels, cruise ships and ferries, as well as vessels utilised in the upstream oil and gas industry such as offshore support vessels, submersible and semisubmersible rigs and FPSO vessels. Bunkering can be broadly categorised into onshore bunkering and offshore bunkering, whereby marine fuel is typically pumped into vessels by refuelling vessels barges, product tankers or another ship in harbours, close to shore, or in open waters. Onshore bunkering involves the transfer of marine fuels on a shore-to-ship basis from an onshore facility, whereas offshore bunkering involves the transfer of marine fuels on a ship-to-ship basis. Refer to figure below for better illustration:
2. International Maritime Organisation Sulphur Cap 2020
Sulphur content to be permitted to just 0.5% (from current 3.5%) or vessels to equip scrubbers to remove sulfur from ship exhaust (Straits is currently supplying MGO with 0.05% sulphur content).
Scrubbers will cost an average of USD2.0 million to USD6.0 million, with downtime to be occurred
Industry players reckon that going straight to burn MGO is the most practical option.
3. 55% stake in Tumpuan Megah Development Sdn Bhd (“TMD”), acquired in Sept 2018, purchase consideration of RM35.8 million, satisfied by cash RM7.8 million and 116.5 million shares at RM0.24 per share. Aggregate profit guarantee of RM10.0 million for FY19 and FY20
4. Banle Energy International Limited, acquired in Feb 2019, purchase consideration of RM15.0 million, satisfied by 63.8 million shares and aggregate profit guarantee of USD1.65 million for FY19 and FY20.
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest.
I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.
1. DAYANG is one of the largest providers of offshore platform services in Malaysia. It is principally involved in the provision of offshore Topside Maintenance Services (TMS), minor fabrication operations, offshore hook-up and commissioning, and charter of marine vessels relating to the oil and gas companies (like Petronas etc).
2. It owns a fleet of 9 offshore support vessels (excluding subsidiary Perdana's young fleet of 17 vessels). The vessels are known as Dayang Pertama, Dayang Maju, Dayang Cempaka, Dayang Berlian, Dayang Nilam, Dayang Zamrud, Dayang Topaz and Dayang Opal. As at the end of December 2018, its total orderbook stood at RM3.0 billion; which can last at least until 2023.
3. DAYANG delivered the highest ever revenue and earnings in 4Q18 quarter, on the back of a revenue improvement of 64.9%, a reversal of impairment loss on PPE amounting to RM20.8m and forex gain of RM15.4m. Core earnings in 4Q18 was about RM80m as compared to an adjusted loss of RM33.6m in 4Q17.
4. The surge in revenue in 4Q18 was driven by much higher lump sum order and vessel utilization rate of 73% (vs 4Q17: 51%). In FY18, due to lower debt as compared to FY17, lead to lower net finance costs (-13.6%), Dayang made a profit turnaround of RM164.2m (EPS 17.02 sen) in FY18.
5. In view of the substantial pick-up in the work orders in the last three quarters of FY18, the management is optimistic that the strong earnings trend would be sustainable in FY19, on the back of strong contract execution track records, high profit margin and 3 billion orderbooks.
6. A few recent Investment banks reports saying Dayang recent quarter strong performance may not be sustainable due to lump sum orders may not repeatable. However, let me share with you an interesting excerpt from Hong Leong’s Dayang research report as below:
Source: HLB Dayang’s report (page 1)
It is stated that Dayang is expected to receive additional lump sum orders from clients in their meeting with management. Actually Dayang has been recorded lump sum revenues for 2017 and 2018 which were 251 millions and 473 millions respectively.
Another more interesting fact from last qtr report (Q4) of Dayang is the missing of schedule rates revenue which is likely to book or surface in coming quarter result. Let see the extract from Dayang last quarter report on its schedule rate revenue as below:
Source: Dayang 4Q18 report (page 18)
Negative revenues of schedule rates of TMS division may due to related cost already recognized but revenue still pending or not yet recognized. If this leftover schedule rate revenue can be recognized in 1Q19, then profit margin may be even higher than conventional quarter due to related cost already recognized or booked.
The schedule rates revenue for 2017 and 2018 were 346 mil and 371 mil respectively (total of Q1,Q2 and Q3 revenues but exclude Q4). This average schedule rates revenue over the past 3 quarter about 123mil, thus, I estimate the possible leftover schedule rates revenue could be around 120 mil+. Don’t forget there is also normal schedule rate revenue in 1Q19 which may make double or exceptional higher schedule rate revenue in 1Q19 (normal + leftover from 4Q18).
