Monday 29 June 2015

Are There Any Good "Bad Companies"?

Many fundamental investors prefer to buy shares in companies which meet certain criteria such as consistent EPS growth, high ROE, high DY, low gearing, low PE etc.

I follow most of these criteria for the past 2-3 years and it works quite well.

So, basically I won't touch any company which is making loss in recent years, or producing excessively fluctuating results, or struggling to grow its topline, or facing declining profit over the years, or having high debts with low quick ratio, or merely thriving on thin profit margin.

However, after accumulating few years of experience, now I think I should not totally ignore those companies with "bad" results or financial ratios.

While avoiding such "ugly" companies makes our investment safer, we might miss a few golden opportunities to make really good profit.

If you follow this blog, you may notice that most of the stocks I bought recently are not "fundamentally-strong".

Johotin's profit fell a lot last year. Geshen struggled to grow its business. HHGroup is new and unproven.

All have low ROE, low or no dividend and no EPS growth whatsoever.

Two years ago, I won't touch this kind of stocks. Now, there seems to be an unconscious change in my investment style to more like an opportunist.

I don't know whether this is a good change or not. It is still too early to tell.

If you invest in a fundamentally strong company with consistent EPS growth, most probably the company will continue to grow and its share price will follow.

If the company grow fast, its share price will go up faster. If the growth is slow, then share price will crawl up slowly.

If you invest in a company with ugly financial results which not many people want, and that company suddenly turns profitable in style, then the return can be enormous.

It's true that higher risk, higher return.

Of course not every company with ugly results is good. Most are really bad and "uncurable" because of lousy management, lack of competitive edge or being in a sunset industry. So it is for us investors to find out which is the good "bad company".

My sister once worked for a listed company and she told me that almost all the top management team are only interested in their salaries. There is no plan to grow the company and it is also full of office politics.

When I checked the financial result of this company, true enough, it has been making loss for the past 16 years with a few years of small profit here and there.

Am I going to put my money in this company? No way unless the whole management team is changed.

Most good companies become "bad" because of the cyclical nature of global economy.

Generally when world economy suffers, demand for most products and services will drop and so do the related companies' financial results.

When US economy is bad, those companies who export most of their products to US will suffer. This is the same with other parts of the world such as Europe, China, Japan etc.

A country's economy cannot be bad forever. When it recovers, those companies' results will also improve, as long as they can survive the difficult time.

Besides this, commodity price also plays an important role in making a company's result bad.

We have seen recently how low crude palm oil price has affected the financial results of plantation stocks negatively. Soon this might also occur to O&G related stocks.

However, if the commodity serves as the main raw material or major cost for a company's product or service, this company will benefit from low commodity price such as crude oil in aviation & resin related industry, corn/soybean in poultry industry etc.

Commodity price as well as global economy will go up and down in cyclical manner. Investors who are sharp enough to see the reversal trend early will make the most money or lose the least money.

Sometimes a company's bottomline looks bad because of certain non-cash items such as high depreciation charge, forex loss, non-recurrent loss from impairment or something written off.

These paper loss may not affect its cash flow severely and this type of company have a chance to survive and then rebound when their time finally arrive.

An ailing company can also turnaround when luck is on their side. They may suddenly get a big customer or contract, or strike a good deal of merger & acquisition, or successfully venture into new business.

Anyway, for all these to happen, it is not solely due to luck. The company's management team has to be decent at least.

I expect my investment style to change with time. So don't be surprise if you see me investing in companies with single digit ROE or even in companies that are making loss.

If this doesn't work, then probably I will revert to less adventurous investment style.

Saturday 20 June 2015

Frontken: Profit Guarantee In TTES Acquisition

In my last post, I wrote about Frontken mainly because one blog reader asked for my opinion on it.

I must admit that I didn't study the company in detail. I am too busy with work lately, feeling a bit frustrated and thus, have not much time and mood in stock market.

As stated in my previous post, I always think that Frontken is a good stock even though I lost track with it since mid-2013. I missed the news of its Tanjung Bin contract.

