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Biscuit From Holland that chokes kcchongnz

Publish date: Sun, 01 Dec 2019, 07:30 PM
This a kcchongnz blog

[London Biscuits writes off receivables of RM363 million

Dear KC,

You saw this happening years ago during our class. i m one of many that benefitted from your FA approach. Thank you again!]

The share price of London Biscuits was practically staying at about 60 sen for the last few years from 2015 and dipped below 40 sen in April 2018. It mystically rose back to 60 sen on February 8, 2019, and then plunged to 5 sen upon announcement of its default of a mere RM9m bank loan. Owing to this, London Biscuit had gone into the PN17 status, and a liquidator has also been appointed. London Biscuit’s share price rose up again to close at 9 sen at the end of November 2019. Figure 1 below shows the share price movement of London Biscuit in the last 5 years.

Figure 1: Share price movement of London Biscuit

London Biscuit announced its final quarter result for FY2019 on 30th November 2019. Owing to an impairment loss in Receivables of a whopping RM363m, it made a loss of RM443m, or RM1.52 per share. This wiped up its equity completely, resulting with a deficit of 25 sen per share. London Biscuit has gone to Holland with a one-way ticket.

Could this be foreseen years ago? Could investors avoid huge losses?

Many years back since the year 2013, London Biscuit has been used as a real-life stock for case study in my fundamental investment course on how to identify a lemon in stock. An exercise was given in the course with its 10-year financial statements. I searched the old record and here is a detail analysis from one of the course participants. This is an interesting to learn so that one will not repeat it.

Cash Flow Analysis for London Biscuit

The Statement of Cash Flows is arguably the most important of the three major financial statements. It tells us how much cash a company is able to generate from its operating, investing and financing activities.

Cash flow from operating activities

The cash flows from operating activities is the more important of the three cash flows statement as it shows how much cash inflow and outflow from operating its core business. Please note that we should look at the “net cash flows from operating activities”, or CFFO, the last line in the statement, as this as you can see from the statement, it belongs to the equity shareholders, which we use to compare with the net income, which is also the final amount due to the equity shareholders, to be consistent. As share investors, this CFFO is what we are interested in.

Table 4 in the Appendix shows the three cash flows statements of London Biscuit from 2006 to 2016.

The cash flow statements of London Biscuit shows that after adding back depreciation and amortization and other non-cash and non-operating items, and adjust the change in working capital etc., London Biscuit generally has positive Net Cash Flows from Operations (CFFO) close to or above Net Income attributed to common shareholders, except for the year 2011 and 2015 as shown in Table 3 in the Appendix and Figure 1 above. The company experienced a major dip in CFFO when its CFFO plunged into negative RM19.5million in 2011 due to the huge increase in Receivables of 30.3m, increase in inventories of 4.8m, and decrease in Payables of 15.9m.

The company managed to reverse the situation in the following year by successfully collecting the outstanding Receivables and reduction in Inventories and achieved a record high CFFO of RM50.2million in 2012. CFFO returns to a normal level of RM18.4million in 2013 and 12.1m in 2014, about the Net Income.

However, CFFO for the financial year 2015 plunge into huge deficit again of RM29.4m. This is due to the huge and abnormal 72.6%, or RM79.3m increase in trade and other receivables as shown in the balance sheet, when the revenue increases by only 12% from 2015 to 2016. It has not enough cash from the operation even to fund its operating costs. Note we haven’t even talked about where to find money for its persistent huge annual capital expenses yet. Fortunately, CFFO in 2016 improves to positive RM21.6m due to a little improvement in less increase in Receivables.

Let’s have a look at the Cash Flow from Investing Activities (CFFI) and see how the company spends money in its investment activities.

Cash flow from investing activities

Table 1: Expenses on property, plant and equipment

Table 1 above shows that Company seems to be playing a game in buying and selling of property, plant and equipment (PPE} throughout the years. For example, in 2010, the company spent a whopping 47.7m in purchasing of PPE, and then followed by selling of 16.4m of PPE in 2011. It appeared that it has been doing it all the time. It purchased a whopping 91.7m in PPE in 2012 when it had the highest level of CFFO, again sucking huge amount of cash resulting huge negative FCF of RM41.5m. And what kind of net income resulted in the following years? A meager net income of average of 16m in the following years, with 91.7m in capital expenses?

In the year 2015, the situation worsens with even CFFO plunging to an incredible huge negative CFFO of RM29.4m, due to the sharp increase in receivables as you may recall from the previous exercise on its balance sheet, and yet the company spent another RM21m in purchase of PPE, resulting the highest negative FCF, or cash flowing out, for the last 10 years of a whopping RM49.3m!

In the year 2015, the company earned RM18.2m, but huge cash amount of RM49.3m came out from the company. This is not the only year of exception as it has a number of years similar like this. Can you see the elephant in the room?

