kcchongnz blog
V.S Industry Berhad: A No-Brainer Investment? kcchongnz
“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 
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
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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Discussions
11 people like this. Showing 50 of 157 comments
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
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
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
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
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
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
I 100% agree with your statement that Sohai followed Koon Koon and went Holland...lol
2015-05-25 08:33
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
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
Sohai n asshole followed Koon Koon and went Holland...pls check if you qualify so....lol
2015-05-25 08:36
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,
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..u dah makan cili dan u dah rasa pedas nya...ooohh rasa nya hebat ke?
2015-05-25 08:39
I am free, I am not BN...I dont like the way Koon Koon cari makan in i3 only
2015-05-25 08:40
amboi..u had laosai ke? tak boleh tahan pedas cili ke?? baby weight ke? bukan taraf heavy weight ke??..
2015-05-25 08:43
Aiyo,,dont be childish lah...u r Suntzhe, not 3 years old boy...no point to argue like that
2015-05-25 08:45
murali, u jangan lah berlagak sebagai "3 year old boy" lah...ni untuk kebaikan anda
2015-05-25 08:47
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
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
Though I like him very much I just cant stand his PR job for the old man...sori...
2015-05-26 08:41
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
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
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
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
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
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
Dear moneyface88,
Here is my response to you.
http://klse.i3investor.com/blogs/kcchongnz/78867.jsp
2015-06-24 07:36
Sifu KC, do you have anymore No Brainer investment to recommend ? I will listen to you.
2015-07-14 13:15
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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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