Even assuming high lump sum revenue or profit may not sustainable in 1Q19 (estimated to drop 50-60%), the leftover schedule rate revenues from 4Q18 may be enough to cover the revenue of lump sum orders. Besides, according to HLB report (guidance from management), there are some variation orders have been carried out but not yet reflected in their revenue (pending client approval).
7. One of the metrics to evaluate the earning capability of a company is by looking at its gross profit margin and general & admin expenses. The table below shows the gross profit (no one-off profit) and admin expenses of Dayang in the past 3 years.
We can see dayang has achieved impressive gross margin and keep admin expenses low in the recent 3 quarter on the rising revenue trend. This leads to higher Ebit (earning before interest and tax) and resulting in higher net profit in recent 3 qtr.
8. High quality of earning. Cash flow from operation is a metric to evaluate quality of earning of a company. Let see the cash flow from operation of Dayang as below:
Source: 4Q18 report
Dayang has generated 293mil cash from operation with an 25 mil capex spent on PPE (property, plant and equipment) in FY2018. In addition, Dayang has paid off about 250mil of borrowings in 2018.
9. Improving balance sheet due to strong cash from operation. Dayang has paid off more than 550 mil debt over the past 3 years (net debt reducing from 1.56B to 0.86B) from the impressive free cash flow as shown in table below:
10. Attractive Valuation - Achieved net profit of RM97 million last quarter. Exclude one-off earnings (reversal of impairment), adjusted net profit about RM80 mil. Annualize = 320mil, discount 20%, discounted annualized profit = 256mil --> Estimated FY19 EPS = 26.5 sen. Fair value of Dayang can be summarized on the table below:
The first 20% discount is due to this EPS estimation is based on highest quarter profit and there is a possibility that coming quarter may not achieve the similar high earning (maybe due to previous qtr result has big lump sum which may not sustaianble in 2018).
The second 10% discount is due to there is a possibility that Dayang may propose private placement due to good share price to raise some fund to prepare for Perdana Bhd coming right issue fund raising. The maximum private placement (pp) is up to 10% where this pp can cause dilution of EPS up to 10%.
Why Dayang should worth PE of 7-8x? Below are the justifications for this valuation:
Strong and Stable Margins - Average Gross Profit margin of above 35% and Net Profit margin of above 15%, one of the most efficient O&G service providers among all.
Proven track records of project execution with good profit and never fall into operation loss over the past 7 years (except in 2016 & 2017 due to non-cash big impairment from subsidiary Perdana Bhd, impairment is not belong to operation loss)
Strong orderbook of 3 billion and good profit visibility for the next 3-4 years as Dayang has shown improving profit for last 3 quarters.
Strong cash flow generation over the past 3 years and pare down debt of 700 mil in 3 years.
Another valuation method is using Discounted Cash Flow (DCF). Based on past 3 years records on average cash flow generation of 294 mil, let's assume the average cash generated per year in future is 250 million (~10-20% discount), the discounted cash flow per share per year is about 26 sen. If this strong cash flow generation trend can continue for 3-5 years (based on strong 3B orderbook and higher rig operation counts from Petronas), the cash generated per share over 5 years could reach RM1.30 per share. Over long run of 10 years, the cash per share could reach RM2.6 using DCF method with some discount.
11. Contract awards secured by Dayang and Perdana from international clients (not only from Petronas) as table below:
Date secured
Effective date
Types of works
Client
Sept 2017
5-yr contract,
effective from 20/9/17
Maintenance, construction and modification Services Package A (Offshore)
PETRONAS Carigali Sdn Bhd
Aug 2018
5-yr contracts
effective from 17/7/18 - 16/7/23
provision of Pan Malaysia Maintenance, Construction and Modification (PM-MCM)
JX Nippon Oil & Gas Exploration (M) and Repsol Oil & Gas Malaysia Limited
Oct 2016 by DAYANG's 60%-owned subsidiary, Perdana Petroleum
3-yr contract worth RM67m
effective from Sept/2018 - 2019
to supply one unit of floating accommodation vessel
Petronas Carigali Sdn Bhd
Nov 2018
3-yr subcontract, USD100mil,
effective from 1/1/19 - 31/12/21
provision of Facilities Maintenance Support in Turkmenistan
Gujurly Inzener
11. Let us have a comparison of Oil and Gas related companies in Bursa and SWOT as tables below:
Comparison is not for Public. SWOT analysis is not for Public.
12. Let see the annual report of Dayang and see who is the top 21 shareholder
Source: Annual report 2017
In fact dayang receiving increasing order of lump sum works in 2017 and 2018 from Petronas. One of the reasons I guess is due to 25 years track records and experience of Dayang in MCM in Oil & Gas. Another possible reason maybe due to Petronas may try to take care of Dayang in contract awards due to Dayang's track records and project execution capability. FYI, the schedule rate revenue mainly come from 3B orderbook which is mainly based on call-out basis (refer to their AR). The high gross margin of their lump sum works maybe due to their arrangement of charter vessel by campaign to another campaign and fully utilize them at offshore.
