Analabs - hidden gems??

I have this 'low profile and probably not known to many' stock in my portfolio, I wish to do some write up on this company if this is also your cup of tea.

Analabs - Background

Analabs has been involved in the environmental and industrial related business since 1936 in Singapore and 1965 in Malaysia. With more than 40 years of experience in this industry, it has been able to chart its success in the environmental business and has positioned itself as one of the pioneers in providing quality laboratory testing by meeting ISO/IEC Guide 17025 and ISO 9002 standards.

Listed on the Second Board of Bursa in year 2000 with initial paid up capital of Rm40 mil (40 mil shares @Rm1.00 each), IPO price was at Rm1.70 per share. There was a 1 for 2 bonus issue in 2002 and its enlarged share capital is 60 mil shares now.

It principal business consists of the followings:-

1. Manufacturing, formulation and sale of resin, chemicals & building materials
2. Recovery and sale of recycled products
3. Contract work, Pipe laying & rehabilitation

 Past 5 years Financial Performance

Income Statement

	2017 (Q3)	2016	2015	2014	2013	2012
	RM'000	RM'000	RM'000	RM'000	RM'000	RM'000
Revenue	117,055	155,176	142,088	140,324	147,376	120,465
Cost of sales and services	(75,480)	(122,509)	(113,830)	(116,949)	(119,508)	(88,929)
Gross profit	41,575	32,667	28,258	23,375	27,868	31,536
Other operating income	2,294	6,975	3,776	7,486	4,062	3,176
Operating expenses	(31,853)	(23,744)	(22,838)	(18,070)	(17,764)	(16,660)
Profit from operation, EBIT	12,016	15,898	9,196	12,791	14,166	18,052
Finance costs	(747)	(617)	(986)	(926)	(540)	(206)
EBT	11,269	15,281	8,210	11,865	13,626	17,846
Taxation	(2,188)	(2,926)	(1,866)	(2,770)	(4,080)	(3,269)
Net Income	9,081	12,355	6,344	9,095	9,546	14,577
DPS, sen	3.25	3.00	3.00	4.13	5.50	5.00
EPS	0.16	0.24	0.11	0.16	0.16	0.24

 

Operating Expenses - FY17 (3 Qtrs) > FY16 Full year, I believe was due to classification issue between COS & Operating Exp as FY16 Annual Report full year Operating Expenses was lower than Q3 FY16. That also explained why Gross Profit for FY17 (3 Qtrs) > FY16 full year.

Cashflow

	2017 (Q3)	2016	2015	2014	2013	2012
	RM'000	RM'000	RM'000	RM'000	RM'000	RM'000
Net Cash generated from operations	10,563	29,046	18,470	19,530	17,506	8,587
Free Cash Flow	9,485	29,055	16,599	11,429	16,902	2,080

Financial Position

	2017 (Q3)	2016	2015	2014	2013	2012
Assets	RM'000	RM'000	RM'000	RM'000	RM'000	RM'000
Current asset
Cash and cash equivalent	45,281	39,055	33,195	25,203	29,075	20,466
Other Assets	51,812	59,076	63,891	71,195	64,054	49,314
Total current assets	97,093	98,131	97,086	96,398	93,129	69,780
Non-current assets
Property, plant and equipment	147,515	150,115	155,127	159,840	95,228	91273
Intangible assets/ DTA	9,804	9,915	9,804	9,755	8,397	7,089
Investments	29,841	31,426	22,722	14,833	7,514	15,365
Total non-current assets	187,160	191,456	187,653	184,428	111,139	113,727
Total Assets, TA	284,253	289,587	284,739	280,826	204,268	183,507
Short-term loan & borrowings	11,292	11,961	19,707	10,488	10,874	3163
Other Payables	18,957	28,779	22,167	24,861	19,731	11,967
Total current liabilities, CL	30,249	40,740	41,874	35,349	30,605	15,130
Long-term loan	6,009	9,457	13,591	17859
Deferred tax & Others	18,570	18,138	19,360	20596	10406	9590
Total non-current liabilities	24,579	27,595	32,951	38,455	10,406	9,590
Total liabilities	54,828	68,335	74,825	73,804	41,011	24,720
Equity
Common stock	66,272	60,024	60,024	60,024	60,024	60,024
Reserve	43,945	50,213	49,467	51,189	14,234	16,934
Retained earnings	121,094	113,097	101,528	96,343	88,999	81829
Total common equity, E	231,311	223,334	211,019	207,556	163,257	158,787
Minority interest	(1,886)	(2,082)	(1,105)	(534)
Total Equity	229,425	221,252	209,914	207,022	163,257	158,787
Total liabilities and equity	284,253	289,587	284,739	280,826	204,268	183,507
No of shares outstanding ('000)	56,105	56,259	60,024	60,024	60,024	60,024
NA value/share	4.1	3.9	3.5	3.5	2.7	2.6

