Established in 1989, FPI is a leading manufacturer of high-quality sound system to worldwide multinational companies.

Collaborating with Taiwan-listed engineering firm, Wistron Corporation (“Wistron”) which made a 28% stake acquisition in 2014, the Group has transformed itself from manufacturing conventional speaker systems to manufacturing advanced wireless speakers, audio components and musical instrument products. Wistron Corporation is an electronics manufacturer based in Taiwan. It was the manufacturing arm of Acer Inc. before being spun off in 2000.

We will discuss FPI’s valuation and prospect, and evaluate our case for the company using 5 criteria:

• Simplicity
• Moat
• Management
• Margin Of Safety
• “Invert, Always Invert”

Simplicity

“Simplicity is the Ultimate Sophistication.”

FPI has a simple business model manufacturing sound system for top-tier brands. The financials are also quite straightforward without any debt, warrants, ICULS, etc. However, there is some short-term pain for the shareholders due to ESOS grant for the directors and employees. Long-term impact is expected to be limited.

Management has a laser-like focus on its core business and they have no big plan to diversify into non-core areas. Revenue, dividend payout and earnings are consistently on the uptrend.

Moat (Competitive Advantage)

Qualitatively speaking FPI does not have a deep economic moat. It does not have a brand name like Coca-Cola, Apple, or McDonalds. It also does not have a patent, monopoly of any kind or utility type toll.

Quantitatively speaking it has a good moat. One of the easiest ratios to identify a company with a moat is RoIC (Return on Invested Capital). FPI RoIC ratio is more than 23%. This is decent by any measure for a manufacturing company. Company with high RoIC are good investment during high inflationary period. It indicates that the company’s capital is being used efficiently and will be difficult for potential competitors to encroach into FPI’s space.

The other numbers to look at to identify economic moat are Revenue, EPS, and dividend payout CAGR. We will look at this from year 2015 to 2021 - a six-year period after Wistron took a big stake in the company.

1. Revenue grew from RM388.9 Million to RM938.9 Million with a CAGR of 16%.
2. EPS grew from RM0.078 to RM0.39 with a CAGR of 31%,
3. Dividend grew from 0.03 to 0.2 with a CAGR of 61%    

Management

We will not go into management personal details. You can find this easily in the annual report, FPI website or other analyst report.

We will use financial data and other measures to evaluate management’s performance:

1. FPI net cash position including short-term investment is RM266 Million.
   Update 6th March 2023 : - Net cash has increased to RM360 Million.
   
2. Return on Equity has improved from 15.7% in year 2020 to 23.3%.
3. Net Profit margin has improved from 6.8% in year 2020 to 10.3%
4. FPI has not skipped paying dividend for more than 20 years.
5. Unlike few other listed companies, FPI does not face any forced labor issues. In fact, it is more employee-friendly than shareholder-friendly. ESOS grant was issued to the employees last year to the detriment of the stock price.
6. Although cash-rich, there has not been any share-buyback the past 10 years.
7. Unlike some companies, there is no major marketing event to prop the stock price.
8. Management is making investments into “selective automation”. This has resulted in significant reduction in the workforce despite the increase in sales.
9. It has one of the lowest PE ratios of any growth company in KLSE.

What can we conclude from the above?

Briefly put, management performance is very commendable with consistent and significant year-on-year improvement of the fundamentals. However, a conservative and muted approach to shareholders has dampened the share price considerably. 

Margin of Safety

“Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”

The most critical element in calculating the intrinsic value of a company is the future growth. We will look at it from 2 different angles:

1. As shown earlier the CAGR for revenue, EPS, and dividend payout ranges from 16% to 61%.
2. Future CAGR projection for smart speakers from analyst varies from 16%-19%. "The global bluetooth speaker market reached a value of US$ 10.1 Billion in 2021. Looking forward, the publisher expects the market to reach US$ 30.4 Billion by 2027, exhibiting a CAGR of 19.1% during 2022-2027."
   https://www.prnewswire.com/news-releases/global-bluetooth-speaker-mark...

Based on the above, we will be conservative and project FPI EPS CAGR to be 16%. Our minimum expected rate of return per year is 10% and future PE is assumed to be 12. Current EPS is RM0.39. We are not excluding any exceptional gain or expense from the earning. Also, we will not deduct the net cash from market capitalization. These items approximately cancel out each other.

Using projected EPS CAGR of 16%, the earning in 10 years will be RM1.72. Multiplying this with the future PE ratio, the future stock price is expected to be RM20.65. We discount this price by 10% per year and bring it back to today. The intrinsic value of FPI based on conservative valuation is RM7.96.

This gives us a very significant margin of safety today (April,’22).

 Update 6th March, 2023 :- After Q4, 2022 earning announcement, I believe the situation has changed. It will be difficult for FPI to grow at the same rate as the past 7 years. Also, it it hard to predict the earning growth moving forward. As such I will use a lot simpler and conservative method to derive the intrinsic value.

FPI average PE ratio the past few years has been around 10x. The  ratio today (6th March, 2023) is 7.34. I'm going to assume the earning will be flat this year and PE multiple will revert to its mean.

Using the above assumptions, FPI intrinsic value today is RM 4.13 ( = 10 * RM3.03 / 7.34).

If you believe the earning is going to take a dip this year, then the intrinsic value should be lower, and vice-versa.

“Invert Always Invert”

There is a bit of risk with customer concentration. We suspect there are 5 major customers: -

1. Sony
2. Wistron
3. Customer C
4. Yamaha (new customer)
5. All other customers

 Update 6th March 2023:

I could be wrong but I believe Sony is no longer a customer of FPI and future growth will be dependent on Yamaha orders. Customer C is most likely Roland.

Also besides the CEO, other in the management team don't seem to have much skin in the game.

Summary

Though FPI is currently considered as a defensive stock and dividend cash-cow, it can also be looked at as a growth stock in every sense of the word. It has a very impressive track record for dividend payout, revenue, and profitability growth. It is also in a space that is expected to grow at least 16% per year.

With Wistron as a strategic investor and partner, and management laser-like focus on their core business, the future is expected to be just as bright.

As the business is currently trading significantly below its intrinsic value, both conservative and aggressive investors can be recommended to evaluate this company.

Update 6th March 2023:

FPI management seems to be holding on to it cash very tightly. This comes as a big disappointment. Though net cash has increased to RM360 Million, management has not initiated any share buyback during this period when FPI is clearly undervalued.

Also, I will not consider the company a fast growth stock anymore. Can it be considered a growth stock? It will be very much dependent on Yamaha orders this year.