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Author: tapdance   |   Latest post: Wed, 20 Jan 2021, 2:51 PM

 

(TapDance) Low Risk High Return – Salutica Bhd

Author: tapdance   |  Publish date: Wed, 20 Jan 2021, 2:51 PM


 

 

  • Summary

Salutica’s earnings profile is on inflection point for its True-wireless Stereo (TWS) headset/earbuds earnings to surface in the coming months – which coincides with the sizzling consumer electronic demand season.

TWS earbuds is on trend. Hearable gadgets are one of the top search shopping items in Amazon. And Jaybird’s (manufactured by Salutica) TWS earbuds’ quality is ranked better than Airpod’s.

Meanwhile Salutica has improved its facilities, secured 6 more new clients, hiring ~200 more staffs, all during the movement control months.

When most (if not all) EMS and Tech related stocks had their fair share of run-up in recent months, Salutica was a forgotten candidate – until 2-weeks ago. Risk-reward is exceptionally attractive especially given the visible growth catalyst in sight.

The tepid market interest perhaps is due to weak expectation to the coming 4QCY20 result (to be announce in Feb’21) – which is widely known to be the last set of weak quarterlies before the potentially nicer looking ones’ surface in CY21. After which should be on gradual up-trend. Potential upside risk explains below.

Regardless, Salutica to generate +50% ROI just by returning to pre-covid levels – during which those 6 new clients were not secured yet. And if only Salutica is allow the full trend of TWS hearables…

The above explains why now – when market is still tepid - and until the share price falls after a potentially ugly looking 4QCY20 result announcement, is the best time to accumulate.     

 

 

 

 

  • Description

Salutica is well known as a contract manufacturer for Logitech’s mouse/keyboard, Bluetooth headsets and recently launched (August 2019) TWS earbuds. The TWS business was gaining traction pre-covid then things came to an abrupt halt.

On pre and post 2018 boom-bust

Salutica Bluetooth headset performed marvelously pre-2018 until its business edge diminishes as new competitors emerged – mainly from China.

The intense competition drove management to slowdown the Bluetooth business and develop TWS headsets. Underlying business (so as share price) performance suffered during the transition period.

Fast forward 3 years, Salutica has an edge over the mass majority of its competitors on TWS earbuds now. There are hardly any competitors around the region, thus far. Obviously existing competition dynamic shouldn’t hold forever. Nonetheless, conservatively estimate, Salutica should have ~3 years of honey moon period.

             On proprietary tech and scalability vs. typical EMS model

Salutica actually possess its own proprietary technology and market its own product i.e. OBM, in addition to its contract manufacturing operation. Therefore, on top of leveraging on its clients’ brand and distribution network, Salutica could scale its proprietary tech on other areas/industry.

For an example, Joshua (CEO) hinted its intention to penetrate into the hearing-aid industry during a recent interview.

The hearing-aid is a USD15 billion market, and growing exponentially. It is said that future hearing aid will run on AI and integrated sensors and is the first device to trace cognitive health and physical activity as measured by hearing aid for utilizing in social situations. Ref

            On Trade war

For Salutica, Western country clients couples with China competitors sounds like the best combo during the trade war era.

Salutica’s amazing pace in securing multiple clients over a short span of time is also likely a trade war effect. If Salutica is lucky then honey moon period can be further extended.

           On recent chip shortage

Joshua confirms to have access to ‘certain’ chipset exclusively during an interview back in November 2020. Risk of production disruption is minimal – not nil.

Joshua was actually quite excited about 2020 before MCO. (P/S: LEESK’s MD Dato Eric said the same thing…). 

 

  • Growth factors

Salutica first secured contract from Jaybird (associate company of Logitech) and subsequently added 6 more clients in 2020. Jaybird markets fairly premium earbuds globally – price points ~$150, though main market is in North America.

Salutica upgraded its facilities during the pandemic months in anticipation of the brighter prospect. The earlier mentioned 6 new contracts are ready for 2021.

Earbuds is one of the top search items in Amazon. A casual search over various online shopping portals indicates that the Jaybirds earbuds are hot selling items. Most platforms are left only with limited amount of inventories or either out-of-stock. Reviews are pretty positive. It is said the headset quality is better than Airpod.

Salutica is on rapid hiring mode – management confirms its intention to hire ~200 more staffs. The development suggests promising production volume.

 


Ref.

 

 

  • Valuation and Why-the-opportunity?

The business value is difficult to quantify for TWS potential has yet to surface.

Salutica share price rose from RM0.30 to RM1 in June 2019 to Feb 2020 (i.e. 3x in 8 months) amidst the TWS launch. The trend was quickly brought to heel by the pandemic.

At RM 0.65, investors will reap a rewarding 50+% if returns to RM1 range.  

On a personal note, market expectation is certainly not high for a promising investment venture with visible growth catalyst before us, trading at 1.6x PB with RM40m (i.e. 20% of market cap) net cash.

The tepid market interest perhaps is due to weak expectation to the coming 4QCY20 result (to be announce in Feb’21) – which is widely known to be the last set of weak quarterlies before the potentially nicer looking ones’ surface in CY21.   

There could be (upside) risk for 4QCY20 result though. Logitech has been raising its annual sales and earnings targets – demand for its video conferencing devices and computer gaming peripherals soared as more people worked from homes, while gaming console sales jumped as a result of shut down of cinemas and other leisure facilities. My understanding from Joshua (CEO) is that the existing Logitech contract is more of an operation to cover expenses i.e. not a profit centre. So (upside) risk probability is low.  

 

  • Catalyst

TWS business (Jaybird + 6 new clients) contribution to surface in coming months

TWS headset/earbud on sustainable trend

Robust consumer electronics related spending

Coming US stimulus

Higher sell-side coverage and institutional investors following 

 

 

*** ***

Disclaimer: The material provided herein is for informational purposes only. It does not constitute an offer to buy or sell any securities. We accept no liability whatsoever for any direct or consequential loss arising from any use of information in this report.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise may buy/hold/sell the mentioned securities at any time without further notice.

 

Labels: SALUTE
  2 people like this.
 
dawchok Hi TapDance : do you know how much TWS business contributes to its net profit ? TQ
20/01/2021 3:08 PM
tapdance Meanwhile it is close to nothing.
20/01/2021 3:11 PM
dawchok tq. Then i have to wait
20/01/2021 3:39 PM

(TapDance) Low Risk High Return (10) – PMB Technology (PMBT)

Author: tapdance   |  Publish date: Mon, 7 Dec 2020, 10:15 AM


 

Summary

Today’s PMBT bears a striking resemblance to the 2016’s Press Metal (PM) – which has grown by +1,000% in 2 years’ time.   

PMBT is banking on Silicon as an essential material for our future economy.

  • Silicon is the basic material for solar industry.
  • Tesla intends to replace cobalt with silicon for its batteries.
  • China alters global silicon supply demand balance as it pivots on environmental friendly policies. 

These factors drove silicon price to a fresh 3-year high.

Majority own and manage by the Koon family, PMBT and PM are of the same playbook. More importantly when PM started off with less resources and market recognition in the past, today’s PMBT – leverage on experience acquired and the market respect from PM – earning will ramp up swifter.

Eventually share price trajectory will follow suit.

 

Description

Press Metal (PM) – one of the most efficient and lowest cost aluminium producer globally is a majority shareholder of PMB Technology (PMBT). Both companies are mange by the Koon brothers. In late 2019, PMBT disposed its aluminium business (to PM) to stay focus as a silicon provider.

Silicon metal is an important element added to various grades of aluminum alloys used in performance applications such as automotive components and aerospace products.

Silicon metal also is a critical raw material in the production of silicone compounds used in numerous products including sealants, adhesives, rubber gaskets, caulking compounds, lubricants, food additives, coatings, polishes, and cosmetics, among others.

In addition, silicon metal is the base material in the production of polysilicon, a purified form of silicon used in solar cells and semi-conductors.

In summary, Silicon demand will be driven by solar and electronics in many years to come, whilst supported by its widely adopted application in various industries currently.  

 

Growth factors

 

  • Management and efficient Hydro power supply

The competitive advantage of the PM series of companies lies in its lean production cost. On top of the very capable management strength, the ultra-competitive position is because of its power procurement contract with Sarawak Energy i.e. Bakun Hydropower.

Aluminium and Silicon production requires substantial amount of power. Energy cost as a single cost component weights more than 40% of the total production cost. The availability of an efficient energy sources alone determines the survival rate of the business.

By securing the ultra-competitive Bakun hydropower supply contract – which is one of the lowest in the world, PM has and PMBT will emerge as one of the lowest cost producer in the world.  

Meanwhile PMBT is already position at the middle to lower quartile of the global cost curve despite starting out as a green field player only in 2019. Further improvement is on sight.

Below snapshot from the PMBT’s website confirms and mentions about its advantages:

 

  • China supply outlook – Silicon and Aluminium price on a tear

 

 

 

Both silicon and aluminium price soars to their 3-year high. While global solar energy demand drove the recovery from March lows, it was actually news about China changing their environmental policies that fuels the price trend.

