com Platinum Members Only Issue: September 2013-130505
2013 Lai Seng Choy. All Rights Reserved.
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STARS Search: Eng Kah Corporation Berhad (7149) Date of Review: 01st September 2013 Closing Price: RM2.87/share (as of 30th August 2013) STARS Rating: 10* Investment Decision: KIV (Keep In View)
Practice is always the best way to have hand-on experience on stock evaluation. I have been practicing my STARS Evaluation System and improving the process to enhance its functionality and effectiveness on identifying quality counters. In order to make our learning process more interesting and proactive, I would like to share with you my "STARS Search" from time to time for ease of learning and identifying investment opportunity. From my course, you may have realized that, by using my STARS Evaluation System, there are not many counters could pass through it. You may wonder whether my system is too stringent that even those so-called famous big-caps could also be out of my list. Well, what I would like to say is that this is how my system is working. I only interested in those counters with genuine good financial and management quality but not based on what publics are talking about and expecting. I must admit that, sometime, small is beautiful. Therefore, I also keep searching for those quality counters that may be neglected by the public due to whatsoever reason. In this months article, I would like to share with you my latest STARS Search: Eng Kah Corporation Berhad. I do not know this company until I saw an article in Personal Money magazine that discussed about high yield stocks. Of course, there are more than ten counters being recommended in the said issue but they all failed in my STARS Evaluation System, unfortunately, except Eng Kah. Eng Kah Corporation Berhad is a low profile Penang-based investment holding company with its subsidiaries operates in three segments: 1. Personal care: include the manufacturing of cosmetics, skin care, perfume and toiletry products; 2. Household: include the manufacturing of household products; 3. Investment holding In 2011, it joint ventured with Cosway Corp Ltd for business expansion by setting up a plant to manufacture personal care and household products for Cosway stores in China. As of 31st December 2012, its geographical sales composition is as follow: 1. Malaysia - 63% 2. Australia - 18% 3. Hong Kong - 9% 4. Others - 10% In terms of segmental sales, the composition as of 31st December 2012 is: 1. Personal care - 70% For investbursa.com Platinum Members Only Issue: September 2013-130505 2013 Lai Seng Choy. All Rights Reserved.
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2. Household - 12% 3. Investment holding - 18% Well, based on the above research, Eng Kahs business is rather straight forward and easy to understand. Its main focus is still in Malaysia market with personal care segment as it main business focus. However, as its products are rather common in nature, I really wonder how it manages to survive within the stiff competition environment. Before I look into more detail, I take a quick look at its business profitability (via net profit margin) and management performance (via Return on Equity) through its 2012 annual report to ensure that this company is worth for my time for further analysis. The outcome: Its business return is impressive (over 15% net profit margin) with reasonable Return on Equity (over 15% as well). So, it passes my quick test. I therefore compile the whole financial information required in my STARS Evaluation System and present it in the following table.
Table 1 For the past 11 years, its sales revenue growth was almost double. However, I can see the contraction in 2007, 2011 and 2012. I therefore look for its annual report for the respective years. Followings are the summary: 2007: The sales contraction was caused by slow manufacturing activities as a result of renovation work for production expansion. The renovation work was completed in second quarter of 2007. As what it highlighted that production capacity has always been one of the main constraints for the Group to achieve higher growth, I believe it could perform better in the future after the said expansion and the growing trend can be observed in subsequent year but 2011.
2011: It did not mention the reason for the mild sales contraction (1.86%) but its net profit improves substantially by 6.72%. To me, it is still fine in view of overall profitability improvement.
2012: It said the decrease in sales was due to implementation of stringent credit control policy to further strengthen its working capital.
To justify this statement, I refer to its Balance Sheet and income statement for the year for Trade Receivable and Revenue to calculate its Day Sales Outstanding (DSO). DSO is used to measure the average number of days that a company takes to collect its trade receivable. It will be good to a company if it collects outstanding receivables as soon as possible for it to have chance to put the cash to use again. Therefore, low DSO may also Counter *ENGKAH Column Labels Values 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sales Revenue 46,833 54,329 65,001 78,981 81,677 65,201 72,542 75,566 97,399 95,582 84,300 Net Profit to Shareholder 6,505 10,302 13,907 15,206 15,227 11,415 11,099 6,832 12,010 12,817 12,996 Net Profit % 14% 19% 21% 19% 19% 18% 15% 9% 12% 13% 15% Cash Flow from Operation 1,973 11,534 11,125 15,426 16,299 6,997 3,845 17,533 10,768 17,201 13,882 Cash % 1.3 2.0 1.7 1.8 2.0 1.4 0.6 0.7 0.5 0.8 1.3 Dividend Yield 5% 2% 2% 6% 6% 11% 12% 10% 8% 8% 7% Return on Equity 12% 17% 19% 19% 18% 13% 13% 9% 15% 17% 17% "STARS" Evaluation 11 10 10 10 10 10 10 For investbursa.com Platinum Members Only Issue: September 2013-130505 2013 Lai Seng Choy. All Rights Reserved.