I did hesitate whether to invest in Frontken in early 2015, when the stock was made popular by fellow contributors in i3investor.

I studied it briefly and finally, the lack of major contract after Tanjung Bin and the gloomy O&G industry caused me to shy away from it.

However, I missed one important information, which is the profit guarantee in the acquisition of 45% in TTES which was acquired in May 2014.

I wish to apologize to readers about this mistake, and feel obliged to write another article to correct it.

The rest of the story is, I missed the opportunity to make a good profit in a short time.

About the profit guarantee, it is stated in the SPA that the cumulative audited PAT of TTES for the financial years ending 31 Dec 2014 and 2015 shall not be less than RM8mil. If not, the vendor shall compensate Frontken for the shortfall.

Since Frontken holds 45% of TTES, then Frontken should get at least RM3.6mil net profit. Who knows TTES can deliver more than RM8mil in that period of time?

TTES's PAT shows CAGR of 88.5% from 2011 to 2013, though PAT in 2013 was just RM1.02mil.

As the vendor is so confident to give such profit guarantee, I think there must be some big contracts on-going and pending.

The acquisition by Frontken was just completed on 23 May 2014. Does it mean that Frontken will not get the profit before 23 May in 2014?

If this is the case, the amount should be very small anyway.

Even though crude oil price tumbled soon after the acquisition, and Petronas capex is reduced, Frontken will still bag the profit guarantee. 

In general, Frontken seems to be a growing company since taken over by a German.

Taiwan's Ares Green is expanding. Even if TTES does not do well in 2015, it certainly will when the O&G industry rebound.

With ample cash, Frontken might acquire another assets or business in the future.

Who knows another big contract is on the way?

So, I think shareholders of Frontken need not worry too much about its long-term prospect.

On whether it is the right time to buy its shares, it depends on your own judgement and confidence.

Tuesday 16 June 2015

Frontken: Will It Get Better in 2015?

I first invested (or speculated) in Frontken in 2009, and subscribed to its rights issue with free warrants in 2010.

This stock swung between profit and loss and somehow I manage to sell all the shares and warrants in early 2011 for some gain.

I still kept a very close eye on Frontken after that as super penny stocks around 10-20sen were my favourite.

When Frontken's share price tumbled to around 6sen in year 2013, I still felt that it was a good penny stock with great potential. I planned to speculate on it again when the time was right.

Unfortunately, I lost track with Frontken after I changed my investment strategy in mid-2013. I didn't follow Frontken close enough, and so I missed its share price rally since last year.

Without shadow of a doubt, year 2014 was a magnificent year for Frontken. 

Its revenue reached a record high of RM309.8mil which is 63% better than FY13. It has reversed its loss of RM2.3mil in FY13 to a PATAMI of RM18.8mil in FY14.

What a turnaround.

Its cash flow is good and it has repaid most of its bank borrowings and becomes a net cash company now.

Why does Frontken perform so well in FY2014? Will it continue to do well in 2015?

Lets check its revenue contribution in 2014.

Looking at Frontken's segmental revenue, there is no doubt that Oil & Gas and Semiconductor industries contributed massively in 2014.

Through 57.9%-owned subsidiary company Ares Green Technology (Taiwan), Frontken is able to enjoy the robust growth in the semiconductor sector in Taiwan.

While contribution from Taiwan has increased 50% YoY in 2014, the main contributor is actually from Oil & Gas sector in Malaysia, in which its revenue increased from RM18mil to RM131mil YoY.

In September 2013, Frontken was awarded a contract by ATT Tanjung Bin Sdn Bhd as the main contractor for a hydrocarbon storage and distribution facility at Tanjung Bin.

The contract is worth RM110.6mil and the proposed date of completion of the project is 11 April 2015.

This means that after the Tanjung Bin project has been completed, its O&G annual revenue will likely to shrink significantly especially when there is a slow down in O&G sector now.

While Taiwan's Ares Green is enjoying superb growth in 2014, there is a disturbing slow down in Q1 of 2015 if compared to Q4 of 2014.

The chart below shows monthly revenue of Ares Green (blue bars) & YoY change (red line).

