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London Biscuits Bhd - Irresistible Bite! kcchongnz
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London Biscuits Bhd - Irresistible Bite! kcchongnz |
The above is the title given by Kenanga Investment Bank, not me. Generally I like to write about good stocks. However without knowing what is bad, how are you going to avoid falling into the pit when your investment bankers, remisiers, sifus from forums keep on persuading you to buy the next best stock in Bursa? For me avoiding losing money in lemons is equally if not more important than catching a good stock to invest in.
This article is written by me purely for sharing and discussion purpose.
Recommendation from Kenanga Investment Bank
The report on London Biscuits published by Kenanga on 5th May 2014 is appended in the link below.
http://klse.i3investor.com/servlets/ptres/22855.jsp
“Undervalued; Rare Malaysian consumer gems” as suggested by Kenanga.
I like to emphasize the term “Rare”. Within a week, its share price shot up by more than 10% to 91.5 sen. Today its share price hovers around 83 sen. The interesting question is whether most of the retail investors profited from this report by buying London Biscuits at about a low of 80 sen just before the call was made and able to sell it at its high of about 93 sen a couple of months later, for a gain of 16%; or a paper loss now by buying close to its high at 93 sen and still holding the stock. I will leave it to your ingenuity to make a good guess.
Let us just forget about the share price movement as you know, you can’t predict share price movement. Even if London Biscuit is really so good as investment as described by Kenanga, its share price may not be fully reflected especially in the short term. Let us look at Kenanga’s thesis on LonBis and its business if it is really good or “turning around”.
Kenanga’s report mentions that “LonBis has registered 12 consecutive years of profitability”. That is 100% true. Nobody can argue about that. But what kind of profitability? How are they achieved? Are they satisfactory with the capital invested? There are whole loads of questions. However Kenanga has not address a single one of them. What are the questions? Why are they important?
London Biscuit: Grow Baby Grow
If you are a growth investor looking for a small capitalization high growth company to invest in, this is it! Its revenue grew from 82m in 2005 to 360m (Table 1 in Appendix), for a compounded annual growth rate (CAGR) of 18%. Believe me, it is hard to find a company in Bursa growing at that rate for a long period of time. But how did it achieve this rate, and what is the bottom-line of this growth?
LonBis keeps on issuing new shares and borrowing money to keep on buying plant and machineries to increase its assets and revenue. Its outstanding number of shares has almost tripled from 68m in 2005 to 164m as at June 2014. Despite the additional money collected through the right issues, its total debt is still increasing consistently every year from 68m 9 years ago to 264m now. Its balance sheet is becoming precarious now with total debt 70% of equity, and current and quick ratios way below unity. The money is mostly spent on buying property , plant and equipment (PPE). PPE ballooned by more than 4 times from 141m to 571m from 9 years ago.
Yes, huge growth in every aspect; revenue, PPE, number of shares, total debts. But what is the bottom-line with this huge capital investment through right issues and bank borrowings?
The Bottom-line Cry Baby Cry
Net income is basically flat throughout the years. Earnings per share actually plummeted from 20 sen 8 years ago to just 8.7 sen for the financial year ended 30th June 2014. How come with so much increase in assets utilized for its operations, with so much borrowings from banks, and increase in share base from right issues, its EPS is deteriorating so badly that its dividend has to be reduced from 15 sen to just 1 sen per share?
One answer lies on its margins and efficiencies.
Margin and efficiencies
Comparing with the margins and efficiencies of another confectionery company, Apollo Food, why is that the other confectionery is so much better than LonBis?
- Apollo’s net income of 32m is twice of LonBis , although it uses only 20% of LonBis’s PPE.
- Apollo’s net profit margin of 14.4% is three times that of LonBis of just 4.8%.
- Apollo’s return on capital of 19.2% is almost 5 times that of LonBis of just 4.2%.