13. Let see the outlook of Dayang from HLB recent report (after their meeting with management) as below:
Source: HLB Dayang report (19 March)
Oil price in 1Q19 and April 2019 remain strong and currently close to USD69 per barrel. Petronas also needs more income in 2019 as they need to pay higher dividend to government of Malaysia. Thus, more oil rig may be in operation that lead to higher maintenance or modification works.
14. Increase of activities in MCM segment in Petronas activity outlook report 2019 to 2021 - Dayang is a direct beneficiary. In the report, “The respective offshore fabrication, linepipes, offshore installation and hook-up & commissioning (HUC)/ maintenance, construction & modification (MCM) segments will also see increase of workflows in 2019-21. Report below shows the MCM activities outlook of Petronas.
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.
probabilityNow days in most Engineered capital equipment Supply & Service providers...biggest profits are made on the service segment than capital sales.....
capital investment by customers can only grow to a certain extent....service is almost forever...
need not say on the fat margins services naturally have (cost being mainly the workforce), and the ease of increasing or reducing these resources (skilled labor) as per the changing need, i.e its not a capital intensive business.
05/04/2019 11:07 PM
probabilityas such the PE rating should definitely be comparable to Serbadinamik level
no way at 7 or 8 like David had used above
05/04/2019 11:13 PM
probabilityIsn't Dayang just doing what serbadinamik is doing on land, but on sea.....
only difference is they have yet to capture overseas market like what serba had done..
05/04/2019 11:21 PM
newbie911Alr up like hell...only comw out with tis article. Why not write about petron at depress price now....lower downaide but higher upaide than dayang.
06/04/2019 12:21 AM
probabilitywei, from 4.0 earlier..it alr drop like heaven ma...
06/04/2019 12:29 AM
pjseowDavid , good write up .In my opinion, your valuations of Dayang is better than the 3 IBs . Your report cover more details with factual figures than the IBs. You have also consider the outlook of Dayang in longer term rather than just the IB's " next qtr earning is not sustainable " . I am happy that you have also pick up the last qtr "missing " schedule rate revenue which is estimated to be about RM 120 million which in my opinion will be booked in Q1 2019 . In the last 2 weeks , I have commented in bit and pieces in the i3 forum about the missing schedule revenue , the great cash flow of dayang and the brief valuations of dayang using both PE and DCF . I am glad that you have been able to put in nicely in a your write up so that most of the i3 readers can comprehend .
06/04/2019 11:18 AM
calvintanengThe oil and gas bull will continue for all of 2019 and into 2020 for very strong reasons:
1. Petronas Refinery needs extra 54.7 million barrels of oil a year
2. Brent Crude now over USD70 makes it worth while to extract more oil
3. PH Govt still need Petronas Revenue to help Malaysia
After this short rest dayang should firm up. Only liability is in perdana's debt load
I think Penergy should also play catch up as it has been included in Both phase 1 and phase 2 ogse jobs
And T7 global will also get follow dayang and penergy because Petronas bypass ogse and award jobs directly to Sme support ogse entities
06/04/2019 11:33 AM
Hilary FernandezAn impressive writeup with substance. That's how a proper analysis should be done with facts and figures. The 3 IBs should learn from you. I believe the TP should be easily RM2-3 in 6 months time based on your writeup.
06/04/2019 11:59 AM
probabilityAnother valuation method is using Discounted Cash Flow (DCF). Based on past 3 years records on average cash flow generation of 294 mil, let's assume the average cash generated per year in future is 250 million (~10-20% discount), the discounted cash flow per share per year is about 26 sen.
...........................
Using above data from David, which takes the average of last 3 years (under depressed market condition), i think we can use PE 10.....to derive TP of 2.60.
reason being i see its depreciation need and maintenance capex would be almost nil going forward.... its assets which are not utilized can be disposed to generate cash....
Posted by Choivo Capital > Apr 6, 2019 3:45 PM | Report Abuse
You're being overly simplistic in your analysis of a highly complex business, in an industry with multiple feedbacks.
Do you remember hengyuan, masteel etc.
How precise your predictions are and how incredible wrong they were?
06/04/2019 3:51 PM
Armada An Quantum Leap Stock In 2019/2020Jon dont shoot first ! Risk only come for the blind spot unknown... Afterall, investment is something we trying to do a set of assumption. Then, u apply a safety of margin by discounting your calculated TP.
Can you enlighten us here ?
