MUDA HOLDINGS BHD
KLSE (MYR): MUDA (3883)
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
itch
1,178 posts
Posted by itch > 2018-05-03 10:47 | Report Abuse
Guys,
What are your views on this? He does not seemed too excited about MUDA. Read the last parts too. "no reason to believe Muda is relatively undervalued"?
"Perhaps the spike in interest could have been driven by a possible merger and acquisition instead"?
Tong's Value Investing Portfolio
Update: 15 Mar 2018
Value investing requires looking beyond the headline numbers
This week’s article comprises of 2 sections. The first is a lesson on how we can be misled by reported financial numbers, the second on our macro outlook for emerging markets.
Two weeks ago, Muda Holdings reported a set of fabulous financial results for its financial year ended 31 December 2017. Revenue grew from RM1.22 billion to RM1.45 billion, up nearly 19%, but pre-tax profit more than doubled from RM31.5 million to RM65.4 million. Even more impressive, net profit shot up from RM18.8 million to RM58.8 million or by more than 200%.
Its stock price nearly doubled, from RM1.30 pre-results to as high as RM2.47 in less than a month, with analysts universally bullish.
The reasons articulated by management and analysts for the strong performance were that costs fell with the lower price of waste paper used for the paper mill recycling while selling prices for paperboard remained on an uptrend. Demand for its paperboard product, used for making corrugated boxes, will grow as e-commerce takes greater hold in Malaysia. On the other hand, waste paper costs fell due to restrictions on imports imposed by China arising from environmental concerns. This resulted in excess supply outside China.
Whilst the arguments are sound, the actual reasons behind the improved reported financial results has more to do with non-recurring items than the underlying operations of the business, specifically, the net charge and one-off insurance compensation for a fire that occurred at the company’s plant in Tasek in August 2016.
Net loss from the fire totalled RM11.8 million in 2016 and depressed that year’s earnings. As a result, pre-tax profit fell from RM41.1 million in 2015 to RM31.5 million in 2016. In 2017, Muda recognised net compensation claims of RM23.3 million, which accounted for 36% of the year’s pre-tax profit.
Combined, the depressed base of 2016 and the compensation gains in 2017 resulted in the tripling of net profit. It also explains why 2017 has a low effective tax rate, of just 8% compared with 34% in 2016.
How do we know all these? It is right there in the explanatory notes of their results announcements to Bursa – item 4 on page 10 of its 4Q16 release and items 1 and 6 on pages 14-16 in the latest 4Q17 results.
In Table 1, we revisited the historical financial performances of Muda and show what the results would have been if we “normalise” it by adjusting for the non-recurring and extraordinary items (since fire at the plant must be non-recurring).
Pre-tax profit would actually show a slight decline from RM43.3 million in 2016 to RM42.1 million in 2017. Net profit would have increased by 15.9% instead over 200%. This is still commendable, just not what was inferred originally. But besides earnings, one must also look into balance sheet. Net debt for Muda increased by more than RM85 million to RM526.2 million. Why?
Aside from capex totalling some RM74.5 million, inventories and trade receivables both shot up by RM58-64 million each, or more precisely by 29% and 27% y-y, respectively. It suggests customers are paying up slower and sales are lagging production, resulting in built up inventories. What could account for this? What I know is that selling prices for paperboard products has started falling this month, even as demand remains strong. Customers are holding back, sensing that prices will retrace in line with the lower waste paper prices.