Icon8888 Gossips About Stocks
(Icon) London Biscuits - Good Results Triggered Re-Rating ?
This company attracted my attention in early 2013. They undertook a private placement of approximately 20,000,000 new shares at RM1.00 per share while the market price at that time was 65 sen.
The placement gave rise to a lot of specultation of what was actually going on at the back. But for me, I can only see goods and no evil. Who am I to complain when the shares are placed out at steep premium ?
(1) Strong Results in the Latest Quarter
London Biscuits latest two quarterly results achieved a breakout. Over the past few years, quarterly net profit ranged from RM2 mil to RM3 mil.
However, in the latest two quarters, the group reported net profit of more than RM4 mil per quarter.
Management attributed that to intensive promotional and advertising activities, which helped to increase demand for the company's products.
| March 2013 | June 2013 | Sept 2013 | Dec 2013 | |
| Revenue (RM mil) | 63.8 | 97.6 | 73.2 | 92.3 |
| Net profit (RM mil) | 2.5 | 2.7 | 4.4 | 4.9 |
| EPS (sen) | 1.79 | 1.97 | 3.06 | 3.45 |
(2) In the Process of Being Re-rated ?
The stock has been hovering at about 70 sen over the past few years. Following the release of the latest quarterly result, there was evidence of active buying.
One possibility is that fund managers had spoken to management post release of quarterly result and they like what they heard.
Trading volume spiked over the past two weeks and share price had gone up to 79 sen as I write this article.
I did a quick check with a Technical Analysis expert here in i3 and he confirmed the stock had achieved a positive breakout. He had also given me consent to mention it in this article.
(3) Corporate Governance Issue ?
London Biscuits incurred certain capital expenditure in the past few years to build up their production facilities (production lines, warehouse, etc). This has caused their gearing to go up and limit their capacity to pay dividend.
There were speculation of bad corporate governance. But nobody is able to prove it. For me, it could be somehing fishy, or it could be an honest mistake, or it is too early to tell whether it is a mistake at all.
In an interview with the press recently, management mentioned that they are now reaping the benefit of earlier capex as they now rely less on labour input, which is a major headache for a lot of manufacturing companies nowadays due to difficulty to hire workers at competitive salary.
Anyway, I think all these are water under the bridge. I believe the stock price has fully absorbed the abovementioned info, and now the market is looking ahead to the future.
(4) Gearing
The group does have a bit of gearing. With net loans of RM250 mil and net assets of RM300 mil, net gearing is approximately 0.8 times.
Having said so, RM94 mil of the borrowings are bankers' acceptances, which is trade related and common for companies that import raw materials for production.
The gearing is also mitigated by the fact that consumer business is evergreen and not so vulnerable to business cyclicality.
(5) Conclusion
This is a stock that has been forgotten by investors. Recent strong quarterly results had triggerd a re-rating. Technical signals looked good.
As usual, I suggest put it in your watchlist.
Have a nice day.
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Discussions
Be the first to like this. Showing 18 of 18 comments
thanks kkchongnz, I am not surprised you will be the first one to response. I have gone through your write up before on London Biscuits and I am familliar with your views. My article is actually written very much with your earlier article in mind.
I admit your points are valid, and I dont think I am going to challenge them violently.
As an arm chair analyst, I am aware of my limitation. You could be right, time will tell.
(btw, I have also noted your view on Ivory Properties and I wrote an article to argue against it. It would be great pleasure if you can go through it and give me your views. It is in my blog postings)
2014-03-24 15:16
Agreed with KKC. Icon, if you are looking for a long term with LB, then I would suggest that you wait a few more years especially during reccession. Their margin is low with high gearing, which is quite dangerous. When problem arise, they will be in deep trouble. I always have doubt in their management.
2014-03-24 15:47
84 sen now. I dont think my little article is so powderful
this thing is beginning to smell like a take over
2014-03-24 16:20
Mr KC Chongnz..may i know what is your opinion that there was a private placement at RM1.00 for 20 million shares when the shares at that time was 0.65 as mentioned by Icon8888.
2014-03-24 17:18
In investing, it pays to be skeptical. I am skeptical about all insiders' move, especially when I find London Biscuit does not worth that much.
There are many things we don't know about the corporate moves. We can be easily deceived. That is my sincere opinion.
2014-03-24 17:50
Its PPE is RM527m and still requires upgrading. Its facilities must be very big and elaborate. One must go for a factory visit to believe it. All shareholers' money has gone to PPE but the good thing is profits are looking up recently.
RM50m annual operating cashflow bodes well for debt elimination in 5 years, assuming modest capex amount. With inflation low and raw material prices contained, the profit improvement is expected. Going forward, it is unclear if the current profit can be maintained.