06/04/2019 4:03 PM
WL LeeChoivo boy you are not contributing shit and now you wanna come out and shoot?
06/04/2019 9:33 PM
WL LeeChoivo boy cant even answer my question now you wanna question others?
06/04/2019 9:33 PM
i3ValueConnie, why delete the Evil Or Angel blog? We were busy discussing choivo, 3rd person Calvintaneng, autism, asperger etc
06/04/2019 9:57 PM
pjseowchoivo ,it will be more constructive if you can objectively point out which parts of David analysis or assumptions are incorrect factually rather than asking a very subjective question on how accurate is his prediction. We will appreciate your comments if you can critique his analysis objectively. We will appreciate more if you can come out with your versions of analysis and prediction.
06/04/2019 10:09 PM
WL LeeI repost already, out of my heart of sympathy i decided to withdraw it yesterday, however after all seems like he never learn his lesson, so i reposted.
Choivo needs to be treated differently, logic does not apply to him as he prefers making comments than acting on stocks in which he has followed kyy and most money on.
Therefore he has stock loss bias, meaning if he loss money on JAKS, no matter how much you may make, he already is opinionated, because while you may start from a neutral point of view, he starts from a negative one.
07/04/2019 6:16 AM
mneoOil price is going uptrend.... positive news for O&G companies including Dayang, Hibiscus, etc
07/04/2019 9:49 AM
VSOLAR Sailang Margin All Inunker probability is right lor! Biggest profit for capital items is made in the after sales service! Just like Rolls Royce mah, they make plane engines and sell to customers near the cost of making it. Then they only make profit from the maintenance and repair of the engines! That's how you make money, so if the companies that bought the capital items uses it more then it's good for you!
07/04/2019 11:23 AM
sosfinancescience + art = stock market reality. However, sometimes it is the art part that counts. Good write up though.
YiStockNegative Revenue is due to over-provide revenue in previous quarters, right? It made no sense to me the Negative-Revenue is due to cost recognition 1st and revenue later. If so, It will be operating loss, rather than negative revenue. Am i right?
07/04/2019 7:40 PM
pjseowYiStock, in my opinion, the Negative Revenue for Schedule rate in Q4 2018 was not due to over provision in previous qtrs . The schedule rate revenues for 2018 were 124M , 120M , 127 M and -29 M respectively for the 4 qtrs while for 2017 , they were 97 M, 113M , 75M and 60 M respectively . You can see that the first 3 qtr revenues of 2018 were about 120 M per qtr . It was abnormal and unusual that Q4 has no revenue of schedule rate at all . Even in 2017 , minimum schedule rate revenue was 60 M in Q4 . Even without this revenue ,Dayang already made record profit due to exceptionally high revenue from the lump sum revenue of 269 million. THe management has over met the target . Hence , I suspect they invoice the schedule rate revenue of Q4 into Q1 2019 which was usually the low season . This will " smoothen " the linearity of revenues by qtr.
Orderbook. Current orderbook stands at RM2.9bn including Pan Malaysia Maintenance, Construction and Modification (PM-MCM) contracts from different PSCs. Apart of from existing contracts, Dayang is expected to receive additional lump sum work orders from clients. We understand there are also some variation orders (VOs) that have been carried out last year. All the VO costs have been recognised last year and its profits will be booked in 1HFY19, pending client approval.
..................
It could be extra costs which took place beyond the agreed schedule rate and subject to customer scrutiny before agreeing on the value.
Since it is executed without a prior agreed contract due to urgency or mishaps (procurement of material to facilitate the intended services), the revenue recognizable are subjective to customer agreement.
It may be accounting requirement that these extra costs are recognized as it is executed without a contract in hand.
It is very well possible for Dayang to execute this way knowing Petronas is their key long term customer based on trust.
stockraiderTycoon with more than Rm 500m networth willing to donate Rm 10m here & there, thus the pledge Of Rm 2m underwriting is peanuts to him mah...!!
08/04/2019 5:06 PM
stockraiderRead carefully loh...in order for u to entitle to the guarantee, which have a composite pool fund of Rm 2m, u must buy Dayang at Rm 1.50 or below and must hold it for at least 9 mths and this cover only maximum 50,000 shares per person.
The offer is effective on 7 april 2019 onwards loh....!! Meaning u must buy on 8-4-2019 onwards.
At the moment, even if u bought dayang at Rm 1.54, and if the share price subsequently fall below Rm 1.50 u r not entitle for the guarantee claim loh..!!
In fact not many people entitle loh...unless they manage to buy at Rm 1.50 & below today loh....!!
In addition KYY max loss reimbursement is only max Rm 2m.
KYY got alot of trick lah....he knows alot of gimmick mah....!!
