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V.S Industry Berhad: A No-Brainer Investment? kcchongnz

kcchongnz
Publish date: Tue, 19 May 2015, 08:47 PM
kcchongnz
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This a kcchongnz blog

Mr Chong, V.S Industry share price has been rising, very hot stock. Is it a NBI?”

A new participant of my course asked me this. Didn’t know much of this company except that the share price has performed very well recently. Ok, let me spend some time on this.

First I look at its past share price performance as shown in Figure 1 below.

$*%&#@, I missed it. Its share price has gone up by three times a year ago from about RM1.50 to RM4.11 at the close today, up by 22 sen today! I missed a No-Brained Investment, or NBI, didn’t I? I must jumped in now, or otherwise I will miss the train, the last train, again!

But wait, just cool down and be rational. Think first, is V.S really a NBI at this price as described here?

http://klse.i3investor.com/blogs/kcchongnz/76694.jsp

For a NBI, we look at cash. No cash comes in from the business, no talk. That is what most successful businessmen think, don’t they? Let us look at its cash flow in Table 1 below.

Table 1: Cash flow of V.S

Year

2014

2013

2012

2011

2010

CFFO

46368

19666

34111

94277

49046

Net Capital expenses

-52371

-39639

-40360

-43268

-20578

Free cash flow

-6003

-19973

-6249

51009

28468

 

What happened to the last three years? There aren’t any cash left after spending money in capital expenses. Cash yield calculated from FCF/Price is negative, or “Not Applicable”. So how?

As businessmen, they want to extract cash out from the business, or use the cash from the business to grow the business to make more cash. They aren’t happy that you tell them they will make a lot of “earnings” but have to continuously put in more money from their own pockets as the cash earned is not enough for capital expenses. I don’t know about others, but my business friends think this way.

But the investment banker said we should buy V.S. This is what RHB Investment Bank wrote.

We  recently  met  with management  and  came  away  feeling  positive  on its  robust  earnings  outlook,  driven  by  higher  volume  growth  from  its key customers, particularly Keurig. Reiterate BUY with a revised TP of MYR4.50 (from MYR2.95), 45.2% upside. The company will produce the third model of coffee machine in 4QFY15.  It expects double-digit sales volume growth for the new model vs the outgoing model. 

Maintain BUY with a revised MYR4.50 TP.  In  view  of  higher  sales volume  growth  from  its  key  customers,  as  well  as  the  recent strengthening  of  the  USD  against  the  MYR,  we  raise  our  recurring earnings forecasts for FY15-17 by 55.6%-61.9%. Accordingly, our TP is lifted to MYR4.50 (from MYR2.95), based on an unchanged recurring FY16 P/E of 10x. With a minimum payout policy of 40%, it also offers a respectable dividend yield of 5.2-6.5% for FY15-17F.”                RHB

Yes, they did. Buy faster, it will go up to RM4.50. It is already RM4.11 now. They aren’t wrong. Not yet.

Let us look at Table 2 below and see how true what is mentioned by RHB.

Table 2: Growth in revenue and income

Year

2014

2013

2012

2011

2010

Revenue

1715082

1163911

1201992

1026818

800170

Operating income

57963

59346

66788

67337

47842

Net Income

46622

39967

32313

35488

25350

EPS, sen

28.8

24.1

18.7

22.9

14.5

 

“Higher sales volume growth”. This is definitely true by any standard as the sales grow by more than 100% in four years, or a compounded annual growth of 21% from 800m in 2010 to 1715 m in 2014.

But why no mention about profit growth? Is there profit growth?

In 2014, the Net Income was boasted by a tax credit of RM4.6m. Without that, it is just the same as 2013. In 2013, a profit of RM28.4m was booked from an obscure item “Effect of acquisition of a subsidiary”. What was that? Mind you this is booked as part of the operating income, not as a one-off extra-ordinary item after the Net Income. Without that, net profit in 2013 would have dropped by more than 60%. Actually he more representative profit is the less tinted operating profit. Do you see any trend of operating profit growth over the years?