China produces more than 50% / 60% of the world’s aluminium / silicon. As mentioned earlier, it takes a great environmental toll to produce these materials. Now that China pivots its environmental concern policies, coal-fired power plants will be discontinued hence potentially shrinking production rates and altering supply-demand balance outlook.

Reference: https://cn.nikkei.com/politicsaeconomy/commodity/42830-2020-12-02-04-59-01.html  

 

 

  • Silicon as an essential material for solar and EV economy

Solar – The basic component of a solar cell is pure silicon, which also has been used as an electrical component for decades.

Polysilicon (a purer form of silicon) is in acute shortage because of vigorous solar module demand. Over 90% of the current solar cell market is based on silicon currently.

Electronic Vehicles (EV) – Elon Musk announced that Tesla will use more Silicon to replace Cobalt in producing its batteries for its future generation models.

The strategy poise to make Tesla EV a lot more affordable and is seen to be adopted by other EV battery vendors.

 

 

  • Aggressive capacity expansion

PMBT is undergoing an aggressive expansion plan to meet the world’s silicon demand is impeccable.

Located in Samalaju Industrial Park in Bintulu, Sarawak, it is to double current (i.e. phase 1) production capacity of 36,000 mtpa to 72,000 mtpa (i.e. phase 2) of metallic silicon by 2020.

First phase of the silicon facility started construction back in Dec 2017, having attained full capacity (i.e. 36,000 mtpa) by 2Q19.

The second phase finished constructed in the end of 2019, and commence operation in 3Q20. Schedule was slightly delayed by the MCO.  

First phase capacity is currently fully utilized. Ramp-up schedule of second phase is to produce 45,000 tons in 2020 whilst gradually increase to its full potential of 72,000 mtpa target in 2021.

Noteworthy, the co.’s corporate presentation indicates that the plant size is of 64 hectares and – is suitable for 4 phases of development.

 

 

  • Trade War

Trade war distorts the global supply chain. PMBT stands to capture higher market share as a neutral Malaysian producer.

Meanwhile the company’s markets are mainly in Europe and America where there are trade barriers against the Chinese suppliers.

 

Valuation

Recent QR registered huge improvement in its core earnings (+150% Y/Y). Those figures will be better indicated by recent silicon price rally.

The second phase expansion effect has yet to surface hence the 30x trailing PE is not reflective of its true potential.

Market expectation is not high from a replacement cost perspective. PMBT is currently valued at 1.5x PB or 1x EV/Assets, versus PM’s 8x and 3x respectively.

PMBT must worth much more than its replacement cost as one of the world’s most cost efficient silicon provider. Based on PM’s track record, market may be incline to see PMBT overtake PM’s valuation for its smaller size and swifter growth.

 

Why the opportunity?

Full earning potential has yet to surface. PMBT is only at the beginning stage of an inflection point.

Illiquid. PMBT shares are closely held (read – ‘cornered’).

Low profile, absence of sell-side coverage.

Institutional investors are forbidden because of liquidity and cap size constraints

 

Today’s PMBT bears a striking resemblance to 2016’s PM (i.e. +1,000% in 2 years)

 

Playbook is basically the same – secures cost advantage on a global scale, aggressive expansion, ramp-up production, improvise cost efficiency, and repeat.

More importantly when PM started off with less resources and market recognition in the past, today’s PMBT – leveraging on experience acquired and the market respect from PM – earning will only ramp-up swifter.

Eventually share price trajectory will follow suit.

 

Catalyst

Solar and EV drives silicon demand

Production capacity expands by 2x in 2021

Tesla battery revolution drives more silicon for anode material

Trade war for higher market share

PM’s aura  

If, better sell-side coverage

If, all 4 phases of expansion

 

P/S: for follow-up discussion on the idea pls visit the link

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(TapDance) Low Risk High Return (9) – Dominant Enterprise

Author: tapdance   |  Publish date: Thu, 12 Nov 2020, 11:30 PM


 

Summary

Dominant - a forgotten candidate is expose to the furniture theme. It is still trading at MCO panic selling level when its peers have since all ran-up by more than +150%.  

The laggard can only explain away by its ultra-low profile with zero institutional investor and sell side followings despite a decent track record since 2003.

Dominant’s earnings growth which broadly matches with its market cap growth (i.e. 4x) plus the decent ~6% DY reassures that it will not be a value trap and trades cheap for long.

Moreover, the co.’s timely capacity expansion which should be ready by late 2020 will come in handy amidst the robust order environment.  

Catalyst(s) 

  • Aggressive ASP upward revision (+20 to 30%) from robust furniture orders driven by
    • US new-home sales growth and
    • suburban migration
    • Work-from-home
  • Trade war led order diversion
  • Timely capacity expansion 
  • Higher institutional coverage / following
  • Sustainable DY of ~6%

 

Description

Dominant is a (furniture) wood related product manufacturer hence an indirect beneficiary from our local furniture industry’s robust demand.

Channel checks confirmed that wood and upholstery furniture orders' lead time has extended from the usual 2 months to now 7 and 4 months (i.e. June / March 2021) for wood and upholstery funitures respectively. 

Particleboards generally have an aggressive 20 – 30% ASP rise from pre-MCO level, confirms by UOBKH research report released days ago. The furniture-board manufacturing industry that has been plagued by overcapacity since 2019 is now officially over.  

Apart from the global work from home (WFH) trend, the furniture trade is also enjoying from the 'suburban pull' factor occurring especially in the US and UK – driven by the intention to minimize pandemic contamination risk from the cities. 

These households – are the ones keeping their job – and of higher net-worth – are unlikely to skimp on home refurbishment budget. Home improvement budget is also expanded as alternative spending opportunities are scarce currently. The ultra-low mortgage rate fuels the trade.

WFH - or hybrid WFH - trend is here to stay post pandemic era as mentioned by surveys and studies conducted by interviewing numerous corporate chieftains. The spike in furniture orders seen thus far may only be the tip of the iceberg.

The US-China trade spate results in order diversion is a structural change. Trust amongst the two nation will not recover in years, that is if it does. Manufacturers alike will diversify supply chain to mitigate future operation disruption.

When Vietnam production cost escalates in recent years and no longer cheap, Malaysia government bans the export of rubber wood sawn timber benefiting our local furniture industry for a cost competitive operating environment.      

 

Valuation

Dominant is not a value trap and will not stay cheap for long. Its revenue and operating profit has broadly grown by 3x and 4x respectively from 2006 to 2019. During which its market cap has also grown by 4x.

It will be trading at 4x PE if earning recovers to FY03/19 level based on its existing market cap of ~RM115m. This is excluding all the above mentioned suburb migration, ASP rise and trade war order diversion etc. 

Meanwhile, it pays consistent dividend which yields ~6% currently. Investors are rewarded decently while the above scenarios pan out. 

Dominant’s timely production capacity expansion (complete by late 2020) will take advantage of the furniture order spike. 

Also, it is trading at 0.39x PB which normally ranges at 0.7x for the past 5 years or so.
 
Expecting a double from existing level is not a stretch at all.

 

Why the opportunity?

Dominant’s share price still hovers at MCO panic selling level whereas the particleboard manufacturers’ share price has generally ran-up significantly.    

One possible explanation is the (acute) lack of sell-side coverage and institutional following. There’s zero institutional shareholder in the company's major shareholders list despite the long established track record that dates back to 2003.

Today’s market sentiment favors those with alarmingly hot traded volume and comments in various social platforms. Not all under-followed stock is a solid idea. However, an undervalued stock idea simply cannot be widely followed.  

 

Catalyst

  • Aggressive ASP upward revision (+20 to 30%) from robust furniture orders driven by
    • US new-home sales growth and
    • suburban migration
    • Work-from-home
  • Trade war led order diversion
  • Timely capacity expansion
  • Higher institutional following
  • Sustainable DY of ~6%

 

Note: Please follow this post for future updates

Labels: DOMINAN
  Young Money likes this.
 
Young Money Undervalue Gem DOMINANT

Reasons:-
-ASP
-Leadtime
-US furniture boom
02/12/2020 2:13 PM

(TapDance) Low Risk High Return (8) – AME Elite

Author: tapdance   |  Publish date: Fri, 16 Oct 2020, 9:48 AM


 

Summary

Despite the tremendous opportunity, AME’s future prospect comes almost for free upon carving-out its property rental income portfolio, hence explains the Low Risk High Return investment payout profile.

AME is a hidden gem for an obvious trade-war beneficiary as global industrialists increasingly shifts supply chain towards Malaysia.  

While analysts alike are amaze by the fast take-up rate of AME’s product, few connects the industrial property’s robust demand with global supply chain reshuffle. Earnings visibility is a lot clearer upon understanding the underlying driver. 

AME’s recurring rental income alone worth more than its existing market cap if spin-off via tax-free REIT. Management is a brilliant strategist in its own right cultivating various synergies and cross selling opportunities amongst its divisions. 

