Analabs - just share buy back and nothing else?

I have written about Analabs - hidden gems?? in Apr 2017 and the share price continued to be dull and boring with no excitement from its results since then. The only consolation is that the price did not drop as bad as many other small cap stocks over the last few months.

It is interesting to note that starting July 2018, the price started to move up north (from Rm2.1 to close to Rm2.5 now) due to share buy back. This stock has very low liquidity and low buying interest, it is not easy for sellers to get rid of their shares especially during a quiet and down trend market. While it seems like a logical reason to buy back its own shares because it is trading well below its book value (Rm4.48), but why make it looks like a well programmed plan to push up the price gradually and consistently? Is this just a share buy back with no other agenda behind the move?
Obviously insider trading does not include company share buy back and it is perfectly justifiable for the buy back as it is trading below its book value.
Yes, I still see a potential privatisation of the company by major shareholder as the likely scenario and I do not see any major benefits from being a PLC in this case. But the share buy back that push up its share price does not support this thought - no major shareholder will want to offer the other shareholders a higher price.  Let's wait and see if there is something brewing in a company that has probably remained unnoticed ever since its listing. 

Learn it from Hyflux's case

I came to know about Hyflux four or five years back when there was a write up on its founder, Olivia Lum, highly successful  Malaysian entrepreneur. Grown up as an orphan in a small town Kampar, Perak, to whom she is and what she has achieved so far, her story is inspiring (you can find it here).

After reading about Olivia Lum and Hyflux, I was tempted to invest in the company then based on the followings:-
1) lead and managed by highly capable founder, who has proven track record to build business
2) with great support by Singapore government as it is seen as a highly successful Singapore grown enterprise that made it to international level
3) it is in water and energy sector - a sustainable business
4) it has been paying consistent dividend since 2003 till 2016
5) the company is expanding into other countries rapidly( highly leveraged on gearing), with very high growth potential 

However, there was one area - its debt level, pulled me back from investing in Hyflux.
Due to the one factor, I have avoided a big surprise from Hyflux ( though in some cases eg Air Asia, yes, I have missed some that have multi fold returns too, but it is ok). Ever since the Asia financial crisis where I have witnessed what happened to some highly geared Malaysian companies went into serious financial problem, I have distant myself from highly geared companies no matter how promising the future of its business appears to be. 
What happened to Hyflux once again reinforced my own belief, avoid highly geared companies no matter what other positives are there, they can't compensate for the high risk of bankruptcy.
In our investment journey, we are bound to make some really great investment and some bad investment too. As long as we did not make a bad investment that cause a big dent in our ship, the sailing journey will continue though it may be slow down by storm once a  while. A big dent could cost the ship sink and our journey may end before we could even enjoy it.

Dividend, and nothing else!

I would like to share my thought after attending a shareholders presentation by a closed end fund recently. I went to the venue early and there was no one there yet except a few staff setting up the place for the presentation.

It was in a ballroom and I think there were about 250 seats and I was telling myself, could it be another over optimism by the organiser as 2 weeks earlier I attended a PLC's shareholders presentation with only 5 persons turned up. To my surprise, the hall was filled with people later on, I would say at least 95% full and they are mostly senior citizen. Well, I thought they must be here for the free lunch. So I decided to chat with a few of them at lunch session.

The few persons I spoke to are either retirees or about to retire and they share something in common - they are less concern on the price volatility as they hardly sell those stocks that they bought. They are more concern whether the DIVIDEND they receive are sufficient for their retirement life as this cashflow will affect them, not the up down of stock price. (of course I think if the stock price goes up, one can always sell some to cover the cashflow but to them, this is not in their mind as they see it as depending on capital rather than income to sustain a living).

From the questions they asked the management, I would say many of them are well educated and with sound financial knowledge. I like the way management responded too as they not only highlighted their big wins, but also provide reasoning and lesson learnt on the big losses where they went wrong.  