Umm, maybe I am not an accountant, I can’t comprehend it. Or maybe non-accountant can easily be deceived.

So high revenue growth, but where is the profit growth? So is revenue growth the Holy Grail, and profit growth is immaterial?

Actually I don’t give a damn to growth, if the quality of growth is poor. A quality growth is one which the return on capital is higher than the cost of capital. What do you think is the cost of capital? To put in simply, if you want to put your money in a business, which has high inherent risk, what is your required return? For me, I would want a return of at least 10%. For V.S, my minimum is 12%.

Let us look at the return on capitals for V.S last few years in Table 3 below.

Table 3: Return on Capitals

Year

2014

2013

2012

2011

2010

ROE

7.3%

6.7%

7.9%

8.7%

6.4%

ROIC

6.7%

5.2%

10.4%

11.2%

7.4%

 

Are you happy with the return on capitals of V.S in its business at 5% to 7%? I don’t. Far from it.  Notice that the trend of return on capitals is actually deteriorating quite badly.

What is the effect on the company with this no-growth profit, low return on capital, no cash business? Let us look at its balance sheet.

Table 4: Balance sheet

Year

2014

2013

2012

2011

2010

Total Assets, TA

1551689

1404443

850986

772166

754179

Total common equity, E

526160

479646

410491

393609

374587

Cash and cash equivalent

123464

97288

58680

71853

67364

Total borrowing

409791

361757

138008

134829

170044

Net borrowing

286327

264469

79328

62976

102680

Trade Account Receivables

447550

410526

317572

203250

195821

Inventory

269794

177760

104577

87227

77380

 

Look at how net borrowing increasing unabated throughout the years from 63m in 2011 to 286m in 2014. Look at how the inventories increased even faster than the growth in revenue. Have they really sold so many coffee makers, or just kept in some subsidiary companies or shops, as they have spent so much money in capital expenses in the tune of RM50m last year as shown in Table 1 above.

Not only we don’t see cash from the high growth in sales, we see company kept on borrowing like no tomorrow. What is happening?

Unfortunately few people pay attentions to good comments from a young man below:

“Posted by lmenwe > Feb 24, 2015 09:52 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

Einhorn had cut his position in Keurig but it is still way too early to judge whether Keurig is a fraud. Do you know how many years Einhorn took to prove he is right in the past? Try to read books and articles related to Einhorn. I know Keurig had been performing for years but please remember price doesn't equivalent to value. Remember John Paulson? Before subprime he also lost his pant but once subprime happen he made tonnes of money. “

 “Posted by sense maker > Apr 5, 2015 12:09 PM | Report Abuse http://cdn1.i3investor.com/cm/icon/trans16.gif

No sooner had I written about my concern over VS's rather big net debt position than it announced a cash call.”

Yeah, I missed making big money from V.S a year ago. I also missed buying KNM at 40 sen two years ago and its price ran up to more than RM1. But I didn’t miss buying it 8-10 years ago when its adjusted price was above RM10. I missed buying Hibiscus also at RM1+ 2 years ago and then it ran up to RM3.00 before Christmas 2013, but boy, I didn’t miss buying it at RM3.00 and it is now 77 sen. Likewise, London Biscuits which went up from 60 sen to close to 90 sen now. I didn’t miss it when it was RM3.00 a few years ago. Guan Chong, Ivory, Smartag, Amedia etc. all exhibit the same patterns, companies seemingly with good profit but very poor cash flows and all prices manipulated by insiders and syndicates.

http://klse.i3investor.com/blogs/kcchongnz/63777.jsp

So serious I have nothing to regret about. I always tell myself, “When everyone is making money in the stock market, and I don’t, it is alright.” My motto is, I presume all businessmen also think alike:

“No cash no talk.”

Look at Enron’s four years financial performance and cash flow from 1997 to 2000 below with its net income galloped by 832% from $105m to $979m before it went belly up. This was one of the most talked about corporate scandals in the US in 2000s. Focussed on PE ratio, Wall Street sent Enron’s stock price soaring from about $30 to $100 from 1997 to 2000. However, from 1997 to 1999, the company burned all its revenues and required an additional $3b of capital expenses just to open its doors.