Spillover of the negative perception for the whole property development sector suggests AME is overlooked despite its entirely different value proposition as an industrial park developer.

  

Reference

 

Description

Market has to accept the fact that trade/tech-war between US and China is a new norm. Malaysia a major beneficiary as the global supply chain reshuffles.

Malaysia tech and EMS related companies have received their fair share of recognition as beneficiaries under the new norm. Unfortunately – fortunately for us – market failed to look far enough.

AME Elite (AME) is an industrial park developer. Its I-Park sales momentum is robust. Management has indicated healthy pipeline of sales from foreign companies hence faces fast land-bank depletion. The above explains AME’s recent acquisition of RM435m worth of land (170 acres) from UEM Sunrise weeks ago.

To further illustrate the point, AME secured a contract from Enics AG (to complement its Europe and China sites) during the MCO period demonstrates the urgent demand from foreign industrialists to actively diversify their supply chain into Malaysia.  

 

Land/Property sales

VS Industry Bhd announced to acquire ~400k sqft industrial real estate from AME for ~RM100m. Simply an attempt to provide context although it is overly simplified, 170 acres = 7.4m sqft or 18x VS’s acquisition.

It is no coincidence that EMS companies are collectively expanding floor space and capacity.

The active industrial land sales/construction phenomenon is an evidence of a robust Malaysian industrial segment driven by the trade war led global supply chain reshuffle. Facts and figures to support the theme - AME’s current order-book ~RM300m vs. less than RM100m a year ago.

The ultra-low interest rate environment is friendly for asset-owner wannabes.

 

Recurring Income

For investors who shuns lumpy (construction) revenue, AME owns and operates purpose-build worker dormitories.

It currently owns 2 dormitories i.e. Ipark @ Senai (2,572 beds commenced in 2019) and Ipark @ Indahpura (3,206 beds commenced in 2014). Occupancy rates at 81% and 95% respectively.

The third dormitory will bring bed count up to ~8.5K (by CY2021) and ~10K after the forth dormitory completes in 2022/2023. i.e. bed capacity to increase by ~50 – 70% from 2021 – 2023.

Overall the Property Investment and management segment (i.e. rental from industrial units and dormitories) contributed ~RM35m revenue or RM23m core PBT in FY03/2020.

Currently 32 industrial units leased vs. 27 units a year ago. The portfolio is 50/50 split by leases of more than or less than 5 years.

Purpose-build dormitory demand will likely remain elevated because of the pandemic scare. Business owners alike will prefer purpose-build dormitory compare to the conventional shop-house model to minimize contamination risk.  

On the other hand, AME’s well manage dormitory is also a tool to attract quality customers/tenants for its industrial park – as oppose to older industrial zones / ‘vendor’ without a dormitory ready-solution. New bed capacity ramp-up will be quick given the above factors.

AME is also setting up its solar division to tackle its own industrial park’s untapped solar opportunity, as another recurring income ignitor. 

 

Industry reputation and management quality

Axis REIT – a reputable industrial property owner – has long business relationship with AME. I find comfort when AME maintains sturdy business relationship with admirable player like Axis.

Management intends to replicate its i-Park model (AME’s signature) across peninsular Malaysia out from its Johor stronghold territory.

On top of geographical expansion, AME enhances its value proposition first by offering construction design/technical know-how, then worker dormitories and now via its solar venture.

Tremendous synergies and value creation for its customers and tenants. Who would have thought an industrial park owner is an operation synergy and cross selling strategist?   

AME’s corporate transparency is decent; solid disclosures are provided in the company’s annual report.

 

Potential corporate exercises amidst ultra-low interest rate environment

If AME management is as good as appraised will likely take advantage of the ultra-low interest rate environment to spin-off its investment portfolio upon attaining certain scale. A tracker stock or a REIT vehicle saves on taxes too.

Axis REIT yields ~4%. As a comparison, AME’s market capitalization at RM900m, its RM23m investment PBT capitalizes at 4% will be RM575m or equivalent to 64% of market cap.

AME’s other assets are literally free if incorporate the ~50 – 70% dormitory bed capacity increase from CY21 – 23.    

 

Why the opportunity

Short listing history (listed in Oct 2019)

Spillover of the negative perception for the whole property development sector suggests AME is overlooked despite its entirely different value proposition.    

 

Valuation

AME is currently trading at 16x trailing earnings or 1.4x PB.

On the surface it appears fair for a reputable industrial property operator. In actual it significantly undervalues the pivotal moment of the Malaysian industrial industry’s structural change.

 

Catalyst

Strong earning visibility with fast expanding order-book (~RM300m)

~50% - 70% increase in dormitory bed capacity in from CY2021 - 2023

More VS-like land sales – EMS collectively expands capacity

Mgmt.’s aggressive land bank accumulation

Fresh 170 acres of land-bank inventory

Potential corporate spin-off – tracker stock / REIT

 

Refence

 

***

Disclaimer: The material provided herein is for informational purposes only. It does not constitute an offer to buy or sell any securities. We accept no liability whatsoever for any direct or consequential loss arising from any use of information in this report.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise may buy/hold/sell the mentioned securities at any time without further notice.

 

 

 

Labels: AME
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(TapDance) Low Risk High Return (7) - LEESK

Author: tapdance   |  Publish date: Tue, 8 Sep 2020, 12:26 AM


 

Summary

LEESK – a mattress OBM – was a darling stock back in 2015 – 2018 era until its sterling performance came to an abrupt halt due to external factors (i.e. Korean won weakened) beyond management’s control. As a result, the co.’s market value experienced free-dive declining ~60% in 2-years.

The situation is beginning to turnaround driven by US furniture replacement trend demonstrated by local furniture players’ healthier order flow. Management confirms that the correlation of furniture and mattress sales is strong.

The growth effect from newly secured clients order which was originally earmarked for the capacity expansion will also surface. Margins to improve further as higher utilization rate and operating leverage effect kicks in.    

The shortening of the mattress replacement cycle – which was once more than 15 – 20 years – is on a secular trend. LSK stands to benefit.

Management quality is decent. The co.’s strategic management principal is Berkshire/Buffett flavored emphasizes in per-share earnings, ROEs and sparing debt usage etc.

Dividend payout increased despite the weaker 2019 – 2020 performance; yields ~5.3% currently. Price action in recent weeks and past 2-years suggests market expectation is at the low. Risk-reward outlook favorable.

 

Description

LEESK (LSK) transformed itself as a pure mattress OEM to an OBM after 2015 – owning various higher-end brands such as Nepure and Englander etc. The strategy paid off as revenue grew ~50% and NPM almost doubled.

Management decided to install new production lines – took 1.5 to 2 years – to cater for newly secured clients from US and China. MD opines that growth and margins to elevate further of which was supposed to surface in 2019/2020.

The said new production line is expected to increase capacity by ~40% (5k to 7k tonnes) aims to achieve RM150m revenue mark. LSK strive to adopt manufacturing automation to improve operation and cost efficiency too.

Unfortunately, Korea as one of the largest exporting country saw its currency depreciated materially in 2019. Local purchasing power was dented. Hence the US and China sales growth effect was muted by weaker Korean contribution. Then the pandemic further dampens underlying performance. Incremental operating costs are accounted amidst weaker sales during the said period. Performance appears a lot more awful than it actually is.  

All the above temporary setbacks are about to reverse, because –   

  • US is undergoing a furniture replacement cycle which is driven by 1. work-from-home trend and also 2. the mass migration from cities for suburb – to minimize pandemic exposure.

 

  • Incidents were also reported where (hotel) mattresses are replaced en-masse for afraid of covid contamination. News reports US mattress sales receive healthy recovery after pandemic shutdown.

 

  • LSK Management confirmed that correlation of mattress and furniture sales is strong. The healthy US furniture orders experiencing by our local furniture players will likely spread over to LSK.

 

  • Mattress consumption is also on a secular growth trend as affluence growth couples with hygienic awareness has shortened mattress replacement cycle. Long gone are the days when a mattress is used for more than 15 – 20 years. LSK stands to reap the benefit from the said trend as it is one of the most prominent player in the market.   

On the domestic market front, LSK widens its retail network reach via increasing number of retail stores. Physical stores are still the preferred model for mattress shopping given the very personal shopping experience required.   

LSK emphasizes in the upper-class market via its branded full latex mattress. The higher end market is a duopoly – barrier of entry is high. The strategy is essentially to avoid the overcrowded lower end segment.

LSK possesses critical geographical advantage over other foreign competitors via access to ‘fresh’ latex – basic requirement for quality mattress. Hence explains the export segment’s competitive advantage and promising scalability.

Measured from its peak in August-2018, LSK market value has eroded by ~60%. YTD is -20%. Dividend payout increased despite the weaker 2019 – 2020 performance; yields ~5.3% currently.

Price action alone suggests market expectation is at the low. Risk-reward outlook favorable.

