INVESTMENT MERIT

Consumer stock with strong earnings track record. Yee Lee Corporation Bhd. (“YEELEE”) is a small cap consumer stock with a clean track record of 20 years of profitability since its listing in 1993. In addition, the company’s net profit has grown at 5-year CAGR of 16% to RM22.0m in FY12. We reckon that its strong earnings growth in the past was due to the evergreen demand for its consumer products such as cooking oils, margarine, shortening and corrugated  paper cartons.

Deeply undervalued.  The company is currently trading at 7.2x trailing 12 Months Historical (“T12MH”) PER and this is at a 26% discount against its peers, which trades at an average Trailing 12-month PER of 9.7x–14.2x. In addition, YEELEE is trading at only 0.65x of its book value of RM1.70. We believe that the discounts are not justified due to its superior earnings growth prospect and improved balance sheet.

Q13 earnings surge 137% YoY to RM8.35m. The strong earnings growth was caused by the margin expansion at its manufacturing division and a turnaround in its trading division (which registered a PBT of RM3.8m against  a loss before tax of RM0.4m last year). The margin expansion was due to better olein margin. We think this should be due to its lower input cost (CPO) and stable selling product price (cooking oil).

Trading Buy with TP of RM1.50.  We value YEELEE at RM1.50 based on a Fwd. PER of 9.0x on its FY13E EPS of 16.7 sen (33% growth YoY). YEELEE is a net beneficiary of low CPO prices and the trend should persist for FY13 as we expect CPO prices to decline 10% YoY to RM2500/mt in FY13. The turnaround in its trading division is another catalyst, which should not be underestimated. Our 9.0x Fwd. PER is in line with the current small-cap stocks' average Fwd. PER.

SWOT ANALYSIS

Strength:  Strong earnings track record with no historical loss since its listing.

Weaknesses:  Margins are affected by volatile CPO and other vegetable oil prices.

Opportunities: Turnaround in its trading division should enhance the overall group profit in the long run.

Threats: Low barrier to entry for the cooking oil business. However, its established brand in the cooking oil market should mitigate this.

TECHNICALS

Resistance: RM1.20 (R1); RM1.38 (R2)

Support: RM1.04 (S1); RM0.91 (S2)

Comments: Watch for a breakout above the crucial RM1.12 resistance which would signal a continuation towards the short-term target @ RM1.35.

Source: Kenanga