copied from kcchongnz post - http://klse.i3investor.com/servlets/forum/900312629.jsp for my reference....

Whether it is economic boom or bust, people are unable or unwilling to cut out of their budgets on essential foods regardless of their financial situation. The demand of consumer staples are relatively constant, regardless of their price. Hence consumer staples stocks offer an attractive investment for investors seeking slow and steady growth. 

Table 1 at the appendix shows some of the mid and small capitalized consumer staples stocks listed in Bursa. Their past year growth, profitability and efficiencies as well as their market valuations are tabulated as shown. Which of them are great consumer staples companies worthy of investing? 

Zhulian has the fastest growth last year with revenue and net profit growing at 26% and 23% respectively, followed by Apollo and Haio, both also experienced double digits growth in both revenue and earnings. Apollo in particular, has its net profit improved by 47% last year. 

London Biscuits, however encountered contraction in its revenue and net profit, quite badly in a contraction of 23% of its bottom line. 

In terms of profit margins, Zhulian again excels with the highest margins, 26% in net profit margin. The high profit margins in turn boast up the return of equity (ROE) and return on invested capital (ROIC), 26% and 39% respectively which is way above its cost of capital. Its cash return (FCF/IC) is also remarkable at 27.5%. Zhulain is obviously enhancing its shareholders value greatly with these numbers.

Haio follows closely with respectable ROE and ROIC at 17.8% and 27% respectively. Its cash return is also as good at 27%. Apollo also did well with ROE and ROIC well above its cost of capital. 

YSP, Yee Lee and London Biscuits did not do well with low ROE and ROIC which are below the cost of capitals . The worst performer is clearly London Biscuits with ROE and ROIC of just 4.1% and 5% respectively. It has no free cash flows at all. In fact it never seems to have any FCF for years. Wonder why it should still be in business. 

With the past year growth and the profitability and efficiencies of the companies, I would rank the companies from the best to the worst as the following Table 2: 

Table 2: Ranking of companies 

I would expect the market would give the highest valuation for Zhulian, followed by Haio and the lowest London Biscuits; but does the market do so? 

PE wise, I am indeed surprised that YSP is given the highest valuation with a PE ratio of 14.6, then only followed by Zhulian at 12.8, Haio etc as shown in Table 2 below. London Biscuit as expected ranks the lowest. 

Table 2: PE ranking 

But a better valuation should be based on enterprise value over earnings before interest and tax (Ebit) for valuation of the whole firm, rather than just the equity. This is because some firms have low debt or even debt free such as Zhulian and Apollo, whereas Yee Lee has considerable amount of debt. London Biscuits’ debt is huge. 

It is a real shocker here that London Biscuits, being the worst in terms of growth, profitability and efficiencies, is given the highest valuation in term of EV/Ebit of 11.4. In fact those companies with poorer performance are given higher valuations than those better ones as shown in Table 3 below: 

Table 3: Ranking based on EV/Ebit 

So which company do you favour as an investment? 

KC Chong (11/7/13) 


Table 1 Appendix