 

A Berkshire flavored management

Management emphasizes on per-share earnings and shuns unnecessary shareholders interest dilution and with a keen eye on ROE. Past experience dealing with a heavy balance sheet taught them to be asset-light.

Management practices its preach, with a respect to minority shareholders interest.  

 

Why the opportunity?

The disappointment from 2018/2019 growth expectation lingers. Stigma will remove when growth resumes its path.

The perception that mattress as non-essential items is interpreted as a discarded trade during the pandemic era. The same was true for local furniture industry until proven false in recent weeks.  

Under-researched and trading illiquidity suggest the opportunity can only be discovered and appreciated by only a small group of investors.

 

Valuation

It earned ~RM12m core PBT back in FY18 i.e. pre-expansion, pre new US and China orders. At current market cap of RM80m, it translates to ~6.5x PBT.

Management aims to attain RM150m revenue mark with the help of the new production lines. A decent 10% margin at ~13x earnings translates to RM1.20/share. Earnings multiple at ~17x during its higher growth years.

 

Catalyst(s)

Furniture replacement upcycle in the US

Pandemic scares drive new mattress demand

Growth to surface from new US and China customers secured back in 2018/2019

Mattress replacement cycle shortening a secular trend

Higher sell-side coverage

Labels: LEESK
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(TapDance) Low Risk High Return (6) - MUI Properties

Author: tapdance   |  Publish date: Fri, 7 Aug 2020, 11:06 AM


Summary

MUI Properties (MUIP) deserves attention from the classic value investors for its substantial cash holding (~50% of mkt cap) and massive land bank (at 80-90's valuation).

Growth lovers would also be pleased with MUIP's Australian Gold Mining co. (listed in Australia Stock Exchange worth RM60m). MUIP's timely gold discovery allows for the extra return kicker from GOLD price of which is on a tear. 

Just imagine buying a typical value stock - attached with a gold warrant for extra reward.

 

Description

$MUIPROP / 3913 (MUI PROPERTIES BERHAD) is an interesting muitifacet play on-top of its ultra-high content gold mine in Australia (read: https://bit.ly/2EZm63Y and here).

1. It is hoarding substantial cash of RM100m (minuscule amount of debt) which is ~50% of its market cap.

2. It owns substantial amount of land-bank (Malaysia, Australia and US) which are accounted at 1980's - 90's valuation. (is this not a crime?!)

3. Ultra high content gold mine has attracted its farm-in partner (Metalicity) to acquire additional substantial land/drill-lease/rights ADJACENT to MUIP's gold mine. The move itself justifies the validity of the gold play.

As a side note, I have consulted a number of gold-mining specialists, a typical high content gold mine of ~5 grams/ton of soil is considered good. MUIP's mine has a content of ~80 grams/ton.

4. Senior Khoo is passing on the baton to Son - Andrew. Andrew has directed a slew of activities to monetise/revive its dated assets/resources. i.e. more cash/good news flowing-in.

5. Gold + land is best hedge to our modern monetary system for those who are terrified by the massive-massive-massive US money printing.

One may ask if gold price is sustainable. Based on my own observation, hedge funds around the world are terrified of the FED's massive money printing. I think gold has legs for more - hitting new highs as I'm drafting this write-up.

 

Why the opportunity?

  1. Gold discovery is in early stage and mine is pre-production – market can’t comprehend the potential
  2. Negative perception over MUI series of companies’ as track record has been somewhat a laggard
  3. (Andrew’s) corporate exercise / special situation plays are less easy to understand for amateurs 


Catalyst(s)

  1. Gold price on a tear
  2. Co.'s Land & Gold as a hedge for modern monetary system risk
  3. Andrew's moinetisation plans
  4. Obvious undervaluation

 

P/S: link for follow-up posts https://my.stockbit.com/post/4319766

Labels: MUIPROP
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(TapDance) Low Risk High Return (5) - NTPM

Author: tapdance   |  Publish date: Thu, 23 Jul 2020, 12:59 PM


Summary

Beaten down for almost 4-years and in the midst of turning around, a seasoned hygienic related product producer armed with 50-years of solid operating track record is offering ~60 – 120% upside (on modest estimates).

NTPM is at an inflection point for a multi-year uptrend because –

  1. Pandemic drives higher hygienic products demand
  2. Vietnam new plant attains breakeven earlier than market anticipates because of the pandemic
  3. Record high quarterly revenue (uptrend on a streak) confirms healthy product demand
  4. Mgmt. guided lower COGS in coming quarters
  5. Raw material cost on down-cycle thus higher margin sustainable 

 

 

Description

NTPM is a 50-years’ operating history company that produces and owns the famous ‘Premier’ tissue paper brand and other personal care products (such as feminine hygienic and baby diapers etc.).

 

 

NTPM is a seasoned and proven operator with a sturdy track record. It has expanded its manufacturing footprint in Vietnam in the recent years with products exported globally.  

Its market value declined ~60% upon hitting its peak (2016) because earnings fell from RM80m (PBT FY16) to RM22m (LTM PBT). The weaker results were due to temporary factors such as start-up expenses from its new Vietnam plant and higher raw material cost.

It invested ~RM200m for capacity expansion and Vietnam new plant in recent years.

 

Why the opportunity? NTPM is now at an inflection point for a multi-year uptrend whereby –

  • Pulp prices have fallen back to 2016 level (or off ~30% from late 2018 peak)
  • Pulp prices on down-cycle hence higher margin sustainable
  • Record high quarterly revenue suggest very healthy demand
  • Vietnam plant attains breakeven months earlier than market anticipates because of the pandemic

 

In the latest quarterly report (4QFY20), mgmt. revealed that coming quarters raw material cost likely to be lower as it adopts FIFO for raw material costs. Pulp price is on down-cycle in recent months therefore higher profit margin is sustainable.  

The pandemic has likely driven a surge in demand for paper-tissue related products. Export contributes ~30% revenue. 4QFYApr20 quarterly revenue hits record high tells a lot. In fact, revenue uptrend has never got disrupted on 12m basis! 

Demand will expedite ramp-up progress thus attaining breakeven point earlier than mgmt.’s target in 2H-21 (guided prior to pandemic).

 

Sizeable opportunity. NTPM generated ~RM75m PBT (or ~RM55m PAT) prior to Vietnam start-up and higher raw material cost drag. The PE band was ~15-17x or ~2.5x PB prior to FY17/18 (i.e. declining) years.

NTPM old plant alone should generate ~RM55m PAT as major cost component has fallen back to 2016 level. Simply assuming inflation would take care of both income and cost equally here; assumption is conservative.

On the conservative side, back-of-the-envelope calculation suggests NTPM worth ~RM1bn i.e. (RM55 x 15) + (1 x RM200m) or ~RM0.90 per share (1.12bn outstanding shares).

NTPM value could goes up to ~RM1.20 per share based on 2.5x multiple on capex – if market is willing to ‘look-beyond’ months of faster ramp-up.

 

Conservative estimates. No multiples expansion build-in out of its historical norm, which is despite the ultra-low interest rate environment at current market backdrop

Supported by the co.’s sturdy track record and the market interest for healthcare related exposure, odds are good for market is willing to prescribe some form of premium over my conservative estimate. 

Simply, NTPM has ~60 – 120% upside at RM0.90 – 1.20/share.   

 

Catalyst(s)

  • Pandemic drives higher hygienic products’ demand
  • Record high quarterly revenue – uptrend on a streak
  • Vietnam new plant attains breakeven earlier than market anticipates
  • Management guided coming quarterly COGS cost lower
  • Pulp prices on down-cycle hence better margins sustainable

 

P/S: Although there’s always the chance, I am less incline to build in an estimate that accounts for “higher ASP on hot demand” scenario simply because it is less sustainable. Tissue papers aint gloves. But if market is willing to prescribe that kind of scenario? Be my guest.  

Labels: NTPM
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(TapDance) Low Risk High Return (4) - MFCB

Author: tapdance   |  Publish date: Tue, 21 Jul 2020, 1:36 PM


 

Summary

EVEN IF the market prescribes a mid-single digit cash multiples (~7x) for a utility business – of which power generation is already offtake(n) by Cambodia i.e. future earnings secured, investors are getting the other assets/businesses for free.   

In a nutshell, MFCB investors get to coattail on a determined and driven management, one of the most lucrative IRR hydro projects – situated in a power hungry region.

It is especially advantageous to invest in MFCB - which is now at an inflection point - given the various immediate catalysts, the nature of business and geographical location which allows for (almost) immunity in possible second wave of the coronavirus pandemic.   

 

Description

MFCB is a mini conglomerate which owns 1. Hydro and Solar, 2. Limestone quarry, 3. Property and Packaging businesses. By far the biggest earning contributor comes from its hydro plant.

 

  • Hydro and Solar

Solar is working on LSS4. Still infant, so we’ll skip.

