Consumer staples stocks
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
1 2 3 4 5 6
Zhulian Haio Apollo Yee Lee YSP LonBisc
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
1 2 3 4 5 6
YSP Zhulian Haio Yee Lee Apollo LonBisc
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
1 2 3 4 5 6
LonBisc Yee Lee YSP Zhulian Haio Apollo
So which company do you favour as an investment?
KC Chong (11/7/13)
Table 1 Appendix
Company Haio Zhulian YSP Yee Lee Apollo LonBisc
Growth Last Year
Revenue 12% 26% 15% -9% 11% -3%
Net profit 22% 23% -11% 14% 47% -23%
Profitability and efficiencies
Operating margin 21.9% 20.9% 12.0% 4.5% 19% 11.3%
Net profit margin 15.9% 26.0% 7.5% 3.1% 14.4% 5.4%
Return of assets 13.9% 22.1% 4.6% 4.1% 12.5% 2.2%
Return of Equity 17.8% 25.9% 6.2% 7.6% 13.9% 4.1%
Return on invested capital 29.1% 39.1% 6.4% 7.0% 17.6% 5.0%
FCF/IC 27.1% 27.5% -1% 16% 13.8% NA
Market valuations
Price on 11/7/13 2.70 3.17 1.49 1.32 4.09 0.685
PE ratio 12.8 12.5 14.6 10.5 10.3 8.4
EV/Ebit 6.9 8.5 8.7 8.8 5.8 11.4
HupSeng which produces biscuits is a good consumer staple stock but a bit expensive right now. Its business is simple to understand, it has a strong balance sheet with no debts, strong cashflows and good dividend yield makes this a good defensive stock.
Using discounted cashflow method of valuation Growth 5%, terminal growth 3%, discount rate of 10%, the intrinsic value is around RM4.95 which is only 13% higher than current price of RM4.3.
If Hup Seng is able to maintain its strong cashflow growth (19% Y-oY), lets say growht of 10% for next 10 years with all other assumptions same then intrinsic value would be RM5.93 which presents a 30% margin of safety.
Hup Seng looks good on its performance. Its ROIC is high as computed by you. A high ROIC company, good free cash flows, healthy balance sheet certainly will command higher market valuation. A PE of 15.9 is alright for me with this type of performance, though market enterprise value a little bit high.
Yeah, valuation wise all depends on its expected growth rate. Good for long term steady and stable return.
You sell biscuit, other people also sell biscuits. How come others do so well and you so bad? I am talking to management of London Biscuits.
The major difference is the people managing the business. Hup Seng management focus of doing their business well; whereas management of London Biscuits doing all kinds of dealing wheeling, buy this investment or plant, then sell off a year later at a loss, and repeating. No trust from me at all.
My target price will be RM3.75 ~ RM3.85, now the stock is a little bit overpriced, but it doesn't matter since Hup Seng has a quite stable historical financial record...
I don't think Hup Seng is able to maintain it's growth of revenue at 10% in next 10 years. I do believe a 3- 5% growth in next 10 years will be more appropriate.
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New IPO: The largest mini-market player and a leading groceries retailer in Malaysia, 99 Speed Mart Retail Holdings Bhd aims to list on the Main Market!
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....
Posted by kcchongnz > 2013-07-11 20:15 | Report Abuse
Consumer staples stocks 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 1 2 3 4 5 6 Zhulian Haio Apollo Yee Lee YSP LonBisc 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 1 2 3 4 5 6 YSP Zhulian Haio Yee Lee Apollo LonBisc 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 1 2 3 4 5 6 LonBisc Yee Lee YSP Zhulian Haio Apollo So which company do you favour as an investment? KC Chong (11/7/13) Table 1 Appendix Company Haio Zhulian YSP Yee Lee Apollo LonBisc Growth Last Year Revenue 12% 26% 15% -9% 11% -3% Net profit 22% 23% -11% 14% 47% -23% Profitability and efficiencies Operating margin 21.9% 20.9% 12.0% 4.5% 19% 11.3% Net profit margin 15.9% 26.0% 7.5% 3.1% 14.4% 5.4% Return of assets 13.9% 22.1% 4.6% 4.1% 12.5% 2.2% Return of Equity 17.8% 25.9% 6.2% 7.6% 13.9% 4.1% Return on invested capital 29.1% 39.1% 6.4% 7.0% 17.6% 5.0% FCF/IC 27.1% 27.5% -1% 16% 13.8% NA Market valuations Price on 11/7/13 2.70 3.17 1.49 1.32 4.09 0.685 PE ratio 12.8 12.5 14.6 10.5 10.3 8.4 EV/Ebit 6.9 8.5 8.7 8.8 5.8 11.4