       Ares Green Tech monthly revenue

Though monthly revenue in year 2015 has reduced significantly, fortunately they are still higher compared to previous year's corresponding periods.

However, if there is no "revenue spike" in Q4 of 2015, then Frontken's revenue from Taiwan in 2015 may not show significant growth.

Last year Frontken has acquired 45% stake in TTES Team & Specialist Sdn Bhd which has expertise in turbo machinery and rotating equipment engineering, technology, maintenance and technical support services.

TTES's customers are mainly in the O&G field. Its PAT in 2013 is merely RM1mil and is unlikely to contribute significantly to Frontken in the near future.

In conclusion, Frontken is a good company, but I think its FY15's financial result is unlikely to beat FY14 unless it secured another fat contract like the Tanjung Bin contract this year.

Thursday 11 June 2015

LCTH: Turnaround In Fortune?

LCTH is a precision plastic injection mould manufacturer like SKP Resources, VS Industry & Geshen.

It was listed in main board of KLSE on 8th Nov 2004 at IPO price of RM1.08. It is a subsidiary of Singapore-listed Fu Yu Investment which currently holds 70.64% shares as at Feb 2015.

I noticed this stock while studying Geshen earlier. What I know is that it has plenty of cash without borrowing.

However, I didn't study it further when I saw its revenue falling quite heavily in the past 2 years.

In this article, I just did a superficial research on LCTH to know more about this company.

First, lets look at LCTH past financial performance since listed in 2004.

In summary, its revenue fluctuates a lot, profit margin drops with time and it suffers loss in 2010 to 2012.

At the time of IPO, LCTH was made up of 2 wholly-owned subsidiaries Classic Advantage (Johor) & Fu Hao Manufacturing (Penang). It acquired 40% stake in Berry Plastic in 2006.

Year 2004
  • Raised RM156.3mil from IPO to expand its business arm in Johor (Classic Advantage)
  • Constructed a new plant with new machinery in Johor Technology Park, and will relocate old plants in Senai & Kluang to the new plant
  • Net profit of 2004 (RM57.2mil) failed to meet target in IPO prospectus (RM65.3mil) due to increase oil price to USD50 and delay in completion of new factory.
Year 2005
  • Relocation of Senai & Kluang plants to new plant completed in June 2005
  • Revenue increased to record high due to higher capacity & orders, but net profit fell mainly due to higher oil price & price pressure from customers
Year 2006
  • Joint-venture (40%) with Owens-Illinois Plastics (NYSE listed) to form O-I Plastics Malaysia (later renamed Rexam and then Berry Plastic), which will operate in a newly-constructed plant within LCTH's existing plant in Johor under lease
  • OIP has contracts to manufacture inkjet cartridges
  • Revenue sustained but net profit fell further due to consistently high oil price
Year 2007
  • Revenue hit record high but net profit fell further, due to surging oil price
  • Proposed sales of fixed assets
  • Proposed bonus issue & capital reduction
Year 2008
  • Revenue and operating profit hit by high oil price (>USD100) and global financial crisis
  • Classic Advantage completed sales of land, factories & office block in Johor and lease back
  • Completed bonus issue, capital reduction with shares consolidation
Year 2009
  • Revenue and core net profit continue to drop for 5 successive years after listing as a result of global financial crisis and slow E&E sector
  • Implement cost saving measures
Year 2010
  • Lost a major customer who shifted to China, thus revenue took a deep fall and suffered loss for the first time since listed
  • Forex loss due to strengthening of RM against USD
  • Decided not to pay dividend for the first time since listed
Year 2011
  • Revenue fell further and continue to suffer loss
  • Faced overcapacity. Set up a new plant in central region of Peninsular Malaysia to relocate some machinery from Johor plant
  • Successfully secured a new MNC customer with potential to replace the earlier loss of major customer
Year 2012
  • Revenue jumped significantly by 150% after securing new customer but net loss widened, as it is yet to achieve optimal operating efficiency
Year 2013
  • Revenue dropped due to change in procurement strategy of a major customer
  • Achieved marginal gross profit after cost-control
  • Classic Advantage sub-let out certain part of its factory and disposed certain assets to Flextronics
  • Net profit in FY13 was boosted by RM18.6mil gain from disposal of assets
  • Export sales increased 22% as developed countries looked to cut cost by shifting to lower cost countries like Malaysia
Year 2014
  • Continuous right-sizing measures by Classic Advantage
  • Revenue took another significant drop but profitability increased due to better cost control and higher margin products
  • Target higher value added industries such as automotive, medical & solar power
  • Expect manufacturing activities to shift out of China due to growing operating cost & strengthening of Yuan
  • Expect higher demand for E&E sector