- And the 4.1% return on capital of LonBis is way below its cost of capital, and hence a huge shareholder value destroyer, every year, consistently.
We must realize that a high growth company with return on capital lower than its cost is a shareholder value destroyer which investors should shun away. By the way, haven’t I mentioned that LonBis has been growing at CAGR of 18% for the last 9 years, and what has been the result? Well even Kenanga Investment Banks doesn’t realize it (really?), where does a small time retail investor stand?
Yes, we shouldn’t focus on earnings growth but return on capital. After all a company borrows $1 billion, hugely increases its bankruptcy risk, and earns $10 million a year, or just 1%, it will still grow its EPS. But why does most investment banks focus on earnings growth, EPS, and talks nothing about return on capital? Beats me.
The “Bright” Side? Cash flow of LonBis
If you look at the cash flow statement, LonBis appears to have good cash flow.
The cash flow from operations (CFFO) is almost always positive, and they are generally more than the net income throughout the years. Few investors realize that that is because of the huge amount of depreciation, which is non-cash, is added back to CFFO. Why not, they spend millions and millions buying PPE every year? Money spent on capital expenses is capitalized in the balance sheet and not expended in the income statement. It is only after looking at its cash flow from investment activities that you can see tons of money is thrown as capital expenses consistently every year, and yield poor bottom-line and a huge destroyer of shareholder value.
Yes even cash flow can be deceiving.
Ok ok ok, we shouldn’t always talk about the past. In investing, it is the future which is important. LonBis’s business is turning around. That is the theme in Kenaga’s report. Really?
Latest annual results ended 30th June 2014
Its latest financial results shows an increase in turnover by a fair bit of 24% to RM360m, not bad at all. However, net profit increased by 14% to RM17.2m, or a miserable net profit margin of 4.8%. The huge RM737m in total assets utilized for the business yields just 2.3% return a year. There is no details of its capital expenses as the cash flow from investing activities is not broken down deliberately (?) but I can see it PPE has increased by another 10% to a whopping 571m now. This is despite of what Kenanga said in its May 2014 recommendation:
“Historically, LONBISC earnings decline from FY10 to FY12 is caused by its high investment to upgrade its capacity and expansion to modernise its equipment and machinery. However, the period of high capex should be coming to an end”
And what about its high debt?
“its cashflow has improved and is now being used to pare down debt to a healthier level.” Said Kenanga.
But I don’t know why, I can’t see its total debt reduced from 2013 to 2014. In fact it has increased by 400k, not much, but still an increase, definitely not decrease. Furthermore, its cash holding decreased from 27.2m last year to only 13.9m now. Where got pare down debts?
What about this?
“We expect FY14E net profit to improve by 15% to RM14.2m”.
Again you only talk about earnings growth, what about improved margin, improved ROE and ROIC to above costs of capitals? If your return on capital improved from 4.1% by 50% to 6%, the return on capital is still way below the cost of capital. It is still a shareholder value destroyer. But I don’t know why, its latest annual results still shows deterioration in return on capital compared to last year. So where is the turnaround?
Surely there must be some positive things investing in LonBis. Yes, its price. Very cheap.
“- Undervalued; Rare Malaysian consumer gems at below 10x Forward PE (FPE). LONBISC is currently trading at 9.2x FPE which is at a 16% discount against its peers”
“In addition, LONBISC is trading at only 0.42x of its book value of RM2.17”
My question is how come Kenanga doesn’t understand that PE ratio is related to things like ROE, ROIC, cost of capital, health of balance sheet etc. It has also something to do with the payout ratio and expected dividend as the value of a company is the discounted present value of all its future expected dividends, instead of just a simplistic PE ratio?
Has Kenanga looked at what kind of quality is the assets of LonBis. What is it made up of? And hence what is its quality book value.
For me, those are entirely different stories, long winded stories.
The moral of the story is, do not blindly follow rumours and hypes.