There is something probably we all could learn from the fund strategy which has recorded 17.5% CAGR over the last 20 years, which I believe there must be something they have done right.

Investment Methodology used by them:-

1. Screen for growth or undervalued stocks

2. Evaluate both qualitative (management) and quantitative (forecast EPS growth & valuation)

3, Buy when a catalyst is identified

4. Sell when valuation is reached

 

It appears to me that we may all know about this, so the key then must be execution - which includes patience and discipline.

I came to agree with the investors I met in the presentation - one can only sit calm when the market is down if one still receive good cash inflow without having to worry about paying your living expenses. Hence, DIVIDEND is one key ingredient to investment for long term.

 

 

 

 

  

This time is different - market or you?

Just like some of you, this is the 3rd time I see huge volatility in market (though it is till far from the previous 1997 & 2008 crisis, where everyone was rushing to sell and wanted to keep more cash ). Probably the real crisis is still not here yet as I do not feel what I felt in the 1st & 2nd crisis, I did not feel like cashing out at whatever price or keep monitoring the price movements of my stocks.

Just as many said, every crisis is different - eg 1997 Asia Financial Crisis triggered by currency crisis and 2008 Global Financial Crisis triggered by the subprime mortgage problem. Well, 2018 - culprit is trade war? So it seems that there are always different elements in the economy that may trigger a crisis.

What about us? Are we acting differently in these crisis - did we learn something from past crisis to improve our re-action so as to take advantage of it instead of being victimised? Are we doing the same right thing or repeating our mistake from previous crisis? 

As for me, I do not re-act too much yet (probably after seeing the last 2 crisis and eventually market will still bounce back, hence I am not that worried somehow). I noted many small cap stocks are already dropped more than 50% from their peak. Isn't that in crisis mode?

What I could recall in the past 2 crisis, I looked at the price compared to the highest and see if it was "cheap" then. I looked at the historical PE and dividend yield but did not pay much attention to whether the company was expected to continue to do well in the future ( if the past could provide a little reference). 

I keep reminding myself, whether the crisis is different this time is not important, the most important is whether I will make the difference this time as crisis do not come often. My past experience was that I could not tell when was the bottom then. When the sentiment started to make a U turn, I was slow to enter and the sharp rebound would make me wanted to wait for a pull back, then I realised I missed  it when it continued to move up......yes, it need some gut to make that move especially it is still on its way down and many said the worst is yet to come...yes, all of us are speculating now, trying to predict when is the bottom.
I don't have to buy at bottom and sell at the peak to make money, I don't believe anyone can do just that. Yes, I have started to accumulate some stocks that appears to offer good margin of safety, also with attractive dividend yield. When the market recovers and the companies  I invested continue to do well, they will probably give double digit dividend yield (based on cost price) - that is my ultimate aim.
  

  

3A Resources - slow and steady

 


Background:
In 1977. Founder of the company, Fang Chew Ham started San Soon Seng Food Industries Sdn Bhd (SSSFI) as liquid caramel producer.

Over many years of expansion in liquid products, SSSFI diversified into powder product manufacturing in the year 2003. Spray drying facilities were brought into the production line, catering for Caramel Powder, Hydrolyzed Vegetable Protein (HVP) Powder and Soya Sauce Powder production. In year 2007, SSSFI continued its specialty in starch-based products by launching full range of Maltodextrin into the market.

Hence, it has extensive products portfolio inclusive of Liquid Caramel(Malaysia Standard), Caramel Colour(International Standard), Caramel Powder, Distilled Vinegar, Natural Fermented Vinegar, Rice Vinegar, Soya Protein Sauce(HVP), Glucose Syrup, Maltose Syrup, Hydrolyzed Vegetable Protein(HVP) Powder, Soya Sauce Powder, and Maltodextrin.

In 2008, a major corporate development took place with the emergence of a big corporate investor, Wilmar International (directors were charged with insider trading lately on some shares dealings then) . It has gone into joint venture with Wilmar for China market but the results was disappointing with losses and no turnaround in sight. Hence, in 2017 3A has decided to sell off its stake in China JV to Wilmar.