Generally, from 2004-2007, LCTH's revenue rose but net profit fell progressively due to margin pressure as crude oil price surged.

From 2008-2011 which was the aftermath of global financial crisis, it lost a major customer which resulted in substantial shrinking in revenue and inevitably, making loss.

From 2011-2014, revenue increased after securing a new big customer. Core profit improved after right-sizing moves.

Basically Hevea and LCTH suffered almost the same fate after their IPO.

Both were listed almost at the same time, in which LCTH was listed just 2 months earlier than Hevea. At that time, Hevea constructed a new particleboard plant and LCTH constructed a new one-stop plastic injection moulding plant.

Revenue of both companies rose after IPO but net profit fell until they suffered loss. Both were hit by price pressure and later poor demand during global financial crisis in 2007-08.

The main difference is, Hevea has high debts and suffered to repay its loan, but LCTH has hardly any borrowings since listed.

Hevea experience a tremendous turnaround since 2012. Though LCTH also got back from red to green since 2013, its earning "quality" is rather poor with decreasing revenue.

Though LCTH's core profit has improved impressively in 2014, its revenue is declining to the level when it lost a large customer in 2010. This is worrying indeed.

Does it lose more important customers or just temporarily lower orders?

Anyway, it hold lots of cash and is reluctant to pay it out as dividends since year 2010. Surely the management will have some serious plan in their mind.

Will it acquire a profitable peer soon just like what Geshen did?

Can it secure more new customers and more orders going into 2015 as anticipated?

Historically LCTH was a company which was very generous in dividend payout. It has a policy to payout at least 50% from net profit.

The table below shows LCTH past dividend payout ratio from 2004 to 2009. It stops to pay a single cent since 2010, though their cash pile continue to build up after assets sales and it remains debt-free.

Year DPO
FY04 89.8%
FY05 >100%
FY06 92.5%
FY07 71.4%
FY08 78.7%
FY09 65.0%

So, dividend policy can be changed anytime.

Currently LCTH has net cash of RM76.4mil with another RM13.7mil in short term investment.

Anyway, in FY14, about half of LCTH's operating profit comes from "other operating income" such as interest & rental income.

These items should contribute year in year out to LCTH's bottom line but personally I don't like it very much if its percentage is too high.

LCTH's operating profit in FY14 is RM13.4mil, in which RM7.06mil is not from its core business.

While it has been selling assets a couple of years ago due to over-capacity in its Johor plant, LCTH has spent RM26.8mil on the purchase of PPE in FY14.

Its management even plans to spend RM65mil on capex this year. It is said to be in talk with Penang government to buy land to increase its Penang plant's capacity. 

Recently Penang has seen quite a lot of MNCs setting up their manufacturing facilities here including BOSE which is LCTH's customer.

Its other customers include Hewlett-Packard and Dyson.

LCTH is bullish on its future as it expects more MNCs to move from China to Malaysia even though it has just lost a few customers to China and other lower cost countries...

We have seen a turnaround in tech, poultry and furniture industries recently. Is this the case with plastic injection moulding industry?

From LCTH's story, low crude oil price will be good as its raw material cost will be lower while spending power in developed countries will be higher.

Almost all companies' bottom lines in this industry suffered during global financial crisis. 

Big players such as VS & SKPRes have turned around impressively with more orders from renowned major customers. Will other smaller players such as LCTH, Geshen, H&L, HIL & Luster follow?

