Posted by kcchongnz > Jun 19, 2013 12:58 PM

Is Classic Scenic a good company? Is it a good investment? 

Posted by fookchng > Jun 18, 2013 06:04 PM | Report Abuse 
Dear KC, have you studied on PESTECH and CLASSIC SCENIC BHD before? I am interested to know your valuation on them. Thanks. 

No, I have not studied those stocks before you mentioned here. But since you ask, I will try to look into one of them. And since you ask in this thread which discusses about searching for a good company, i will give my opinion if this is a good company worthy of investing also, before I attempt my valuation here. 

Classic Scenic is engaged in the manufacturing of wooden picture frame moldings, and wooden pallets. Operations are carried out in Malaysia, North America, Australia, Europe and other Asian countries. 

The business appears to be boring, isn't it? But often a boring traditional business is a good business. It's business has a high net profit margin of about 20% and provides a return of 16% (>12%) of invested capital. The quality of its earnings is good. Free cash flow is abundant at 20% of revenue (>>5%) and 16% (>>5%) of invested capital. That is why it can distribute a high dividend of 9 sen, (DY=8.1% at RM1.11). The only shortcoming is its business is quite stagnant with not much growth at a CAGR of only 4% fro the last 7 years. It is not that bad though as it is still growing in tandem with the broad economy. Last year's growth in revenue of 19% was great. So I can certainly say CScenic is a good company. 

At RM1.11, its PE ratio is 10 (<20), EV/Ebit=6.7 (<8) and price-to-book of 1.4 (<2). So it is not expensive and hence may offer investors a good investment. 

CScenic's valuation is quite straight forward as its revenue and earnings are quite stable. Assuming CScenic continues to grow in tandem with the economy at 3%, CScenic at RM1.11 is already fully valued as shown below, unless its business can continue to grow at last year's rate for a few more years. 

Revenue 62329
Ebit 14753 24% 
less income tax -3388 23% 
EBIT after tax 11366
Add average D&A 2738
Less average capex -5983
Normalized Ebit 8121
Cost of capital, R 10%
Growth rate 3%
Capitalized earnings=Ad Ebit/R 116007
Add cash 21724
EPV 137731
Number of shares 120500
EPV/share 1.14 >