This info are fed by raider's lawyer friends loh....!!
Don get con loh.....!!
It is a share moving scam loh.....!!
08/04/2019 9:38 PM
Ricky Yeo@connie555, yes i don't like to contribute shit, like overly optimistic shit.
23/05/2019 12:40 PM
stockraiderRaider already warn u on 8 april mah.....!!
23/05/2019 12:43 PM
freddieherofly together all be rich rich tis year......
pjseow3i，can you point out which part of his analysis is wrong. With Q1 2019 result published yesterday,the 4 qtr rolling eps is 18.78 sen and PE of 4.9 with current share price of 91 sen. What he stated in his analysis are all facts. You should not use the market pricing which can swing up and down to say that he is so wrong. Mr markets are filled with emotions . The market can swing +and -50% without any change in the fundamentals.
24/05/2019 4:40 PM
qqq3that is david style......................can make money or not don't know lah.
too complex and too detail...can see the trees but don't know whether can see the forest?
dayng is quality share or not?
24/05/2019 5:31 PM
calvintanengThe final impediment and stumbling block to dayang = the stupid over indebtedness of perdana now resolved.
After this dayang should find its foothold and rebound up slowly
SO THE OIL AND GAS BULL RUN STILL ON
BEST OF TIME IS NOW TO BUY THOSE OVERSOLD OIL & GAS STOCKS
ONLY AVOID THOSE WITH HIGH DEBTS AND INSOLVENT
THOSE WITH REASONABLE DEBTS BUT HAVE SECURED HIGH REVENUE JOBS SHOULD EMERGE STRONGER
25/05/2019 12:23 AM
Ricky Yeo@pjseow - As far as my understanding, 50% of this article is about extrapolating the past into the future. You would agree everything about the future is not 'fact' but hypothesis. Just as I can state the same kind of fact but come to a totally different conclusion.
The elephant in the entire article is the $294 mil cash flow over the past 3 years, and the assumption if that can be maintained over the next 3-5 years, then Dayang is worth PE 7-8 and price XXX. Based on an equity of $1.3 bil. The ability to generate that amount of cash flow in the long run is like amazing (22%). Literally putting it in the top 5% of bursa.
But no one talks about the fade rate, how long can this go? Oh right, someone forgot to talk about depreciation of close to $130 mil per year. Purchase of PPE has not been keeping up with depreciation, accounting for only 10% over the past 3 years. Yes sure Dayang can pay off all the debt in record time. And how long before they can skim on purchase PPE before the big bills comes in to normalised the cash flow figure?
Author:davidtslim | Publish date: Wed, 20 Mar 2019, 5:12 PM
CRESBLD currently has four core businesses - Construction, Concession arrangement, Property Development and Investment Holding. Moving forward, the Construction arm will continue to be major revenue contributor (unbilled orderbook RM1.1b) and concession & parking management provide stable and recurring income.
FY2018 and FY2017 were record years for Cresbld as its revenue and profit improve substantially (FY18 595m vs FY17 499m revenue, FY18 70m vs FY17 28m profit) The FY2018 EPS improve by an impressive 46% YoY to 23.5 sen (excluding the one-off RM25m land disposal gain). However, Cresbld lost a court case which their client was awarded with LAD and defects rectification of an amount of 31m. The financial net effect of this court case is Cresbld lost about 25m which dragged the construction segment profit (PBT) in 3Q18 significant lower at 0.2m. All in all, the gain of land disposal has been contra off by the lost in the court case and the real operation profit in FY2018 is actually stood at 70m or EPS of 39.8 sen).
High quality of earning. Cashflow from operation is a metric to evaluate the quality of earning of a company. Let see the cash flow from operation of Cresbld as below:
Cresbld has generated an impressive net operating cash flow of RM161.4m(95 sen per share) in FY2018 (vs 65m in FY2017), more than 100% improvement YoY and most of the cash flow used to pare down the debt. (low capex requirement in 2017 and 2018).
A closer look at the latest segmental result revealed that concession and investment holding command a stable revenue and profit. This is because recurring annual income of 43.5m from UiTM Tapah concession (up to year 2034) and parking and rental income of its properties in Shah Alam, Subang. FYI, parking segment is estimated to be able to achieve a net profit margin of 60-70%.
Cresbld has proposed to distribute dividend of 4.50 sen for FY2018 which translate to dividend yield of 4.3% (to be paid around June 2019 after AGM). Cresbld has consistently pay dividend from 3-5 sen over the past 10 years (total paid dividend of 40.5 sen over past 10 years).