“No one protects the retail investor-not corporate officers, not brokers, not analysts and investment bankers, not the media, not even government agencies and elected officials whose job is to do so. An investor must use his own best judgement, all the information available (bearing in mind that publicly available information is never equivalent to insider information), and be very conservative.”
Total return of LonBis for the last 5 years
Appended here is the interesting comparison of return on share price of LonBis (in green) and the broad market of KLSE (in blue) for the last 5 years. A picture paints a thousand words.
K C Chong (20th September 2014)
Appendix
Table 1
|
Year |
2014 |
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
2007 |
2006 |
2005 |
|
Revenue |
359987 |
289979 |
253520 |
259286 |
223434 |
184302 |
138163 |
117171 |
107740 |
81958 |
|
Net Income |
17182 |
15079 |
13764 |
17433 |
17594 |
17122 |
9256 |
11852 |
14686 |
11737 |
|
EPS, sen |
8.7 |
8.7 |
8.4 |
14.2 |
15.2 |
20.5 |
13.5 |
16.3 |
20.0 |
16.9 |
|
DPS, sen |
1.0 |
1.0 |
1.0 |
0.0 |
4.5 |
3.0 |
5.0 |
13.0 |
15.0 |
5.0 |
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Discussions
15 people like this. Showing 30 of 30 comments
I hv hold this stk before ,no value ,market up it feeze there,market down it follows,
2014-09-20 21:33
Hopeless management team, I once read its annual report a couple of years ago, notice young directors are Dato-Dato and Datin-Datin who want fume and famous only. But don't know how to manage own business. I wonder those Dato and Datin directors are still around.
Lately, I also notice its products are heavily advertised in Singapore Media corp. I also noticed its MD is appearing in sponsorship of a few Singapore TV series. I wonder what is its return and segment sales in Singapore market? Or MD take opportunity to flirt with Singapore Media Corp Artists
2014-09-20 21:52
Nice and timely article. My dad seems interested in this counter. :) let me show him this article
2014-09-21 20:32
investment bank are nothing more than sales department, their job is to sell sell sell and make money at the cost of the public domain
2014-09-22 02:22
Without a doubt KC is the BEST to dig out these longkang shares thru his thorough CSI forensic analysis about the true state of the company financials. I see very much similarities of this London biscuits together with KNM. Turnaround stories written by research houses,getting new projects n now with Epf being a substantial shareholders,high NTA,borsig listing,r all add excitement to the stock. Look at how these 1/2 past 6 investment houses wrote about this KNM longkang as if it's the gem of the century
28/08/2014 KNM Group Berhad - Recovery On Track
28/08/2014 KNM Group - 1H on track; expect a stronger 2H
08/08/2014 KNM to get slice of Pengerang job, eyeing work worth RM1bil
08/08/2014 PublicInvest Research Headlines - 8 Aug 2014
08/08/2014 KNM Group Berhad - Seeing is Believing!!! More to Come…
08/08/2014 KNM Group - RAPID ready
04/08/2014 Maybank Research Highlights - 4 Aug 2014
04/08/2014 PublicInvest Research Headlines - 4 Aug 2014
03/07/2014 Highlights / Stock Picks of the Day - KNM Group Berhad (KNM) - Not Rated
02/07/2014 KNM Group Berhad - Phoenix Reborn!!! - HLBank Research Highlights | I3investor
if you look at the real balance shits of KNM as highlighted by KC from time to time u will see how General 'Wolf' Lee being the most creative CEO constantly playing the news n working the balance shits with his latest creative accounting to raise $$$ like the one eg here
http://www.theedgemalaysia.com/business-news/272902-knm-proposes-to-cut-share-par-value-by-50.html
juz like that will be 745 mills in the coffer :)
Though KC has written many short snippets about how 'good' the balance shits of General 'Wolf' Lee's KNM not sure whether he has in details highlighted the stock performance of KNM compared to Bursa index ( chart wise )as like L.Bis n am telling u it ain't pretty at all - it' is so bad that even if you've bought in the middle of 2011 like I did at the price of 2+ u would have lost more than 100% n let's not even 'try' to look at those who bought Jan 2008 which was @ over 10 bucks - take a look for yourself ( u might want to do it in the toilet incase u feeling like puking afterwards :) )-
