Art of Investments


Publish date: Thu, 25 Feb 2021, 01:43 PM

Its results season again and one company which reported their results yesterday caught my attention and left me stunned at current valuations.

The name of this crazily undervalued gem is TEXCHEM.

Everyone can relate to TEXCHEM since they own the Sushi King brand in Malaysia. At the share price of RM0.735 TEXCHEM is trading now, it is like paying half the valuation multiples of BJFOOD for the Sushi King business and every other business in TEXCHEM (they have a few other very profitable divisions) is free! The undervaluation is so ridiculous, it is a matter of time before this stock explodes like how Focus Point exploded. TEXCHEM used to be a darling stock last time when Sushi King was doing very well. The Sushi King business then had problems and Texchem's share price started falling. But now, they have been closing the underperforming Sushi King outlets and have successfully turned around the business, making RM6-7 million in profit per quarter! 

What was the share price of Texchem previously when Sushi King did very well? It was about RM1.60. Also when TEXCHEM reported profits last time, they paid 10sen dividend every year! With the profits they are earning now, it is definitely a matter of time for TEXCHEM to resume paying that 10sen yearly dividend. At the share price now of RM0.735, that would be a crazy 13.6% dividend yield! 

Here is a screenshot of the quarterly profit TEXCHEM reported yesterday:


Also, here is the graph showing the share price of TEXCHEM last time when Sushi King was doing well:


TEXCHEM has a few businesses but only 3 contribute significantly to the group while the rest are negligible. The 3 are restaurant, industrial and polymer.

For restaurant, everyone knows what Sushi King is. Sushi King was glorious last time before starting to see profits declining after they expanded too much and opened too many outlets. Today, Texchem successfully turned around the business and Sushi King is making a profit of RM6-7 million PBT per quarter.

For industrial division, TEXCHEM does trading of industrial chemicals, resins and textiles. This is exactly the business that Warren Buffett spent billions buying recently as he is betting on commodity prices to increase significantly and generate big profits for commodity traders. This division has been making a profit of about RM4 million PBT per quarter.

For the polymer division, TEXCHEM mainly manufactures plastic parts for the semiconductor and tech industries. Both of those industries are experiencing booming business as you can see from the earnings of the semiconductor and tech companies. The high demand explains the increase in PBT from RM4.5 million in 3Q20 to RM6 million in the 4Q20 results released yesterday.


How to value Texchem?

The restaurant business is very easy to value. We just have to use BJFOOD's valuation multiple since BJFOOD is also in the F&B business. Annualising BJFOOD's most recent quarterly profit of RM11 million and with their market cap of RM589 million now, BJFOOD is valued at 13x PE ( 589 / 11 x 4 ).

With a PBT of RM6 million or RM4.5 million PAT per quarter for TEXCHEM's restaurant business, this comes up to a yearly net profit of RM18 million. 

The restaurant business itself should be valued at RM234 million ( 18 x 13 ). What is the market cap of Texchem now? It is only RM91 million! And we have not even valued the other businesses of TEXCHEM!

For the industrial division, we can use Samchem and Nylex as comparisons. They trade at 7-9x PE. With a quarterly PBT of RM4 million and PAT of RM3 million, the industrial division earns a net profit of RM12 million per year. At 7x PE, the industrial division is worth RM84 million.

For the polymer division, there is no pure plastic injection moulding player listed on Bursa. All the EMS players like ATA IMS, VS, SKP do plastic injection moulding but they also do assembly. The EMS players are now trading at more than 20x PE but this may be too high to use since their revenue is in the billions while TEXCHEM's polymer revenue is only about RM240 million per year. A 70% discount to their multiple of 20x is reasonable. With a quarterly PBT of about RM5 million and PAT of RM4 million, the polymer division earns a net profit of RM16 million per year. At 6x PE (70% discount to 20x PE multiple), the polymer division should be worth RM96 million.

In total, TEXCHEM should be valued at RM414 million ( 234 + 84 + 96 ) or RM3.34 per share! Once TEXCHEM starts paying out the normal 10sen dividend per year, a share price of RM3.34 gives you a 3% dividend yield and that makes sense (similiar to Focus Point's dividend yield now). At today's share price of RM0.735, the dividend yield will be 13.6% and it makes no sense at all.

The undervaluation of TEXCHEM is too extreme and it is a matter of time before the share price goes up by 4-5x like how Focus Point did.


UPDATE: Since recommending this stock at RM0.735, the share price has nearly doubled to RM1.30 now and I would suggest that you do not be greedy and take profit at these levels.


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