Recurring income from UiTM concession, parking management, strong construction orderbook and large property TOD projects (strategic LRT location) make sustainable future strong cash flow generation which may further pare down debt and continue to pay good dividend. (about 300m of Operating financial asset is for UiTM concession)
Cresbld current in highly geared position (mainly due to funding for UiTM concession of about 290m). Anyway, net gearing of over 1.0x in 2017 and this ratio has improved significantly in the recent two quarters at 0.89x (net debts of Dec 2018 = 434.4m vs 537m of FY2017, net debt reduced RM103m) mainly due to strong cash flow from operation.
One of the metrics to evaluate the earning capability of a company is by looking at its gross profit margin and general & admin expenses. The table below shows the gross profit and admin expenses of Cresbld in the past 3 years.
The revenue, gross profit and net profit improve substantially in FY2018 as compared to FY2017. Finance cost will continue to reduce as debt has reduced by 103m in past 12 months.
Despite Cresbld's relatively small paid-up capital of RM176.9m, it has managed to bag three major privatized development projects with a combined GDV estimated at RM4.1 billion (like Latitud8, The Elevat8, Jalan Ampang, Residensi Hijauan, Kelana Jaya, LRT).
In Property Development, Cresbld's two major on-going projects are Residensi Hijauan (GDV: RM330m) in Shah Alam and Latitud8 located on top of the Dang Wangi LRT Station (GDV RM1.1B). This Transit-oriented Development (TOD) project is based on a capital light business model whereby the land would be provided by the owners. (Prasarana is entitled to 21.2% or RM233.3m of Latitud8's GDV, 90% of the payment to Prasarana will be in kind in the form of units of the project. Similarly for 1.3B Elevat8 project in Jalan Ampang where the land is contributed by MRB).
Investment Holding arm of Cresbld generated recurring income and profit for past 2 years. The division has three key assets - The Crest, 3 Two Square in PJ (16-storey office blocks, shops & parking bays/150,522 sqft); Tierra Crest in Kelana Jaya (2 blocks of office building & parking bays/280,549 sqft) and Avenue Crest in Shah Alam (retail lots & car parks/29,210 sqft). Total available parking lots in 3 Two Square is 1370 lots, 525 lots in Tiera Crest another new 713 lots in Avenue Crest (to contribute income in 2Q19 for Avenue Crest).
For future construction profit visibility, let us go through Cresbld current on-going projects as below:
A few projects (like South Brooks, DBKL carpark, latitud8 etc) are at the middle of the project cycle which should contribute higher profit. According to management, Crest is looking for a yearly replenishment 500-600m of contract on its orderbook which will be the future profit growth driver.
Undervalue: - Show growing profit for past 9 quarters results but share price still stagnant around 90 sen to RM1.2. Achieved net profit of RM16.8 mil last quarter, annualize = 67mil, discount 20%, discounted annualized profit = 53.6mil à Estimated FY19 EPS = 32.1 sen (exclude 10mil treasury shares). Fair value of Cresbld can be summarized on the table below:
PEx (EPS 32.1 sen)
Fair value
5x
1.60
6x
1.92
Annualized 53.6mil profit is backed by two stable and recurring incomes (Concession & Parking)
Recurring income or profit from UiTM concession is estimated about 10m-12m per year, while parking management is estimated can generate 3m-4m profit per year. They also have rental income (12-13mil per year) for their offices spaces in their properties (3 Two Square and Tiera Crest). All these recurring annual incomes are estimated to contribute about (11+3.5+12.5) an amount of 27m profit (EPS of 16 sen, just from recurring income alone).
The justifications on Cresbld should worth PE of 5-6x are as below:
Impressive cash flow from operation of 161 mil and 65 mil in 2018 and 2017 respectively where the market capital of Cresbld is just about 184 mil (based on RM1.04 share price)
Strong and Stable Margin - Average net Profit margin of above 10%, one of the most efficient construction+concession+property players among all.
Recurring income from its concession and investment holdings (car park management & office rental)
Proven track records of project execution with good profit and never fall into operation loss over the past 10 years (show big improvement in revenue and profit and cash flow in past 2 years)
Strong construction orderbook of 1.1 billion and 4.1 billion GDV of property development projects – provide good profit visibility for the next 3-4 years (refer to appendix).
The 20% discount in the EPS is due to possible property segment revenue and profit slowdown in FY2019 (as profit is record high in 2018) although the GDV under development still at high level of 4.3 billion.
Company has aggressively buys back the share from RM0.88 – RM1 up to 10 mil shares (5.6% of total shares) which shows that company management views current price is undervalue.
Increment of dividend payout to 4.5 sen (from 4 sen) and aggressive share buy share recently show that management is confident of their future cash flow generation (as they burned 10mil+ cash to buy back shares & 7.5mil for 4.5 sen dividend).