http://finance.yahoo.com/echarts?s=7164.KL+Interactive#symbol=7164.KL;range=my
now u tell me is this stinking longkang or stinking longkang :) yeah it surged 8% last Friday n got all the brave hearts excited n 'likely' to go up more today since it's on the 'uptrend' but will it sustain? - dun forget that it also dropped about 20% in 7 trading days from a high of over 1 bucks juz this month - why? - epf selling? why the &^%$ EPF buying in the first place? - have they not learned from their past mistakes? - well apparently NOT :(. More importantly will it ever even go back to a quarter of it's high of 2008 which is only 2 bucks since so many research houses are so bullish on it despite the fact that it's contracts won are always with very low or no margins,the foreign exchange losses, high debt that needs to be serviced, etc. I never doubt General or Bolihland ability to goreng but do u seriously want to 'invest' in KNM for the excitement?
I know this is about thread is about London bis n not KNM but when they're longkangs they're all stinking longkangs no matter how you clean them :) whether it's Lon Bis or KNM or even MEGB - They're still longkangs :) STINKING LONGKANGS LOL
2014-09-22 03:54
Amazing warren buffet wannabe. Trying to find value in a biscuit co. I m speechless.
2014-09-22 04:23
HI KC, allow me to add one more point towards LondonBisc.
“Historically, LONBISC earnings decline from FY10 to FY12 is caused by its high investment to upgrade its capacity and expansion to modernise its equipment and machinery. However, the period of high capex should be coming to an end”
Look at the PPE spending at 2013 at the cash flow statement, it was just a modest amount of RM22Million which represents a total of 7.6% of total revenue.
Hell yeah the period of high capex should be coming to an end!!!
But wait a minute, part of the PPE spending was actually being funded by bank borrowings which we could find the little notes at the end of cash flow statement as below:
“Property, plant and equipment at aggregate cost of RM55,226,040 (2012 - RM115,409,572) was acquired during the financial year of which RM33,213,902 (2012 - RM23,730,715) was acquired by means of hire-purchase and term loan.”
Taking into account of the full PPE spending, it represents a total of 19% of total revenue!! What about for the latest financial year 2014?
“Property, plant and equipment at aggregate cost of RM58,768,000 (2013-RM55,226,000) was acquired during the financial period of which RM18,172,000 (2013-RM33,214,000 ) was acquired by means of hire purchase and term loan.”
In 2014, its total revenue was an impressive figure of RM360million but 16% of it is going back to PPE while its operating margin before Depreciation was just 15%. What a coincidence figures that whatever they earned (after COGS, after SG&A expenses) in the first place is going back to the machine. Well working capital, bank interest charges, taxes are yet to come to the picture.
Whatsoever, London Bisc is still making a not so bad on paper EPS of 9.68sens for the financial year 2014 and the company is priced at a ‘cheap’ valuation with PE less than 10 for its impressive sales growth.
2014-09-22 10:12
your article is always the best to read in i3. keep up the good works.
2014-09-22 11:20
Good to read BUT I don't agree. The debt and those private placement shares of both LONBISC and Kheesan are too fishy. I am worried on the accounting
2014-09-22 12:21
Dont worry, Khee san and Lonbis have long history of profits. If anything bad goes wrong, sure there is somebody who is interested in them .
2014-09-22 12:40
Long history of profits? What is the theme of this article? Investors should focus on return on capital, not earnings. Earnings below cost of capital is a big destroyer of shareholder value. Long history of profit below cost of capital is long history of misery for shareholders. That is why they have to keep on putting money for right issues, and company keeps on borrowing and its debt level is precarious now.