Most of the time, its net capital expenses are way higher than its net income. As shown in Table 1 above, in the last 11 years, it has acquired a total PPE of RM388m, during which it only made a total net income of just RM171m, or a total CFFO of just RM166m, both less than half the amount it spent on capital expenses alone. It also sold almost RM100m in PPE.

Is biscuit making its core business or buying and selling of PPE its core business? How come Co A in my previous analysis that Apollo Food only required a faction of London Biscuit’s PPE to do similar business and have much better income and cash flows?

In the last 11 years, the company was bleeding cash like there is no tomorrow. A total of RM125m cash flowed out from the London Biscuits shown in Table 1 above, despite it making “profit” every year. Still can’t see the elephant in the room?

Free cash flow (FCF) is the lifeblood of the company. It provides the fund for the company  to pay dividends, buy back shares and reduce debts. Without positive free cash flow, the company will have to resort to asking money from shareholders in the form of right issues, and increasing debts, even for the normal operations of the company. That is exactly the dilemma of London Biscuit,  and what the management has been doing; issued more shares and diluting earnings per share, and borrowing more and more as you have seen in the previous exercise of its balance sheet.

Not only that, the management of the company is also fond of investing in other businesses they were not familiar with and resulted in heavy losses. For the last 11 years, it has spent 50m acquiring subsidiary and associate companies, and subsequently dispose of at 27m, causing a loss of 23m as shown in the cash flow in investing activities.

Cash flow from financing activities

The persistent negative free cash flow is why the company has to get more money from shareholders and banks every year as summarized in Table 2 of cash flow from financing activities below.

Table 2: Cash flow from financing activities

With negative FCF, London Biscuit must continuously borrow money from the banks. Net borrowing has increased by 180% from RM91m in 2006 to RM255m in 2015, down a little to RM204m in 2016. This is despite that share capital has also increased by a large amount of a total of RM116m to RM187m now as shown in its balance sheet. It is unable to pay dividend from internally generated fund. Dividend has decreased hugely from 15 sen per share 11 years ago to nothing now. With poor FCF, London Biscuit has to resort to continuously asking more money from shareholders from rights issues or private placements and as a result increased in the number of shares, and diluting earnings, and borrowing more from banks to carry on its business with increasing amounts as shown in Figure 2 below.

This obviously is a not a good business to get involved in. But how come Appollo Food with the same business can do so well as shown in the previous post in our blog? Hence, it is not the poor business they are in, rather it is the capability and credibility of the management.

Net Cash Flow

Table 3 below shows the summary of cash flows.

Table 3: Net Cash Flow for 2016

Table 3 above shows there is a net cash surplus of 32.2m for 2016, mainly due to additional borrowings.  As investors, we want to see cash surplus and increase in cash in balance sheet from cash generated from the ordinary operations, and not from additional money fork out by themselves, or additional borrowings.

With cash at the beginning of the year of 13.756m, at the end of the year, cash is increased to RM45.963m. This includes RM22.047m from bank overraft. The cash and cash equivalent in the balance sheet is RM23.916m.


Earnings is important. But earnings, or earnings growth is useless if it is not converted to hard cash. Even good CFFO is deceiving as shown in LonBis’s case, as it constantly requires high capital expenses which “eats up” its cash.

Without free cash flows, a company just doesn’t have internally generated fund to do its business, and have no choice but to resort issuing more shares and hence diluting earnings per share, or continue to borrow money and resulting the company under higher bankruptcy risk.

When in doubt with the capability and credibility of the management in managing its cash flow, just walk away. This is the kind of lemon an investor must avoid at all costs in order not to jeopardise his overall investment return. This stock of this company is one I won’t touch with a ten-foot pole.  

Appendix: Table 4: Cash flows statements of London Biscuit


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2 people like this. Showing 28 of 28 comments

enigmatic ¯\_(ツ)_/¯

"Earnings is important. But earnings, or earnings growth is useless if it is not converted to hard cash."

2019-12-01 23:34

Haw Liao

too many other biscuit brands in the market hence many competition...

no business moat

2019-12-02 09:53


Holland Biscuit

2019-12-02 09:54


At least Notion got fire incidents n compensation fm Insurance to help...lol

2019-12-02 10:14


Posted by i3lurker > Dec 1, 2019 11:46 PM | Report Abuse
Those cash just went out the door from purchase of PPE, property plant and equipmemt
latest one just before collapse was RM50 million (from memory)
its quite simple
you had actually converted a very simple case
to an extraordinary complex case with unnecessary data, padding and complex interpretations

Thee are two types of personalities in decision making; one using system 1, the easy and lazy type of cognitive bias to jump into conclusion without using his left brain, the other uses system 2, think and analyze in detail first before making a conclusion.

Most people use system 1, which is natural for most people as they are human. Those using system 2 are rare.

To each his own.

2019-12-02 10:29

鹅麟依旧≈ 扫地僧

Ohh my god... Choked my sifu Master Kc chong???! Drink heneiken la....