Strategic or prime locations for their new property projects launch (like Dang Wangi & Kelana Jaya LRT stations projects, refer to appendix for list of projects)
Great Eastern (holding 6.5mil), Public small cap and Public Ittikal funds are their top 30 shareholders (refer to Annual Report 2017, 2016, 2015).
Let us have a simple comparison of small cap and big cap construction companies in Bursa as in the table below:
Obviously Cresbld shows the highest revenue, ROE, orderbook to market cap ratio and second highest dividend yield net profit margin. The advantages of Cresbld over other construction companies is it has long term recurring income from UiTM concession, office and car park management (Under investment holdings segment). One of the closest competitors is Gadang but Gadang has shown decreasing profit in recent 4 quarters result while Cresbld has shown impressive profit growth for 9 consecutive quarters.
Appendix: Appendices are not for public
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.
Author:davidtslim | Publish date: Mon, 4 Mar 2019, 11:26 AM
Highlights:
1. MFLOUR is involved in 4 businesses - flour milling, animal feed production, poultry processing, and breeder and broiler farming. 3Q18 losses were due to lower production of poultry, forex losses to weak MYR and Rupiah (5.5M), fair value loss on biological assets (7.7M) and impairment of receivable and share of loss on JV biz on Indonesia (2.9M).
2. Higher selling price that lead to better margin in in flour and grains trading segment. Currently, the total milling daily capacity for Malaysia and Vietnam is 2,000 tonnes and 2,700 tonnes, respectively.
3. 3x poultry processing capacity to be completed in 1Q of 2019 in phases (As at 31 October 2018, the construction of the additional poultry processing is approximately 83% completed (from 80k birds to 240k birds per day). Running at full capacity of 80k bird in 4Q18.
4. Improved broiler production volume as a result of improved day-of-chicks (DOC) and feeds quality.
5. Broiler segment is expected to get lift from rising chicken prices in 4Q2018 and Jan 2019 (rise from RM4.2 per kilo to RM5.5-5.7 per kilo in Jan 19).
6. Turnaround at JV in Indonesia poultry biz as price competition has eased since 4Q18. Besides, lower cost of import in Indonesia due to Rupiah has strengthened (from 15,100 in Q3 to 14,000 in Feb 2019).
7. It is a net beneficiary of a stronger ringgit (as 70% of its costs consist of imported raw materials (USDMYR was 4.14 in Q3 vs 4.07 in Feb 2019)
8. 50% Malaysia fast food restaurant chicken supply come from Mflour (McDonald’s, Texas Chicken, Nando’s and Domino’s Pizza.) (source: CFO mentioned this in BFM interview)
9. Possible of fair value gain on biological assets due to improve margin on poultry due to higher live bird prices in 4Q2018 and Jan-Feb 2019 (previously fair value loss of 20M in 9M18).
10. The current aquatic feed mills can utilise the by-products from flour milling and poultry. The ongoing construction of the new aqua feed milling will increase aqua feed milling production capacity of up to approximately 10k metric tons from 1.6k metric tons per day.
11. Higher feeds sales volume as a result of improvement in feeds quality in Q4.
12. It is guided that there would be significant improvement in Q4 2018 which will be announced by end of this month, February 2019 (refer to their 3Q18 report).
Company Background
MFLOUR is involved in 4 businesses - flour milling, animal feed production, poultry processing, and breeder and broiler farming. MFlour now ranks as second in importance in the flour industry after Federal Flour Bhd. MFlour has two flour mills in Malaysia, which are located in Lumut, Perak; and Pasir Gudang, Johor. MFlour's brands for its flour products include Peaches, Roses, Bunga Cempaka, Red Bicycle, Diamond, and Balance. MFlour ventured into the poultry processing as well as breeder and broiler in the early 1990s.
Besides the operations in Malaysia, Currently, the total milling daily capacity for Malaysia and Vietnam is 2,000 tonnes and 2,700 tonnes, respectively. The new mill and warehouse facilities at Pasir Gudang had completed and commenced production in 2013.
Fundamental Data
Currently Mflour is trading at trailing PE Ratio of 33 (based on current price of RM0.60) with EPS of 1.87 sen. High PE ratio of Mflour mainly due to 3QFY18 reported loss where this loss was due to lower production of poultry, forex losses due to weak MYR and Rupiah (5.5M), non-cash fair value loss on biological assets (7.7M) and impairment of receivable and share of loss on JV biz on Indonesia (2.9M). However, forex and fair value losses may reverse to gain in 4QFY18 and 1QFY19 due to higher MYR rate vs USD and improve poultry margin due to higher live bird and chicken price.