Despite various obstacles, MFCB pursued Don Sahong (“DS” – a hydro plant situated in Mekong River, Laos) relentlessly since 2006. Hard work paid off. DS registered its maiden power earnings in 4Q2019 (“trial run”) and has since been generating healthy cash flow.

The key is – DS has not shown its full potential yet. The market community has thus far seen the trial run and drought water level earnings contribution. i.e. DS’s real potential is masked.

Like most water system on earth, Mekong’s water level has its own season. Mekong reaches its peak in August to November and gradually plateaus and slows to its low water season.

Another fact less known by many is the severity of the Thailand drought in 2020. The drought was one of the worst in 40 years (ref). Naturally it affected Mekong’s water level.

So, how did DS performed in such dire straits? It surprised the market by earning RM71m EBIT in the 1Q20 period.

If only one thinks about the actual background going-on behind the result. Ask, what happens when Mekong returns to its wet season? absence of the drought impact? The water level is rising fast in recent weeks confirmed by The Mekong River Commission.

Cambodia government has signed an offtake agreement with Laos/MFCB hence future income is secured.

MFCB up-trend is only half-way through given its potential. Based on reasonable estimates – on assumptions given by MFCB in past interviews and reports – DS alone will contribute USD90m (eq. RM380m) PAT group level. That is including USD20m amortization. i.e. in cash flow terms, DS will sprinkle (‘shower’ is a much appropriate term) USD110m (eq. RM465m) cash inflow pa.

Maintenance capex is low given DS is a run-of-the-river hydro. Safe to conclude that cash will flow almost straight back to shareholders’ account.

Based on MFCB current market cap of RM3.1b, it is currently valued at 6.7x cash flow generated from DS alone. So even if one accepts that DS only deserves a mid-single digit earnings multiple, investors are getting the other assets/businesses for free.

By the way, the ultra-low interest rate environment temps many pension-like institutional funds in bidding up for utility like cash flow businesses.  

 

  • Limestone, Property and Packaging

I’ll just roughly brush through these various ventures to prevent the thesis from going overly tedious. Basically the limestone operation contributes ~RM15 – 20mn pa. PBT since 2015. Limestone is a basic requirement in many heavy industries. Given the diverse application and favorable geographical advantage, the business will remain resilient. MFCB intends to build up its reserves.    

The Property division is a scrap mainly consisting some land and/or building which is generating miniscule profits. Management has no intention to drive the business perhaps until a much favorable industry landscape returns.

Packaging was a passive venture until management spotted some scale up opportunity recently. It focuses in paper packaging. The industry size is huge and perhaps the ban of single-use plastic may benefit paper packaging segment. The business has recently breakeven and shall continue to improve as management scales up.

 

  • Qualitative factors

Since the above tangible factors are less known by the public, I thought might as well shed some lights on the even lesser known intangible qualitative factors.

Classy management quality

  • Determined management to have pursued the DS for 10+ years
  • Constructed DS at BELOW budget – which is unheard of
  • Negotiated and secured advantageous financing terms (from 7% to ~2%)
  • Mr. Goh subscribed and converted warrants years before maturity at premium (for ~RM20m)
  • Mr. Goh pays himself no salary, and the whole board of directors were paid RM1.38m only

 

  • So why the opportunity?
  • DS is still in its maiden contribution year. Naturally market would want to see it first to believe it.
  • Market is not aware of the severity of the drought (and Mekong’ seasonal effect) hence does not understand the real potential of DS
  • Perhaps it is also the environmental led stigma in the water dam businesses, of which MFCB has addressed these concerns in the past.  
  • Management adopts a low profile approach.  

 

In a nutshell, MFCB investors get to coattail on a determined management, one of the most lucrative IRR hydro projects – situated in a power hungry region.

It is especially advantageous to invest in MFCB now given the immediate catalyst, and nature of business and geographical location allows (almost) immunity in possible second wave of the coronavirus pandemic.   

 

Catalyst

DS real potential to surface in coming quarters – PAT / FCF at RM380m / RM465m.

Immune to second wave pandemic (should it happen)

Solar division clinches LSS 4 – MFCB a formidable contender for its caliber and resources

 

Edits: MFCB is negotiating for a 5th turbine (on top of its existing 4) for DS. I think its a foregone conclusion that it is a green light; so just to grind out some papert work and formality from here.

All the figures above excludes potential 5th turbine contribution.   

Labels: MFCB
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(TapDance) Low Risk High Return (3) - Daiboichi

Author: tapdance   |  Publish date: Fri, 15 May 2020, 10:26 PM


Summary

Daibochi is mistaken as ugly, unpredictable and expensive - market expectation low. Misperception to be remove in four months.

Nestle Procurement Vision 2020 is a major driving force for the company.

Resin (raw material) cost is on down cycle will widen profit margin – for an extended period of time.

Scientex – an excellent business operator and now Daibochi’s major shareholder – brings tremendous value.

MPP acquisition brings immediate earning accretion and clientele-mix enhancement (domestic vs. MNCs / big vs. small)

Indochina coming of from low base allows for huge potential for its existing Myanmar stronghold       

 

Description

Market misperception – hence expectation low

In today’s Bursa investment world, investors are quick in forming their first impression on a company by merely peeping at the result snapshot and the accompanying prospect commentary.

Does the snapshot below disgust anyone?

 

 

 

I thought the discontinuation-and-change of financial year is extremely confusing and the lumpy performance is utterly frightening. The valuation appears mind boggling too!

The financial year change is the result of the co.’s merger i.e. Scientex took over Daibochi in 2018/2019. Because Scientex’s financial year ends in July 31st and to align the group’s financial reporting, hence explains the change.

Still, just why did the very successful Scientex acquire Daibochi (~62%)? And why did numerous successful investors build their position into Daibochi’s substantial shareholder list?

I might have a few clues.

First, the below snapshot presents business performance prior to the financial year change. It shows Daibochi’s growth consistency and resiliency. Another clue is about Nestle – I’ll explain later.

 

 

 

Judging by its pre-merger result, it is acceptable to gauge its 12m performance by annualizing a single quarter result. Daibochi is only trading at ~12x PE (not the headline 50x).

Daibochi is a lot sturdier, easy to understand and undervalued than the market thinks. Market will eradicate the negative perception in four months after two more quarterly results announcement.

 

Nestle Procurement Vision 2020 a mega driver for Daibochi/Malaysia

One of Daibochi’s main client – Nestle announced that Malaysia is one of the three Global Procurement Hub to cater for the need of over 100 countries globally for its manufacturing operations.  

Scientex decided to take over Daibochi not long after Nestle’s announcement. Is that a coincidence?

The other two hubs are located in Switzerland and Panama – safe to assume that Malaysia will be responsible for Nestle's Asia business. 

 

Structural change

 

  1. Management Caliber

Scientex as an excellent operator will bring tremendous value to Daibochi. It is an open secret that Scientex’s management is exceptionally driven. Scientex as a global packaging player grew its Revenue/PBT by 6x/12x since FY06 i.e. ~20% CAGR.

Excerpt below from latest AR (mind the choice of word):

Right after the conclusion of the takeover, Daibochi adjusted its dividend policy and was out acquiring a competitor – Mega Printing (“MPP”). MPP’s clientele are mainly local Malaysian F&B operators hence an immediate complement to Daibochi’s MNC clients.  

The investment brings immediate value. It is the standard Scientex playbook. On top of earnings accretion, these bolt-on acquisitions will-be-given and bring synergies in many forms. 

  1. Raw material cost and product synergies

Scientex as a global packaging player has huge clout in raw material procurement especially in the local scene. Daibochi will be a net beneficiary from raw material cost savings standpoint leveraging on the ‘Daibochi + Scientex + MPP’ scale.

The group is able to centralized corporate services and collaborate in various technology and R&D initiatives for packaging solution. For instance, Scientex’s 100% recyclable packaging material will be an easy sell for Daibochi’s MNC clients.

 

Growth potential – Asean and Indochina

Daibochi has a plant in Myanmar and is already contributing ~30% of the group’s profit. Daibochi stands a good chance to ride on the region’s huge population potential and affluence growth of which is just coming off from a very low base.

 

Resin raw material cost in down cycle and multi-year low

Daibochi’s profit margin will expand for an extended period of time. The ultra-low oil price environment couples with significant investment in the petrochemical industry results in massive resin supply glut. Plastic product manufacturers will benefit from the down cycle.   

 

MCO impact limited

The sell down since March-2020 is unjustifiable. Daibochi’s products are essential for the food & beverage industry – where people consume more during the lockdown period.  

Production is carried out as normal despite the 50% capacity condition – by altering the administrative workforce for allowing full factory production.  

 

Catalyst

  • Market expectation is low - negative perception eradicates in two more quarters
  • Malaysia as procurement hub in Nestle’s procurement vision 2020
  • Resin supply glut and down cycle
  • Scientex effect – mgmt. caliber, raw material cost, clientele and innovation collaboration
  • MPP’s earning accretion
  • Indochina affluence growth

 

Voila! you have yourself a low-risk-high-return investment idea.

