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?