For 3Q18, revenue of the Mflour improved by 17.4% QoQ to RM642m, mainly due to higher revenue recorded in Flour and Grains Trading segment, largely driven by higher sales volume. Gross profit however, declined by 3.2% qoq to RM58.0 m. Excluding the net exceptional losses of RM7.5 m which mainly due to unrealised forex loss and net fair value loss on biological assets, the group made a lower profit before tax of RM3.8 m for 3Q18. The lower profit was mainly due to loss incurred by the Poultry Integration segment (RM13.2 m) as compared to an operating profit of RM2.5 m posted in 2Q18. The loss was due to lower selling price of live bird in 3Q18 as well as the higher net fair value loss on biological assets of RM7.8 m in 3Q18
On the other hand, Flour and Grains Trading segment's operating profit increased by 50.5% to RM17.5 m on better margins arising from higher selling price in 3Q18. For 9M18, revenue declined marginally by 3.1% yoy to RM1,754.2 m, mainly due to lower sales recorded in Poultry Integration segment.
For 9M18, the Poultry Integration segment recorded a significant decline in revenue to RM505.4 m (-14.6% yoy), due to lower production volume and selling price of live birds. This segment subsequently registered an operating loss of RM9.2 m as compared to a profit of RM33.6 m in the last corresponding period. The loss was mainly due to lower margins arising from lower live birds price, and the downward adjustment of fair value on biological assets of RM14.4 m (9M17: +5.6 m).
Prospect for FY2019
The profit of Mflour poultry segment depends on live bird or chicken price. Let have a look on recent live bird price in Malaysia as shown in the Figure below.
We can observe that the price of live bird has recovered (from RM4.2 per kilo in Nov to RM5.8 per kilo in Jan 2019) since 4Q18 to 1Q19. Price of live bird of above RM5.5 per kilo is actually new high in 52 weeks of time.
More interesting is the expansion of 3x broiler processing of Mflour is scheduled to be completed in 1Q19 (or 2Q19). There will be 3x poultry processing expansion of capacity to be completed in 1Q of 2019 in phases (As at 31 October 2018, the construction of the additional poultry processing is approximately 83% completed, from 80k birds to 240k birds per day). Currently its broiler processing running at full capacity of 80k birds. Let us have a look on its right issue prospectus which mentioned about its expansion as below:
Besides, the company also expanded its production capacity for the aqua feed milling plant. Let see the description of the right issue prospectus as below:
This mean when poultry processing expansion completed in 2019, Mflour can increase their processing up to 120k birds per day which can contribute higher revenue and profit in FY2019. As long as live bird price is above RM5 per kilo and raw material cost remain stable, I think Mflour can produce a better result in poultry segment.
Flour segment
Another main revenue from Mflour in manufacturing of flour and trading of grains. Let see the price of wheat which is the raw materials of flour as graph below:
Let read another news on possible flour price hike as reported by SINCHEW Chinese newspaper on 21 Feb 2019 as below:
Source : Sinchew newspaper on 21 Feb 2019.
In addition, another factor that can affect the profitability of Mflour is movement of MYR and IDR (rupiah). Let us see the recent MYR and IDR charts as below:
Source: Investing.com
From the above two charts, we can observe that both MYR and IDR have strengthened since Dec 2018. This situation lead to lower import of feed or raw material cost for Mflour.
Lastly, it is guided that there would be significant improvement in Q4 2018 which will be announced by end of February 2019 (refer to their 3Q18 report prospect, turn out good result released on 27 Feb)
Source: 3Q18 report
This is the prospect given by Mflour of the latest quarter report result 4Q19 as below:
Source: 4Q18 report
Risk
Rising labour cost (min wages increment in 2019)
Weaker MYR and IDR currencies (higher cost raw material import).
Weaker live bird and broiler selling price
If you interested on my analysis report, please contact me atdavidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.
Booyeahagree. wheat price, cpo and corn price has been going down as well. poultry might do well this 1sr half.
04/03/2019 12:41 PM
sapurakencanaI like your sharing,anyway i prefer you reseach base on visit to their plant ,other vise you wil be surprise when come to the end of May 2019.This is my experiance in this company over 6 years time.
04/03/2019 7:41 PM
value88Very detail analysis with facts and data. MFlour will enjoy higher product selling prices, i.e. flour and broiler, and lower raw materials costs, i.e. feed cost, resulted from strengthening of RM and IDR against USD. This forms a very favourable business environment for MFlour, and it should kick-off its up-cycle.
TakeProfitsYOU ARE CORRECT abcd...very lousy useless management. Every few years rights issue. They are not managing company well..Even.players push it up I WON'T BUY. LOUSY STOCK...