 

Labels: DAIBOCI
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tapdance Consumers are spending more/less on packaged food (& beverages) during lockdown? ..snacks?
17/05/2020 9:34 AM

(TapDance) How does a low risk high return investment looks like? (2) - Ancom Logistics

Author: tapdance   |  Publish date: Wed, 13 May 2020, 2:07 PM


 

The art of investing is all about minimizing losses and maximizing returns.

Many knows it, but only a few can really grasp and identify it. Please allow me to explain why Ancom Logistics is a low-risk-high-return idea, as mentioned in my previous post.

Ancom Logistics (AL) and Nylex (NX) are associate companies. Based on latest AR, NX contributes ~20% of AL’s revenue. i.e. AL has been providing logistic services for NX.

To reorganize the group businesses and improve efficiency, NX sold part of its logistics business to AL back in 2018. Unfortunately, the transaction occurred right before the trade war which had affected NX’s performance. It also means that AL has not reap the full potential of the transaction. 

Given the robust ethanol demand AND the absence of trade war impact (details please visit my previous post on NL), AL would benefit from NX’s robust business volume. AL’s revenue will expand.

Fuel cost is a major cost component for logistic companies. So low oil price is a mega positive factor for logistic businesses. It could run-up to more than 60% of operating cost depending on business models. And our local fuel price has been slashed numerous rounds YTD.

AL’ operating profits improved rapidly in the past 2 years despite its assets being under-utilized. Now that with higher revenue and lower fuel cost, earnings will improve exponentially.

Factors in the operating leverage – details refer to my previous post, earnings will likely receive positive surprise.

And best is, AL is coming off from a low base. Its miniscule ~RM 2.2 mn TTM PBT is on an uptrend since mid-2018. I don’t think a 20 - 30% revenue improvement (i.e. RM 6 - 9 mn) is a stretch. Factor in the fuel cost savings while the rest are broadly fixed costs… you make your own earnings projection. My own conservative calculation surprises me on the upside. 

The market is now clearly hunting for healthcare related exposures e.g. gloves, sanitizer, hospital beds and accessories suppliers and healthcare providers. Although the trend is very much positive and resilient – likely to continue as long as the coronavirus continues to haunt – it is fair to note that many of these ideas are no longer cheap based on traditional valuation metrics.

So contrast AL against the market backdrop – share price has barely moved and is only back to its pre-crisis level – while operating performance was already improving for the past 2 years, and considering the huge improvement in future earnings, investors’ risk is immaterial.

If healthcare stocks are going berserk because of the healthcare theme, Nylex and Ancom Logistics will benefit from the healthcare PLUS low-oil price theme.

Voila! you have yourself a low-risk-high-return investment idea. 

*** *** ***

P/s: One might wonder, why has market not taken notice of AL?

My answer is – negative perception. How many of you were shaking your head looking at AL’s historical records? or even worse by just the name itself?

There are those who could see the future, and those who are fixated on the past.

Labels: ANCOMLB
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tapdance Back in office now, so can only rush this out during lunch break. Apologies for the grammatical errors.
13/05/2020 2:09 PM
tapdance Too many big headlines in the news in the last few months. People simply overlooked the magnitude of the petrol price slashed. Check it up, and you'll be shocked.
14/05/2020 3:11 PM
tapdance Earning improvement came in faster than I've expected. More to come.
14/05/2020 10:46 PM
tapdance Diesel price has only started declining in early Feb '20, and Ancom Logistics is already seeing visible/material margin expansion.

So the improvement is primarily driven by the operating leverage i.e. revenue expanded by 14% which translates to a +35% EBIT expansion (Y/Y).

Diesel is down by more than 35%, if you have not check on the pump prices lately.

How does it look like when both (operating leverage & low fuel cost) factors surface at the same time? Use your imagination.
15/05/2020 9:37 AM
tapdance https://www.comparehero.my/transportation/articles/latest-petrol-price-ron95-ron97-diesel
15/05/2020 9:40 AM

(TapDance) How does a low risk high return investment looks like? (1) - Nylex

Author: tapdance   |  Publish date: Sun, 10 May 2020, 1:09 PM


 

The art of investing is all about minimizing losses and maximizing returns.

Many knows it, but only a few can really grasp and identify it. So I would like to give a brief example based on my previous posts on Nylex and Ancom Logistics.

 

Nylex

Nylex is especially attractive is because of its lopsided payout profile.

It is a fact that its ethanol product is hot in demand. Hexza (ethanol producer) has publicly confirmed the trend in its own quarterly report, and Nylex will be announcing its own report in the coming weeks.

Furthermore, potential return is enhanced by its well-timed expansion. The enlarge capacity coincides with the coronavirus and will be put into good use. It was completed back in mid-2019.

By now the plant is on its way out from starting towards ramp-up stage, which means higher production and margin rates.

Additionally, the current low oil price environment will only bring down its raw material cost and widens its profit margin.

Typical fundamental investors would be alarmed by its recent lackluster performance. The weaker result is merely because of a planned shut-down to allow for the installation of the abovementioned new capacity. The weaker earnings in recent months is an extraordinary event.

The uglier figures have affected market perception. It is fair to note that market expectation is low – which allows for our higher potential return.

To summarize,

  • Ethanol demand as a catalyst allows Nylex as a high conviction idea.
  • Recently weaker result is irregular to give way for larger production  
  • Operation resumes to norm plus the capacity enhancement allows for huge potential return
  • Low oil price to widen its profit margin
  • Market expectation at the low limits downside risk

Voila, now you have a high return low risk investment idea!

 

Labels: NYLEX
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tapdance There are only really 3 key questions to ask here. 1) Nylex's current sustainable earnings? 2) Is the sanitizer demand here to stay? and 3) are those value reflected on price yet?
11/05/2020 12:33 PM
tapdance There are those who focuses on the future, and those fixated on the past.
12/05/2020 10:00 AM
tapdance Slow and steady up trend... Nylex is still below chart-ist(s)' radar.
12/05/2020 10:01 AM
tapdance Nylex was earning RM30 mn PBT back in 2017/2018, before trade war affects its performance. Now trade war impact gone as US/China reach consensus on petrochemical products. And Nylex's market cap is only RM174 m. So without even the need to point out the various positive factors mentioned in my article, I rest my case.
13/05/2020 3:14 PM
tapdance So what is the difference now vs. 2017 - 2018? Oil price. Check how much margin has expanded (in %) during the 2015 - 2017 period when oil price tanked.
13/05/2020 3:14 PM
tapdance Chartist(s) took note of Nylex now!
13/05/2020 3:16 PM
tapdance Position closed
21/05/2020 10:54 AM

(TapDance) Significant change of fortune for the obscure Ancom Logistics

Author: tapdance   |  Publish date: Wed, 6 May 2020, 11:37 AM


 

The fun part of capital market investment is that – Good leads will always lead to more good ideas.

Following my previous Nylex post (up by a humble ~10%), I’ll reveal another idea related to Nylex and aligns to my obscure series of ideas.   

********

Summary

Ancom Logistics is about to experience a significant change of fortune.

Ancom, Ancom Logistics and Nylex are associated companies. As my previous post - Ethanol theme on an obscure small-cap industry leader – indicates, Nylex will experience a surge in its ethanol (key ingredient for manufacturing sanitizer) product demand.

  • Ancom Logistics is in the right position to reap the benefit. Nylex has been contributing ~20% of Ancom Logistics revenue. It will be more going forward.
  • Ancom Logistics will also benefit from the lower fuel price environment. Fuel cost is a major cost component. Lower fuel price will materially broaden its margin.
  • Also, because of fixed cost nature of the business, any small amount of revenue improvement could lead to significant jump in earnings. Ancom Logistics having not being able to attain its full potential over the years, will soon experience significant change of fortune as Nylex’s sales kicks in.
  • Market fails to acknowledge the change of fortune while valuation remains exceedingly cheap
  • All in all, one should expect a many fold jump of earnings in Ancom Logistics.

Description

Nylex ethanol/sanitizer will experience a sudden spike of demand, and this is a fact.

Nylex, on top of having most of its resources allocated into its manufacturing arm, it maintains a small fleet of distribution team itself – the logistic division. Given the condition that demand will spike, that small distribution team won’t cope.

So, what is the likely next course of action from the management? Ancom Logistics.

Ancom owns Ancom Logistics and Nylex. And there has been a fair amount of RRPT over the years amongst the companies to attain certain synergies. Completely understandable.

However, despite the support from Ancom and Nylex, Ancom Logistics performance has not been sterling to say the least – Revenue of ~RM30 mn and Pretax profit of ~RM2 mn for the past few years.

Logistics is broadly a fixed cost business namely infrastructure has to be in place before the securing of businesses. i.e. one has to build a warehouse or buy a truck before earning thin margins from orders – that is if there’s any. The reason for Ancom Logistics’ miserable performance is because it fails to attain the economies of scale to attain its optimum output.