Table 5: Enron cash flow

Year

1997

1998

1999

2000

Net Income

105

703

893

979

D&A

600

827

870

855

Non-cash charges

-65

-233

-1000

1769

Capital expenses

-2000

-2000

-2000

-2000

FCF

-1360

-703

-1237

1603

 

 

 

 

 

Few businesses can survive long without the ability to generate cash.

But putting cash aside, does V.S that compelling an investment as suggested by the investment bank?

our TP is lifted to MYR4.50 (from MYR2.95), based on an unchanged recurring FY16 P/E of 10x”

Why based on 10X PE, why not 5, 15, 20, or 30? Is PE a good metric when V.S has so much debts?

At RM4.22, the present PE ratio is 14 and enterprise value is 21 times operating income. Is that cheap?

 

Conclusion

I try to train myself to look at business at the businessmen’s point of view, i.e. Cash is King, and No Cash No talk. So V.S obviously doesn’t fit into my category by miles.  Yeah I know, I have missed it. But again I always try to console myself, “When everybody makes money and I don’t, it is ok”.

I have put up this thing on my wall

"A friend of mine decided to get into the stock market and called his broker. “Buy me 10000 shares of XYZ.” And sure enough he bought and the price went up. He says, “This is great. I’m making money.” He picks up the phone three days later. “Buy me another 10000 shares.” The price goes up again. And this goes on for weeks and the price is mounting and he’s building a huge block of stock in his portfolio. My friend says, “You know, I have gotten to the point where I don’t want to be too greedy. I want to sell.” He picks up the phone, once again to call his broker. He says, “Jim, I’ve had enough. I want you take all my stock and sell it.” The broker responds, “To whom?”

 

For personal discussions, please contact me at ckc14invest@gmail.com

 

KC Chong (20th May 2015)

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11 people like this. Showing 50 of 157 comments

kcchongnz

Posted by murali > May 24, 2015 09:05 PM | Report Abuse

Kc,do u think we screw the old man coz we followed his calls n lose money?

No, the "You" in my comment is not you. I do think you have made some good comments. but I think you are out of way condemning a man who has contributed a lot to the society.

As your previous comment that I don't bodek Mr. Koon, you are right as I have my own philosophy which is totally different from Mr. Koon. You can read and understand my philosophy which I have expressed in my 125 postings in my blog in i3investor, and many more before those.

2015-05-24 21:14

murali

Do u think its alright for him to promote stocks at high prices again n again n at the same time selling them quietly?

2015-05-24 21:29

Ooi Teik Bee

Mr Koon recommended VS to me, I do not want to claim credit for this stock. I just help him to do a FA report and also TA report.
I know it better than anyone, no point to dispute it.
Thank you.

2015-05-24 21:55

sunztzhe

Murali, So u followed uncle Koon's advise and make losses in the stocks that u have mentioned...so now u r blaming uncle Koon for your losses...and just because u followed uncle Koon advise , u r innocent and uncle koon is guilty..

In the first place, do u as a person take full responsibility, be accountable and take ownership for decisions you make in your life... If the question is a bit vague for you , let us focus on your investments in uncle Koon recommended stocks...

Did uncle Koon buy the stocks on your behalf or u buy the stocks yourself?

If u had decided to buy the recommended stocks, do u take 100% responsibility, be accountable and take ownership for the decision u made in buying stocks which uncle koon recommended??

2015-05-25 08:10

murali

Only sohai will follow Koon Koon's calls....