A simple comparison of profit margin shows that LCTH is on par with others.

Revenue Gross Profit Gross % PBT PBT %
LCTH 126.06 16.373 13.0 12.33 9.8
VS 1715.08 197.86 11.5 41.99 2.4
SKPRes 616.55 76.94 12.5 57.18 9.3
Geshen 85.00 8.42 9.9

Normally I won't invest in a company just because it has a lot of cash or assets. How the company use its cash is more important.

For LCTH, if it successfully secures more contracts like what its management anticipate, then it's good.

At current price of 48sen. it is trading at actual PE ratio of 13.4x base on FY14 EPS of 3.59sen.

There seems to be no problem in LCTH's operation, balance sheet and cash flow at the moment. It's just about the revenue.

From the big capex, it looks like the management is very confident to get more orders. Do you have the same confidence?

Tuesday 2 June 2015

Johotin: Finally Game Over?

Johore Tin FY15Q1 Financial Result

JOHOTIN (RM mil) FY15Q1 FY14Q4 FY14Q3 FY14Q2 FY14Q1
Revenue 90.8 104.7 90.7 58.8 61.5
Gross Profit 14.6 16.0 11.7 5.7 13.3
Gross % 16.1 15.3 12.9 9.7 21.6
PBT 6.1 6.6 4.0 -0.5 7.6
PBT% 6.7 6.3 4.4
PATAMI 4.0 5.2 2.9 -0.3 5.1

Tin Rev 20.9 24.7 21.1 24.8 21.5
Tin PBT 1.3 4.4 1.3 3.3 2.4
F&B Rev 69.9 79.9 69.6 34.0 39.9
F&B PBT 5.2 3.0 3.0 -3.4 5.4

Total Equity 184.7 179.9 175.5 174.4 174.8
Total Assets 328.8 323.6 252.8 253.6 237.2
Trade Receivables 42.0 70.5 39.4 44.3 38.5
Inventories 148.2 125.0 81.8 74.1 63.1
Cash 28.9 25.5 31.1 38.7 40.5

Total Liabilities 144.1 143.6 77.2 79.0 62.3
Trade Payables 14.8 54.5 16.1 18.6 13.6
ST Borrowings 95.0 58.8 35.6 32.9 20.2
LT Borrowings 9.4 10.5 11.7 12.9 14.1

Net Cash Flow 3.4 -12.7 -7.1 0.6 2.2
Operation -26.7 -28.7 -9.0 -6.3 4.4
Investment -6.5 -12.3 -6.7 -2.5 -0.5
Financing 36.5 28.3 8.7 9.4 -1.6

Dividend paid 0.0 1.9 1.9 0.0 0.0

EPS 4.27 5.59 3.15 -0.27 5.44
NAS 1.98 1.94 1.88 1.87 1.87
D/E Ratio 0.41 0.24 0.09 0.04 Net C

At first glance, Johotin's latest FY15Q1 result is rather disappointing to me, as I expect it to better FY14Q4.

Its PBT and PATAMI are not only poorer than FY14Q4, they are even lower than FY14Q1.

Nevertheless, it registers net forex loss of RM1.8mil in current quarter, compared to RM1.7mil loss and RM0.3mil loss in FY14Q4 and FY14Q1 respectively.

PATAMI drops QoQ and YoY mainly due to more distribution to non-controlling interest in current quarter.

Anyway, gross margin slowly climbs to 16% in the last 4 quarters even though it is still a distance from 20+% in the pre-quality issue era.

Johotin's last quarter result was saved by its tin manufacturing segment but this time it is the other way round.

Its revenue (-15%) and especially PBT (-70%) in tin segment tumble because of high material cost (purchased in USD) and lower demand.

However, PBT in F&B segment surge 77% compared QoQ despite a 13% drop in revenue which is very good. This is mainly due to lower material cost.

The most disturbing part in Johotin's FY15Q1 report is its short term borrowings which has shot up by 60% in just 3 months time.

As a result, net debt/equity ratio increase to 0.41. Will it go up further?

This looks like game over...