All is about to change. Ancom Logistics will experience a sudden spike in its revenue as the ferocious demand for Nylex ethanol/sanitizer kicks in – that is including the newly installed capacity which is commissioned in recent months.

Fact is, Nylex has already been contributing ~20% of Ancom Logistics sales before the sanitizer demand hits. (Ref: AR2019)

The beauty of a fixed cost business model is the operating leverage, namely, in laymen, any increase in sales will almost flow straight down to the bottom line. So any decent increase in revenue will lead to exponential growth in earnings.

My estimate is that a +10% change in revenue could lead to +32% change in PBT. So a reasonable +30% increase in revenue translates to >+100% improvement in PBT. This is excluding the potential fuel cost savings mention below.  

Oil price tanked is a mega boon to logistics companies. If NTPM – a tissue paper manufacturer can save RM30k/month or RM360k pa. (ref: RHB on NTPM), the impact of the savings could only be better for a pure breed logistic company like Ancom Logistics.    

Has all the above catalyst reflected on price? No. Share price has merely recovered to the pre-coronavirus sell down level. The positive change of prospect is definitely not reflected on price yet.

In terms of valuation, Ancom Logistics trades at ~13x PBT. Balance sheet looks typical logistics like, nothing interesting neither threatening. Real estates are pretty dated and worth a lot more than accounting value – but that is immaterial.

Cash flow is self-sustainable. Dividends are lumpy but that is because of lousy performance in the past. There is reasonable chance it will increase as the change of fortune occurs. A significant change of fortune it is!

Catalyst

  1. Material revenue improvement spillover from Nylex’s ethanol/sanitizer related products’ ferocious market demand
  2. Oil price tanked a huge boon for logistic business/companies
  3. Earnings profile to improve significantly driven by operating leverage and fuel cost savings
  4. Market fails to acknowledge the change of fortune
  5. Valuation is exceedingly cheap on the potential
Labels: ANCOMLB
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tapdance Too many big headlines in the news in the last few months. People simply overlooked the magnitude of the petrol price slashed. Check it up, and you'll be shocked.
14/05/2020 3:11 PM

(TapDance) Ethanol theme on an obscure small-cap industry leader

Author: tapdance   |  Publish date: Tue, 5 May 2020, 4:19 PM


 

Summary

Market demand for sanitizer will remain elevated in the foreseeable future amidst the virus rampant era.

This company – which supplies ethanol, a key ingredient for manufacturing sanitizer – has recently commissioned its new facility to enhance capacity and productivity.

Given the ferocious sanitizer demand, the new facility’s ramp-up could exceed market expectation in terms of speed and profitability.

The co. is not trading at a premium valuation despite the crazy ethanol theme seen in the market right now (i.e. Hexza and/or Hextar). It is because the co. has recently experienced some lackluster performance which is mainly by-design.

The capacity enhancement program mentioned earlier requires the management to shut-down its existing facility for months affected its profits. Therein, alongside with the trade war impact, it looks uglier than it actually is.

Simply, investors will be able to invest in:

  1. A sanitizer themed company,
  2. which product is experiencing significantly elevated demand,
  3. at a well-timed production enhancement program
  4. at a discount
  5. because real potential is masked by identifiable factors

Description

It appears the usage of sanitizer is here to stay and likely would escalate further if taking into consideration of the ‘new norm’ i.e. virus will still be lurking around – even post vaccine launch. 

Ethanol is a key ingredient for manufacturing sanitizers. It explains the sudden spike in interest for ethanol players.

Hexza being one of the more prominent ethanol player saw its share price spiked more than +60% ON TOP of the April market recovery.

 

 

The mighty ethanol trend is truly mighty. To truly understand the hype, look no further from Hextar. Yes, mild spelling difference from Hexza.

 

 

Hextar or Hexza, one might wonder! Confused? I was. So I’ve decided to look up Hextar and found out that it focuses in agricultural chemical.

Quite misleadingly – especially under the ethanol trend – the website states one of its division is to ‘manufacturing of hygiene disposal product’ of which was referring to its cotton and tissue products. Not entirely surprise that market misunderstood Hextar as Hexza and that it supplies ethanol.   

Perhaps Hextar’s run-up is explainable. Still one couldn’t completely neglect the fact that both moved up at the same time and that there’s no spill-over effect at all. Or perhaps they both fuel each other’s price trend.

While market is completely sucked into the two Hex-es, the truly leading ethanol player was ignored.

Hexza generates ~RM100 mn revenue. This true leader (“True Leader”) that I’m going to talk about is valued at ~RM100 mn market cap whilst generating ~RM1,300 – 1,500 mn.

In case you have not gotten it, I’ll spill the bean. It is trading at 1x Hexza’s market cap when it generates 13 – 15x Hexza’s revenue. The below chart proofs that its share price performance is broadly muted.

 

True Leader used to generate ~RM30 mn pretax. Its recent earning has declined affected by the US/China trade war. Hexza experienced similar treatment.

The big deal is – True Leader allocated more than 2-years’ worth of earnings into capex for capacity expansion AND HAD TO SHUT DOWN ITS EXISTING FACILITIES FOR SEVERAL MONTHS –  so to make way to ready the new capacity!

Excerpt from AR is as attached:

 

 

It means True Leader experienced double whammy whereby its recent lackluster performance was dragged down by

1) trade war and,

2) some purported anomaly event – not related to its true earning power – and that particular event is making its way to proof its worth.

The best part is –

  1. the real potential is about to be surface amidst this sanitizer hungry period of time
  2. while the market punishes it for its recent misery – which is by-design by the management.

******* *******

Enough about (potential) earnings.

True Leader’s balance sheet might look a bit shabby on a quick glance. Its debt level appears slightly high but that is because of its trade facility – namely, in laymen, is for acquiring stocks. Verifiable in the co.’s AR.

The co.’s dividend is nothing to shout about. However, because of its hammered valuation, that paltry dividend payout is now yielding a decent ~4%.

Bear in mind that management increased its dividend payout amidst the weaker performance, and after the recent heavy capex cycle.

So when the business performance recovers, it is also reasonable to expect an even higher dividend.    

******* *******

For those impatient punters who couldn’t wait to have the co.’s name, sorry, I WON’T reveal.

I believe there are sufficient hints in my article to discover the co.’s identity. And investors ought to do some work for their own fortune. That is also to excuse myself from any low-class pump and dump accusation.

So, good luck!!

******* *******

Latest update (2.5 hours after the original post):

I certainly did not expect it to be so easy.  Kudos to fellow mate Terrchung who has figured out the co.'s identity!

And yes the the company is Nylex.

 

 

  tapdance likes this.
 
tapdance Make ur guesses heard over here!
05/05/2020 4:28 PM
terrchung Nylex :)
05/05/2020 6:52 PM
tapdance :) Kudos Terrchung
05/05/2020 8:50 PM
tapdance Can someone pls tag this post to Nylex, thx
06/05/2020 4:02 PM
tapdance The next quarterly announcement should show some decent improvement driven by ethanol demand
06/05/2020 4:54 PM

(TapDance) Only World Group (OWG) - riding on promising secular trend with (extremely) low market expectation

Author: tapdance   |  Publish date: Thu, 21 Mar 2019, 2:11 PM


Summary

OWG is at an inflection point after a two year sell-down (~-75%) of which was triggered by temporary (suspend Genting Highland operation to give way for GITP) and extraordinary factors (Genting vs. Twentieth Century Fox world theme park dispute).

As the investment cycle’s gestation period is finally coming to an end, it is the beginning of a multi-year growth phase. The latest 2Q19 result is already showing signs of turning around.

For a start, a modest 1x PB translates to ~50% upside.        

Description

Background info: Genting Integrated Tourism Plan (GITP) is a multi-year RM10.4 billion capital investment program to revamp Genting Highland as a tourism hotspot – which includes a Twentieth Century Fox (TCF) world theme park costing RM2 billion alone. The program, initially budgeted at RM5 billion and doubled with conviction, expects to push number of visitors to Genting Highland to 30m by 2020 from 20m pa. currently.

In late 2018, shock wave was sent across the market when Disney decided to cancel TCF’s original theme park planning after Disney acquired TCF. Disney does not want to be associated with Casino activities.

Cause of sell-down: OWG’s performance was halved in FY17 and remained lackluster in FY18 after giving way for GITP’s development.

 

 

 

 

OWG will stand to benefit from Genting Integrated Tourism Plan (GITP). Instead of recognizing the promising investment cycle, market refuses to look-through the gestation period AND penalizes it by shredding -60% of its market value (2017 to mid-2018).

The TCF theme park dispute triggered another round of sell down on OWG. Essentially a double penalty. By now OWG market value has declined ~ -75% (2017 to end of 2018).

 

 

 

The bearish sentiment was severe. GITP started rolling out new entertainment attractions were completely ignored. Attractions includes Genting Premium Outlet, indoor theme park (Skytropolis), hundreds of retail and F&B outlets in SkyAvenue and SkyCentral, SkySymphony performance, Awana Skyway – new cable car system, new hotels etc.