Sure there is somebody interested in Khee San and London Biscuits. But that depends of what price to pay.
In Sept 2007, London Biscuits acquired 18.420 million shares, or a 30.7% stake in Khee San Bhd for RM27.630 million, or RM1.50 per share. It was purchased at a huge premium. And many other acquisition also at high premium. Hence it has this "goodwill" of 12.7m which has been in its balance sheet for many years already. today Khesan is trading at only 61 sen, a loss of 60% after 7 years. @#$%*.
2014-09-22 15:35
news report by Focus Malaysia on London Biscuits in this Sept.
http://www.theantdaily.com/Business-Targeted/Is-3rd-share-placement-in-3-years-sufficient-for-London-Biscuits/
2014-09-22 18:42
Don't worry when it comes down gradually it will goes up again hold on the iron rod ...... It will be cold again
2014-10-09 02:00
thanks KC! loved your impartial comments! (unlike some other "famous" blogger started with the word "B" who gave the BUY call and many followed and get trapped) keep it up!
2015-01-31 11:13
KC, Good report. Just one question. The Fix Asset at RM570 Million. Huge !! How many years is the depreciation base on? 5, 7, 8 or 10 years?
2015-02-05 15:36
Posted by Tey Tian Foo > Feb 5, 2015 03:36 PM | Report Abuse
KC, Good report. Just one question. The Fix Asset at RM570 Million. Huge !! How many years is the depreciation base on? 5, 7, 8 or 10 years?
I am no accountant. I think PPE life span probably 5-10 years? For London Biscuits, I doubt the life span or the depreciation method matter as they buy and sell huge amount of PPE every year. So there will be huge amount of capex and add back of depreciation to make cash flow from operations pretty, but persistent negative free cash flow, and hence persistent right issues and private placement, and of course continuous borrowing every year. A very interesting management action indeed.
2015-02-06 00:17
The just announced quarterly results was so poorly prepared that we can%27t see how its profit and especially cash flow comes about. %0A%09%0AAgain reduction in profit is one thing. How is its cash flow%3F Does cash flow from operations results from heavy depreciation write back%2C but again high capital expenses resulting negative free cash flow again. %0A%0AIt doesn%27t even tell you what the capital expenses is. Is this an acceptable quarterly report%3F
2015-02-27 20:01
kcchongnz why are we talking about London Biscuit again %3F%0A%0AI sick of the left over rice...
2015-02-27 22:29
Posted by fortunecheat > Feb 27, 2015 10:29 PM | Report Abuse
kcchongnz why are we talking about London Biscuit again %3F%0A%0AI sick of the left over rice...
Reflection Is the Most Important Part of the Learning Process
"We do not learn from experience ... we learn from reflecting on experience." John Dewey
It is also important to keep on reminding oneself what has gone wrong in an investment; otherwise he will continue to make mistakes in the future, endlessly.
By the way, it is not my responsibility to tell you what you want to hear, is it?
2015-02-28 05:09
The just announced quarterly results of London Biscuits was so poorly prepared that we can't see how its profit and especially cash flow comes about.
Again reduction in profit is one thing. How is its cash flow? Does cash flow from operations results from heavy depreciation write back, but again high capital expenses resulting negative free cash flow?
It doesn't even tell you what the capital expenses is.
Is this an acceptable quarterly report?
What is hiding behind the closet?
London Biscuits is one of the poorest performance and corporate governance company. That is why it can be used as a text book case study in a MBA Finance course.
2015-02-28 05:15
thank you for sharing your thoughts and knowledge.its good to be able to refer back to especially in current market condition.feels like reading one of howard mark's memo.
2017-08-18 22:16
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
inwest88
KC - once again superb analysis. Dissecting FA from a different perspective, not the conventional way. It's no surprise that more people are willing to be coached by you.
2014-09-20 21:10