The increase in debt is mainly contributed by poor operating cash flow, even though levels of trade receivables and payables have "normalized" after a sudden surge in previous quarter.

The problem lies in its inventories, which has increased by 135% in one year, and never seem to go down!

There is no explanation on the inventories in its quarterly report but luckily, its FY14 annual report has been released at the same time, and we can know what those inventories are made up of.

From the inventories break down, it seems like the cash are tied up in "Goods-in-transit". It is not finished goods stored in the warehouse.

Raw materials increase by 50% as I expect the company to take opportunity on recent low dairy price.

I don't know why there is a sudden surge of "Goods-in-transit" from RM1.4mil to RM49.9mil in one year. Is it because its export sales experience a sudden surge, or there is some issue during the transport?

Anyway, I feel that this is more positive than negative as those goods should have been sold and just not reaching its destination yet.

Sooner or later they will turn into receivables and then cash. This may explain why the management took only short-term loan.

I'm not too sure whether sales are included in revenue or not if the customers have not receive the goods. If it is not, then those "goods-in-transit" are like "unbilled sales".

Personally I think that those "goods in transit" should be considered sold thus already included in the revenue.

Another positive for Johotin is that it has successfully penetrated into Central America market in 2014 which has contributed as much as RM40mil in revenue.

As the location of Central America is quite far away, is this the reason for the high "goods-in-transit"?

Basically Johotin's investors are waiting for the new milk packaging factory to start its operation.

It is earlier reported that it will be ready in Q2 of 2015 but now it seems like it will be postponed to Q3.

So, investors still need to wait until Q3 or Q4 to see more positive financial result.

Johotin will pay 3.5sen dividend for its FY14 which represents 25% payout from PATAMI. This is almost the same payout ratio compared to FY13 (5sen).

Dividend yield of FY14 stands at 2.3% at share price of RM1.55.

If we annualize FY15Q1 EPS of 4.27sen, projected EPS of FY15 will be 17.1sen. At current share price of RM1.55, it is trading at forward PE ratio of 9x.

As I predict its FY15 EPS to be higher than 17.1sen, I will continue to hold Johotin's shares.

For me, the risk is there but it is not yet game over. 

The game might just about to start.

Monday 1 June 2015

My Portfolio May15

Summary For May 2015

Numbers of stocks 11
Cash:Share ratio 1:15
Share Bought Hevea @ 3.10
Share Sold None

Overall 2015
Portfolio Return May15 4.0%
KLCI Return May15 -3.89%
Portfolio Return YTD15 41.3%
KLCI Return YTD15 -0.78%

Portfolio return is inclusive of dividends received

Stock Portfolio @ End of May15

Satellite Portfolio

Stocks Avg Apr15 May15 Div 15 May15(%) Overall(%)
GESHEN 0.575 0.68 0.67
-1.5 16.5
GTRONIC 2.43 5.95 5.95 0.08 0.0 144.9
HEVEA 3.10
N/A 0.0
HHGROUP 0.475 0.580 0.610 0.005 5.2 28.4
HUAYANG 2.32 2.10 2.06 0.05 -1.9 -11.2
INARI 0.82 3.16 3.50 0.023 10.8 326.8
INARI-WB n/a 1.40 1.44
2.9 n/a
JOHOTIN 1.54 1.53 1.60
4.6 3.9
LATITUD 2.09 5.65 6.15
8.8 194.3
MATRIX 2.09 3.16 3.21 0.065 1.6 53.6
SCIENTEX 5.47 6.65 6.90 0.13 3.8 26.1
TAMBUN 0.77 1.88 1.70 0.03 -9.6 120.8

  • Add a little shares of Hevea in May15. 
  • Total stocks held is already more than 10 at 11.
  • No dividend ex-ed in May15.
  • Good overall monthly return of 4% in May15 due to Inari & Latitude Tree.
  • Fail to accumulate cash again.
  • Property stocks clearly have a hard time except Matrix. Keep or Sell is always a headache for me.

  • May consider to add more shares of Hevea, HHGroup or Geshen.
  • May need to sell some shares.