Signs of turning around: In its 2Q19 result, OWG commented that the indoor theme park opening in December 2018 has led to an increase of its F&B operation performance. A comparison table is presented below.

Let’s still call it a 1-month effort – actual operating hours likely lesser because of opening preparation works etc. The F&B division registered a sterling +126% growth in earnings for the whole quarter, on the back of a mere +16% revenue growth as operating leverage effect kicks in.

The ‘Other Services’ segment – operates retail and beauty salon outlets at SkyAvenue experienced similar improvement. Losses narrowed from RM6.8m to just RM1.4m in a single quarter i.e. +79% yoy.

The ‘Amusement and Recreation’ segment could be a drag. But let’s focus on the big picture – which is the Genting Highland’s side of operation.  

The performance is certainly sustainable, supported by the continuous role out of entertainment attractions from Genting. Visitor growth is gaining momentum. Operating leverage elevates bottom line significantly, which in turn (eventually) leads to multiplier effect on the co.’s share price.

Legwork confirmation: Cross channel checks confirmed numerous highland F&B outlets are indeed nationwide high sales outlets – all within a short span of few months.

Outlets with lower price-points has no peak/off-peak period apparently. They are well supported by the highland workers (from retail, F&B, casino, construction, renovation, marketers etc.). Holiday season or not is irrelevant. And lower price point is OWG’s forte. 

There are more than enough videos circulating about the crazy amount of crowds at the highlands during the 2019 Chinese New Year period. The (likely) significantly positive impact has will be captured in the coming quarterly result.    

Commonsense says oversold: Genting targets to launch its outdoor theme park in 2H-2019 originally. It could delay because of the TCF debacle. Nonetheless as a sensible business operator, an indefinite launching postponement (which costs billions) simply for the sake of a brand-name theme park is unfathomable. I believe there’ll be a contingency plan. Commonsense usually prevails.  

Secular trend: The real beauty about OWG is its long runway. That is at least until the outdoor theme park effect sizzles. Imagine Genting Highland as a holiday idea in the local tourism industry until the whole GITP matures. It will take many years. Institution investors will commit sizeable investment sum for a sustainable business trend.  

Insider buying cum risk removal: Insiders scooped up some shares during the Genting/Disney dispute sell down. Transacted price around RM0.50/share. While the support is certainly a vote of confidence, it also removes substantial risk for public shareholders that insiders could be plotting to privatize the co. at the cheap.

Risk-reward and payout odds: Whatever the outcome of the outdoor theme park, OWG is undergoing an inflection point. The significant improvement in the underlying business performance will surface in the coming months. Couples with the ultra-low market expectation and identifiable cause of a 2 years’ sell-down makes it a very compelling investment case.   

I must confess that my range of earnings estimates is simply too wide to be of useful. Nonetheless I reckon it is conservative to expect at least 1x price-book from a high cash generative business with a promising outlook and other attributes mentioned above.

OWG is trading at 0.65x PB thus translates to ~55% upside. Hopefully OWG discloses more information as the valuation gap closes, to better appraise its intrinsic value.

Catalyst

·         December 2018 figure showing signs of turning around.

·         Chinese New Year’s significant higher visitor volume to be reflected on coming quarterly report

·         GITP comes to fruition bringing in more visitors

.         Sell side coverage increase - currently none of the large research team is covering OWG explains why the opportunity

 

Questions and constructive comments are welcome. You are encouraged to bring fresh perspective so I can reexamine my logic. 

Labels: OWG
  tapdance likes this.
 

(TapDance) OWG - riding on a promising secular trend with low market expectation

Author: tapdance   |  Publish date: Wed, 20 Mar 2019, 9:46 AM


Summary

OWG is at an inflection point after a two year sell-down (~-75%) of which was triggered by temporary (suspend Genting Highland operation to give way for GITP) and extraordinary factors (Genting vs. Twentieth Century Fox world theme park dispute).

As the investment cycle’s gestation period is finally coming to an end, it is the beginning of a multi-year growth phase. The latest 2Q19 result is already showing signs of turning around.

For a start, a modest 1x PB translates to ~50% upside.        

Description

Background info: Genting Integrated Tourism Plan (GITP) is a multi-year RM10.4 billion capital investment program to revamp Genting Highland as a tourism hotspot – which includes a Twentieth Century Fox (TCF) world theme park costing RM2 billion alone. The program, initially budgeted at RM5 billion and doubled with conviction, expects to push number of visitors to Genting Highland to 30m by 2020 from 20m pa. currently.

In late 2018, shock wave was sent across the market when Disney decided to cancel TCF’s original theme park planning after Disney acquired TCF. Disney does not want to be associated with Casino activities.

Cause of sell-down: OWG’s performance was halved in FY17 and remained lackluster in FY18 after giving way for GITP’s development.

 

OWG will stand to benefit from Genting Integrated Tourism Plan (GITP). Instead of recognizing the promising investment cycle, market refuses to look-through the gestation period AND penalizes it by shredding -60% of its market value (2017 to mid-2018).

The TCF theme park dispute triggered another round of sell down on OWG. Essentially a double penalty. By now OWG market value has declined ~ -75% (2017 to end of 2018).

The bearish sentiment was severe. GITP started rolling out new entertainment attractions were completely ignored. Attractions includes Genting Premium Outlet, indoor theme park (Skytropolis), hundreds of retail and F&B outlets in SkyAvenue and SkyCentral, SkySymphony performance, Awana Skyway – new cable car system, new hotels etc.

Signs of turning around: In its 2Q19 result, OWG commented that the indoor theme park opening in December 2018 has led to an increase of its F&B operation performance. A comparison table is presented below.

Let’s still call it a 1-month effort – despite given the opening preparation works etc., actual operation hours are likely less than that. The F&B division registered a sterling +126% growth in earnings for the whole quarter on the back of a mere +16% revenue growth as operating leverage effect kicks in.

The ‘Other Services’ segment – operates retail and beauty salon outlets at SkyAvenue experienced similar improvement. Losses narrowed from RM6.8m to just RM1.4m in a single quarter i.e. +79% yoy.

 

The ‘Amusement and Recreation’ segment could be a drag. But let’s focus on the big picture here – which is the Genting Highland’s side of operation.  

The performance is sustainable given the continuous role out of entertainment attractions from Genting. Visitor growth is gaining momentum. In turn feeding the business’ operating leverage thus bottom line, which (eventually) leads to multiplier effect on the co.’s share price.

Legwork confirmation: Cross channel checks confirm numerous F&B outlets in the highlands are indeed nationwide high sales outlets – all within a short span of few months.

Outlets with lower price-points has no peak/off-peak period apparently. They are well supported by the highland workers (from retail, F&B, casino, construction, renovation, marketers etc.). Holiday season or not is irrelevant. Lower price point is OWG’s forte. 

There are more than enough videos circulating about the crazy crowds at the highlands during the 2019 Chinese New Year period. The (likely) significantly positive impact has yet to be captured in the abovementioned latest quarterly result.    

Commonsense says oversold: Genting targets to launch its outdoor theme park in 2H-2019. It may delay because of the TCF debacle. Nonetheless as a sensible business operator, an indefinite launching postponement (which costs billions) for the sake of a brand-name theme park is unfathomable. I believe there’ll be a contingency plan. Commonsense usually prevails.  

Secular trend: The real beauty about OWG is its long runway. That is at least until the outdoor theme park effect sizzles. Imagine Genting Highland as a holiday idea in the local tourism industry until the whole GITP matures. It will take many years. 

Insider buying cum risk removal: Insiders scooped up some shares during the late 2018 Genting/Disney dispute sell down. While the support is certainly a vote of confidence, it also removes substantial risk for public shareholders that insiders could be plotting to privatize the co. at the cheap.

Risk-reward and payout odds: Whatever the outcome of the outdoor theme park, OWG is undergoing an inflection point. The significant improvement in the underlying business performance will surface in the coming months. Couples with the ultra-low market expectation and identifiable cause of a 2 years’ sell-down makes it a very compelling investment case.   

I must confess that my range of earnings estimates is simply too wide to be of useful. Nonetheless I reckon it is conservative to expect at least 1x price-book from a high cash generative business with a promising outlook and other attributes mentioned above.

OWG is trading at 0.65x PB thus translates to ~55% upside. Hopefully OWG discloses more information as the valuation gap closes, to better appraise its intrinsic value.

Catalyst

·         December 2018 figure showing signs of turning around

·         Chinese New Year’s significant higher visitor volume to be reflected on coming quarterly report

·         GITP comes to fruition bringing in more visitors

 

Questions and constructive comments are welcome. You are encouraged to bring fresh perspective so I can reexamine my logic. 

https://klse.i3investor.com/servlets/stk/5260.jsp

Labels: OWG
  3 people like this.
 
Manekineko Thanks for sharing, interesting points to consider this counter.
20/03/2019 12:07 PM


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