Past Financial Performance -RM'000  (somehow not able to put up chart on this blog now & formatting is in a mess)  

	2012	2013	2014	2015	2016	2017
Revenue	306,428	302,910	311,410	352,400	387,718	411,485
Net profit	19,209	14,591	24,115	27,409	44,798	44,804
Net profit margin	6%	5%	8%	8%	12%	11%

**Net profit above excluded results from China associates which was divested in 2017.

The improved results seen in 2016 & 2017 are very much due to strategy to focus on specific customer requirement for higher profit margin  as well as expansion of maltodextrin plant No 3.



Cashflow from Operation and Capital Expenditure (Rm'000)

	2012	2013	2014	2015	2016	2017
Net Cash generated from operations	2,574	45,402	39,252	6,018	78,499	52,839
Capital Expenditure	(12,832)	(9,406)	(2,518)	(12,572)	(27,597)	(30,368)
Free Cash Flow	(10,258)	35,996	36,734	(6,554)	50,902	22,471

 
2016 & 2017 – mainly for maltodextrin Plant No 3 and land for future expansion. The expansion is done via internally generated fund as its debts level has been on the decline since 2012 (gearing is only 6% as at 31/12/17).


Equity, Debt & Cash reserve (Rm' mil)

	2012	2013	2014	2015	2016	2017
Cash & Equivalent	18	17	17	13	29	47
Debts	72	43	12	36	15	20
Equity	214	219	232	248	279	309
Gearing Ratio	34%	19%	5%	14%	5%	6%

Return on Equity (ROE) & Return on Invested Capital (ROIC)

	2012	2013	2014	2015	2016	2017
ROE	8%	5%	8%	8%	13%	13%
ROIC	8%	6%	10%	9%	17%	16%

Both ROE & ROIC are improving from single digit to double digit (13% & 16%) as a result of focus on high margin products.


Dividend

Steady growth in dividend - though on the low side with 1.7% yield. It has been paying dividend since 2006.

Revenue growing at CAGR of 6% while profit(excluding share of associates’ results - China JV, which was divested in 2017) at 19% CAGR for period from 2012 to 2017.

Margin of Safety

Using DCF method with next 10 years profit/FCF growth at range of 10% -12% pa and 3% thereafter, the indicative value is expected to be in the range of 1.65 to 1.80, at current price of 1.05, hence providing a margin of safety ranging from 30% to 40%.


Potential

1. Good and cheaper proxy to F&B sector (around 20x PE) while 3A is trading at PE around 12 times . Forward PE should be less than 10 as the completion of maltodextrin plant No 3 in 2017 is expected to provide more contribution in FY18.
2. Extensive expansion in 2016-2018 with focus on high margin products are expected to provide sustainable growth in revenue & profitability.
3. Better dividend payout could be expected as company's cash reserve has built up and its' ability to generate strong free cash flow.

Risk:

If Wilmar start to offload in open market, then its share price will be subject to heavy selling pressure in the already soft market. Though its not risk but may cause share price to go lower if that happen.

More competitors are coming as highlighted in its reports and this may squeeze its profit margin.

Positive
1. F&B business is generally more stable and demand shall grow steadily over time, especially its overseas sales. 
2. Profit compounding at 19% over the last 5 years is commendable.( strong management capability) 
3. Expansion is funded mainly from internally generated cash.(indication of a strong cash flow business)

Negative

- few board members charged with insider trading, this has put the management's integrity in question., though there is no reported incident of mismanagement in company's affair so far.

My view:-

The current down market provides a good opportunity for me to accumulate 3A at 1.02 - 1.06 as a mid to long term hold as it has shown the potential to grow steadily over the years. The only concern that I have for not building a bigger position is due to the insider trading charges on its directors, which put the integrity of major shareholders and key directors in question.

Please do your own evaluation if you like to have 3A in your portfolio too.