 

Key Financial Metrics

Key Metrics
Price	2.25
Intrinsic Value	3.7
MOS (DCF)	39%
Dividend yield	1.4%
P/FCF	8.9
PB	0.55
PE	10.5
EV/EBIT	4.2
FCF/ Market cap  ( cash yield)	11%
ROIC (Average)	6%
Average ROE	5%
EY = EBIT/EV	24%

The negative from the metrics – ROIC and ROE

1. Low ROIC – high PPE value mainly in land & building pull down the ROI, fortunately it does not require replacement such as Plant & equipment, hence, its' FCF is still very strong.
2. Low ROE – mainly due to low dividend payout(ranging from 10% to 30%) and company retained most of the profit and resulting in high Equity value but unable to generate more return from the reserve retained.
   Both these are signs that management are not efficient in resource utilisation and not able to invest for higher return.

The Positive from the metrics – FCF, EV/EBIT, PB

1. Strong FCF as low requirement in capital assets replacement ( cash yield at average 11%)
2. Low EV/EBIT 4.2 appears cheap from valuation point of view (Earning yield at 24%)
3. Low Price to Book - 0.55  (45% discount to book value – cash, Maybank share + land & building selling to us at 45% discount)
4. PE of 10.5 seems ok.

Indicative Valuation

Current Market Capitalisation : 56mil (net of treasury shares) @Rm2.25 = Rm 126 mil

 DCF method : Rm3.70

 – derived from Discounted Cashflow (DCF) basing on average FCF from the last 6 years, discount rate at 11% and growth at 2% p.a. This provide a margin of safety of 39%.

 

This is further supported by its Net Asset value of Rm4.1 per share. At Rm2,25 now, it is actually 45% discount to net asset value.

Assets mainly consists of: 

Cash                                               Rm 45.3 mil ( 80 sen per share, net of debt will be 50 sen per share)

Investment                                    Rm 29.8 mil (mainly investment in Maybank shares as announced in Apr 17, worth 53 sen per share)

PPE                                                  Rm 147.5 mil (mainly land & building, which has been revalued in 2014)

  

Past 6 years share price performance

 Shareholding as of 29 Jul 2016

1 KAN YOW KHEONG                                                                                      38.01%

2 KAN YOW KHEONG                                                                                      18.16%

 Mr YK Kan is holding 56% of Analabs and top 30 shareholders hold 85% of the shares, hence, the liquidity of the shares is quite low.

 

Any near term catalyst??

 Business prospect – the business has been relatively stable and Analabs has attempted to expand the business but did not bring much results. In its 2016 Annual Report, it has highlighted that it has downsized the Singapore operation that is not performing to cut operating cost and will not expand or venture into new business in the near term. It appears that this is a boring company with not much excitement in financial performance or corporate news. Hence, it does not get much attention from investors as it is really a dull and boring counter.

I tried to imagine if I were Mr Kan, what would I do? Well, I would privatise it (only need Rm55 mil for the balance 44%) and I can easily get back my money from the cash + investment in Maybank shares. ( must learn from Maxis, Astro and so many others, privatise first and put up a much higher value for re-listing). Obviously Mr Kan is also not keen on corporate exercise, even though with high net asset per share and low liquidity, it has only done a bonus issue back in 2002 (15 years back, It was due to the requirement for main board transfer - min Rm60 mil share cap then). He probably knows that does not create value.  

 As for me, if it is purely an asset based value stock (Net Asset/share = Rm4.1), may not excite me too. However, when it is also supported by strong free cashflow of average Rm15 million per year (market cap at Rm126 mil, cash yield >10%), I am willing to ride with Junior Kan (recently re-designated to Executive position)  if he will bring excitement to Analabs and how the cash reserve can be utilised for higher return or higher dividend to be considered. Yes, hope is not strategy, in this case, it only has opportunity cost but limited risk and based on DCF valuation, there is 39% margin of safety (60% upside potential). Yes, I will camp here for a while.