I rate Lonbisc 70 points at current value. RM130m market cap is achievable for now, given the obvious liquidity or solvency risks. The risks of course is if profits swing down, it will go for another cash call quite soon to pay its current debts. This is a turnaround story for those who believe it.
2014-03-24 20:40
Today 10 mil shares changed hand. Let's see what happen tomorrow
London biscuit is a very attractive target for private equity investors. I am not surprised if existing owner team up with PE to take it private
2014-03-24 22:11
The gem that London Biscuit has is its 32% associate Khee San. Khee San is the largest manufacturer & distributor of confectionery and sweets in Malaysia.
It is trading at a PER of 13x based on the earnings of the latest quarter. The market cap is ridiculously low at RM45mil.
Financial management leaves a lot to be desired. Balance sheet is below average.
The factory is sitting on a gold mine. The market price of the factory land is RM40-50mil. Will not be surprised if Khee San relocates it factory and sell the land. It has other landed properties worth RM8-10mil.
Khee San is worth RM1-1.20 per share.
2014-03-24 22:39
Fake 2013 Private Placement of 20m shares at $1.00 when market price only 0.65. Money moved from left pocket to right pocket
The churning of Kheesan shares on a monthly basis says it all
2014-03-25 11:27
don't understand. Please elaborate with figures
they place out 20m shares to investors at RM1.00. This brought in RM20 mil cash.
and then ?
2014-03-25 12:30
Posted by JaniceLove > Mar 24, 2014 05:18 PM | Report Abuse
Mr KC Chongnz..may i know what is your opinion that there was a private placement at RM1.00 for 20 million shares when the shares at that time was 0.65 as mentioned by Icon8888.
Who was that stupid "private investor"? Or was there something behind the scene which we didn't know?
Fundamentals of London Biscuits have changed for the better? Really?
I always say, in investing, it pays loads to be skeptical. But if he is still keen in investing in a particular stock in a similar situation, he has to do at least some analysis, something like what I did here. (Sorry, trying to entice people to read my posts)
http://klse.i3investor.com/blogs/kcchongnz/48584.jsp
2014-03-27 06:19
"Losers whine about their best. Winners go home and fxxk the prom queen"
Sean Connery, The Rock
2014-03-28 11:54
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kcchongnz
Icon888,
First I must say you have provided a factual report on London Biscuits. Hope you don’t mind I be the first to give you a totally opposite view on it. It is one of the most sour lemons in my list below:
http://klse.i3investor.com/blogs/kcchongnz/45373.jsp
I have also written an article depicting why I think so as below:
http://klse.i3investor.com/blogs/kianweiaritcles/40683.jsp
Let me provide my comments point by point to your article.
(1) Strong Results in the Latest Quarter
Yes, LB’s revenue and profit increased by 36% and 23% to 166m and 10.8m respectively for the last two quarters. But is that considered as a breakout? I beg to differ here.
LB sold more the last two quarters, which is good, but their margins actually reduced. ROE improves though due to the higher sales but it is still a very low at 5.8% with the annualized profit. This is despite its high financial leverage of 1.9 times. This ROE is way below my personal requirement of at least 12% for a company like LB. Why does LB needs such a high asset, especially a fixed asset of 528m to make a net profit of just 22m a year?
If they have done so much better, why is that there no significant improvement in its cash, or rather debt position?
(2) In the Process of Being Re-rated ?
“there was evidence of active buying.”? Who buys? The fund managers? I would advise anybody investing in this fund to get out quick.
Or is it speculation and frying (again) by insiders? I would think more of this.
I do not deny that one can make big money speculating this share because there are always frying of this stock, for the benefits of the retail investors.
(3) Corporate Governance Issue ?
Reaping the benefits of high capital expenses now? Again why does LB needs so much capital expenses and earned such a meagre return? Is that a good capital allocation? Is the money spent maximizing shareholder value? Not that I can see.
It is hard to prove bad governance in court. But good hints are available from the actions and the results of the actions.
(4) Gearing
These are some of the ratios regarding its balance sheet:
Interest coverage 1.8 times << 3
Current ratio 0.6 << 1.5
Quick ratio 0.5 << 1.0
I see the big problems of its high borrowings, don’t you?
(5) Conclusion
To me LB is a bad company as explained above. However, a bad company can still be a good investment also, if the price is right. With an annualized EPS of 13 sen, P/E is only 6 at 79.5 sen now. Is it really cheap? Not until you consider its debts.
At 79.5 sen, its enterprise value is 428m. At an annualized EBIT of 37m, its earnings yield (ebit/EV) is a meagre 4.3%.
I won’t touch this stock with a long pole.
2014-03-24 15:02