2015-05-25 08:27

sunztzhe

So Sohai u confirmed u had made losses...hahahaha

2015-05-25 08:28

bintang21

please be fair with murali and the readers here, most of us are NOT that experience or smart as required or expected

Constantly, now and then, I come across this state "do u as a person take full responsibility, be accountable and take ownership for decisions you make in your life..."

uncle KOON is not nobody, he is a successful businessmen, he is influencial like tun mahathir,

person with such status when giving advice need to be more careful

unless you are not sifu, nobody like me, bintang , not influential then I follow your call, then I am stupid , nobody to blame ,


uncle Koon,
please less recommend , keep your recommendation to yourself.
I am also not very happy when you ask people to borrow money to invest.
I lagi tak happy you recommend us to buy at high and yet you already bought at low

2015-05-25 08:28

murali

U think those people like us who screwed him coz we followed his calls and go Holland? Infact, I believe 99% of those who screwed Koon Koon 99 never follow his calls

2015-05-25 08:30

sunztzhe

So Sohai u confirmed u had made losses... so u confirmed to yourself and everyone here in this forum u indeed is a sohai beyond any doubt whatsoever...hahahaha

2015-05-25 08:30

murali

Sohai followed Koon Koon and make losses..yes...u are right

2015-05-25 08:30

murali

Sunzthe, u are just another asshole who like to PLP...

2015-05-25 08:31

sunztzhe

So u r indeed a sohai..u followed uncle koon and made losses...

2015-05-25 08:31

murali

I 100% agree with your statement that Sohai followed Koon Koon and went Holland...lol

2015-05-25 08:33

sunztzhe

So u r indeed a sohai and u made yourself to be a asshole as well...congratulations on your achievement...hahahaha

2015-05-25 08:33

bintang21

may be it is better, next time uncle do not use his real name to advise

use my name bintang less 21

if you follow, then you are stupid because you don't do homework

2015-05-25 08:34

murali

If i am not mistaken U did buy Jtiasa n Mudajaya....lol

2015-05-25 08:35

sunztzhe

so murali..u r an sohai plus an asshole...u feel good now being so???

2015-05-25 08:35

murali

Sohai n asshole followed Koon Koon and went Holland...pls check if you qualify so....lol

2015-05-25 08:36

murali

Siapa makan cili dia akan rasa pedas....

2015-05-25 08:37

sunztzhe

Murali ..u certainly qualify yourself as a sohai and an asshole to the highest degree...congratulations to this stupendous achievement ...hahahaha

2015-05-25 08:38

murali

Haha, feel pedas?

2015-05-25 08:38

bintang21

murali,

you are so smart, your are not cheated by his advice, if as you said 99% not follow , then what is the problem?

I just don't understand?

I think you must be very free or BN people

but I tell you I am PR

2015-05-25 08:39

murali

Go to find that how "Popular" is Koon Koon in I3 lah....

2015-05-25 08:39

sunztzhe

murali..u dah makan cili dan u dah rasa pedas nya...ooohh rasa nya hebat ke?

2015-05-25 08:39

murali

I am free, I am not BN...I dont like the way Koon Koon cari makan in i3 only

2015-05-25 08:40

sunztzhe

eh eh murali, u rasa u amat popular di i3 forum ke? ya ke? betul ke?

2015-05-25 08:41

murali

Haha, dont laosai Sunzthe if cant stand the heat of cili

2015-05-25 08:41

murali

I never claim that lah...i dont call myself superinvestor

2015-05-25 08:42

murali

Most importantly I dont con people in I3

2015-05-25 08:42

sunztzhe

amboi..u had laosai ke? tak boleh tahan pedas cili ke?? baby weight ke? bukan taraf heavy weight ke??..

2015-05-25 08:43

murali

Aiyo,,dont be childish lah...u r Suntzhe, not 3 years old boy...no point to argue like that

2015-05-25 08:45

sunztzhe

murali, u jangan lah berlagak sebagai "3 year old boy" lah...ni untuk kebaikan anda

2015-05-25 08:47

Christensen

I earn a lot from vs
I do not curse anyone
Be happy

2015-05-25 09:03

Ooi Teik Bee

Post removed.Why?