2019-12-02 11:53

鹅麟依旧≈ 扫地僧

Sifu chong..... Holland waffer so nice why u Kena chocked? https://en.m.wikipedia.org/wiki/Stroopwafel

Cannot be

2019-12-02 11:55


market price RM15.00 per kg for scrap metal or around there plus minus

2019-12-02 11:57


Posted by Haw Liao > Dec 2, 2019 9:53 AM | Report Abuse
too many other biscuit brands in the market hence many competition...
no business moat

Many listed biscuit companies such as Apollo, Hup Seng, etc are doing ok. None so bad as London Biscuits.

2019-12-02 14:05


at the first place whether any of the purchase of machinery is indeed for their purpose?. hope no repeat of Megan Media Holdings Bhd case.

2019-12-02 14:17

Choivo Capital

Owners Earnings!

2019-12-02 15:18


Many years ago whereiszemoola warned about this stock....

2019-12-02 15:42


finally boils down to integrity of Directors
no integrity ==> surprise RM400 million impairments wipe off everything

now only worth RM15.00 per kg scrap iron value

I think biscuits are also sold by weight.

2019-12-02 15:45


"very simple
PPE just took out RM50 million (last purchase)
and company just collapsed"

Very simple?

Many companies invest in PPE, tens of millions a year is very common, and many of them made good profits after that. London Biscuits also spent RM92m in 2012 for PPE. Why didn't it "just collapsed" then?

Analysing a company's cash flow and understanding it is easy meat, if you know. Of course if one knows nothing about financial statement, then it is complicated. He may just treat it as complicated "theories", instead of practical investing.

Only businessman knows about business and others don't? I know many businessmen don't know about managing businesses. That is why most businesses fail.

To each his own though.

2019-12-02 15:54



its not too late for you to learn

2019-12-02 16:20


Posted by i3lurker > Dec 2, 2019 4:06 PM | Report Abuse
have you heard of Monte Carlo Simulations?

Of course I know what Monte Carlo Simulations are.

But here is wrong place to boast about it. It is also useless in investing.

The useful investing skill is to know some basic accounting to understand how to read and understand financial statement. It is definitely not the useless MCS, or Mong Char Stuff

2019-12-02 16:32


you are correct as usual of course!!


2019-12-02 16:33


Posted by i3lurker > Dec 2, 2019 4:33 PM | Report Abuse
you are correct as usual of course!!

Well, did I say that anywhere?

Just like to have an intelligent discussion with you.

By the way, who talked about "complicated theories" here?

Reading and interpreting financial statement or MCS?

2019-12-02 16:38


i3lurker has left a new comment on your post "Biscuit From Holland that chokes kcchongnz":
you have only 11 columns up there
to interpret anything out of those 11 columns is just irresponsible
we interpret 20,000 cash flows minimum and usually more

I thought you prefer simplicity, just because "50m taken off for PPE" or something like that?

Why now 20,000 cash flows minimum?

What "20000 cash flows minimum" you were doing ah?

2019-12-02 16:44

Philip Greta

Well written and appreciated article.

Jumping over 10 foot poles indeed.

2019-12-02 18:01


Malayan flour also ?

2019-12-02 18:46


Posted by Philip Greta > Dec 2, 2019 6:01 PM | Report Abuse
Well written and appreciated article.
Jumping over 10 foot poles indeed.

It is human nature; after spending time trying to share something, feeling dejected kena hantam, and happy when appreciated.

Thank you.

2019-12-02 19:50

鹅麟依旧≈ 扫地僧

How are u Icon8888 boss?

How are u Master Kc chong?

2019-12-02 20:37


It is obvious governance issues, manipulated so obvious also no action from any authority to take a look or investigate?

2019-12-02 23:33


You are right.

However, you know, what QL was listed years ago, I look at the accounts and I had the same doubt. Account receivables were entirely finance by borrowings. So I passed. Surprised, surprised, just missed a 20 baggers.

2019-12-03 10:24


You know, in the early years, if you look at Gillette, the accounts were terrible too. But when Warren bought it, they already had the breakthrough on the blades.

That is the beauty of investing. Much more complicated than numbers.

Always walk the extra mile, check harder.

2019-12-03 10:27


Account is the language of business. We need to see if the language spoken is consistent with the reality of the business.

2019-12-03 10:28


Posted by supersaiyan3 > Dec 3, 2019 10:24 AM | Report Abuse
You are right.
However, you know, what QL was listed years ago, I look at the accounts and I had the same doubt. Account receivables were entirely finance by borrowings. So I passed. Surprised, surprised, just missed a 20 baggers.

That is why some people don't treat things as so simple like those using "system 1" type of thinking as above. I personally prefer using "system 2" in more detail analysis, just like you do below,

Posted by supersaiyan3 > Dec 3, 2019 10:28 AM | Report Abuse
Account is the language of business. We need to see if the language spoken is consistent with the reality of the business.

2019-12-03 13:48

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