2015-05-26 08:28

Sunkist118

Sir OTB vely deep lor. Rat n Cat, cat catch rat and use machine gun but cannot condemn. Sir OTB is complicated man but I like him and his friend lor. One use cat, the other use machine gun to catch rat

2015-05-26 08:37

murali

OTB is oredi a master grade investment Guru. He knows what he is doing. He knows TA, FA n his "market intelliegence" is good too. That's why he can be the Sifu of the self proclaimed Superinvestor.

2015-05-26 08:40

murali

Though I like him very much I just cant stand his PR job for the old man...sori...

2015-05-26 08:41

murali

I like OTB's way of investment, simple, straight forward,even newbies also can understand....KC way is a little bit more complicated....but good to learn from both Sifu lah...

2015-05-26 08:45

pisanggoreng

OTB,

you missed the most important point

you are good in machine gun so you success

but majority of the investors here believe what sifu say only

do you think is it fair to ask them to use machine gun

if machine gun is that safe as you and you new friend have claimed

and he is more talented than you as you had admitted , why din't him

use the machine gun earlier.

why talk so much "if" after the story

So , I doubt the truth of your story

I also have to reassess your status as sifu

2015-05-26 08:48

pisanggoreng

OTB,

shame on you to have come out with such a statement

2015-05-26 08:50

singkalan

Someone is making sense right now...

2015-05-26 08:55

murali

He doesn't really promote the use of margin ac, unlike the old man...

2015-05-26 08:56

Ooi Teik Bee

Post removed.Why?

2015-05-26 08:57

kakashit

from biz point of view, dun u think that service one particular customer is too risky? what if Keurig pukkai?

Does Keurig has stake in VS like Avago has stake in Inari? To make sure their interest is aligned with yours?

For a big brand, oem's profit is his cost.

Got it? VS's profit is equal to Keurig's cost.

2015-05-27 11:03

Shum Chang Loon

How to get the figure of net Capital expenses and free cash flow in vs ? From statements of cash flows ? Thanks.

2015-05-27 18:52

kcchongnz

Posted by Shum Chang Loon > May 27, 2015 06:52 PM | Report Abuse

How to get the figure of net Capital expenses and free cash flow in vs ? From statements of cash flows ? Thanks.

Yes, from cash flow statement. Do a little addition and subtraction.

2015-05-27 20:21

moneyface88

Hello Mr Sifu KC Chong .... from New Zealand ?

Your article very Keng , very analytical. I have learnt a lot reading this article of yours.
Then got worried and sold my V.S Share then share price moved up strongly.
Today Q2 result announced, not what you have expected, you must be disappointed

How much you charge ah to learn something from you ?
Please tell me so that I can subscribe to your tips

2015-06-24 00:05

kcchongnz

Dear moneyface88,

Here is my response to you.

http://klse.i3investor.com/blogs/kcchongnz/78867.jsp

2015-06-24 07:36

moneyface88

Sifu KC, do you have anymore No Brainer investment to recommend ? I will listen to you.

2015-07-14 13:15

kcchongnz

Posted by moneyface88 > Jul 14, 2015 01:15 PM | Report Abuse
Sifu KC, do you have anymore No Brainer investment to recommend ? I will listen to you.

Posted by moneyface88 > Jun 24, 2015 12:05 AM | Report Abuse
Hello Mr Sifu KC Chong .... from New Zealand ?
Your article very Keng , very analytical. I have learnt a lot reading this article of yours.
Then got worried and sold my V.S Share then share price moved up strongly.
Today Q2 result announced, not what you have expected, you must be disappointed
How much you charge ah to learn something from you ?
Please tell me so that I can subscribe to your tips


Mr Moneyface88,
I can see beaming with joy and boasting your story of success in investing everywhere and to everyone like the lady who had 18 in a Black Jack game, called for a card and got a three as described in my article here:

http://klse.i3investor.com/blogs/kcchongnz/79050.jsp

The purpose of me appending the above link is also kind of advise you to focus on the process rather than the outcome of just a hand of black jack. You seem only know about price, and no value; asking all the time for tips, follow rumours and hot stocks, all the time thinking to be spoon fed, rather than learning something, think analytically, independently, and catch your own fish.

2015-07-14 19:23

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