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means that a company does not require short term loan to fund its working capital that could avoid interest expenses. The formula of DSO is very simple:
(Trade Receivable / Sales) * 365
To investigate Eng Kahs DSO, I have done the following compilation and analysis:
Table 2 What we can see from this table is that Eng Kah indeed attempts to lower its DSO via stringent credit control system. To me, it is a good sign as it has improved its DSO significantly from previously over 100 days to less than 80 days in 2012. After investigation, I find that Eng Kahs sales growth trend is still intact with reasonable explanation over its minor contraction in some years. I give it 1* for this category. Further on that, to analyse its net profit trend, I realize that the contraction of its 2007 net profit was due to the impact of the renovation work for its plant expansion while 2009 was due to change in product mix by consumers. As for its net profit contraction in 2009, Eng Kah highlighted that it was due to the increase in operating cost and changed of product mix which reflected the market demand as a result of unfavourable global economic condition. To justify this, I observe that Eng Kahs net profit recovers since then. This means its business has improved. Since the contraction is acceptable to me, I give Eng Kah 1* for its net profit trend. Next, since its average net profit margin for the past 11 years is at 16% mark, I give it 2* in this category. As Eng Kah passes the first three criterions of my STARS Evaluation System, all I need to do next is just to evaluate the remaining four criterions according to my STARS Rating System. After the analysis, I can conclude that: 1. Eng Kahs business is viable with good profit margin 2. Its management able to create value to its shareholders throughout the evaluation period and award its shareholders generously via cash dividend payment 3. It is a cash rich company with more than enough cash to cover its total obligation. That is why it has strong cash flow from operation and is debt free Now, back to the question on how it remains its competitiveness with common products. We should understand that should the raw material price increase while the company unable to transfer the cost up impact effectively to its customers, its profitability performance will be very much affected. However, this scenario is not applicable to Eng Kah. As we can see from its consistent strong net profit margin, I can conclude that Eng Kah is trying to control its costs at reasonable level For investbursa.com Platinum Members Only Issue: September 2013-130505 2013 Lai Seng Choy. All Rights Reserved.
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despite of increasing cost pressure as a result of inflation. This has reflected the intelligent of Eng Kah's management on cost control to remain its competitiveness and profitability. Throughout the evaluation, I can realize that it score 10* and above which also shows the consistency of its management and financial performance. I also take a quick check on Eng Kah's financial performance in 2013 so far. Based on first half yearly unaudited result, I have annualized its Sales and Net Profit for a quick reference: Items 6-Month Result (RMk) Annualized (RMk) Sales 32,968 65,936 Net Profit 4,070 8,140 Net Profit % 12% Table 3 Do note that the annualized figure is only an indication for ease of analysis. If I compare it with 2012 result, it shows a contraction of 23% in sales while its net profit margin is still intact. As the 6-month financial result is an interim report, no further explanation is given. Furthermore, the actual annual result might not be turned out this way should there be any counter measure to be taken on sales recovery. In view of this, I will keep this counter in view for further observation. How about its share price movement? Below is its price movement chart since 2012:
Chart 1 (Source: chartnexus.com) For investbursa.com Platinum Members Only Issue: September 2013-130505 2013 Lai Seng Choy. All Rights Reserved.
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Its trading volume is rather fair without any surprise but still acceptable to me as long as its volume moving average is not flat. Even with the recent market turbulence, I can't see there is any panic selling over this counter (sharp price contraction along with high trading volume). However, I can observe that its share price was on the downward trend since October 2012 and has entered into long term downtrend in January 2013 when its share price fell below 200SMA. (Note: The 200SMA is used to observe the long term share price movement trend. It is calculated based on the simple average of the past 200 days' closing price) I can conclude that its share price movement does not in line with its financial performance. Probably it is due to its unpopularity. Furthermore, due to recent market turbulence, its recent share price has reached early 2012 level. In other words, for those who hold this counter since 2012 gain nothing from its share price movement but did receive dividend payment of 8% per annum. Well, even though the return is not so promising, it is still performing better than fixed deposit return. In short, I might consider taking the position only when all of the below condition are met: 1. 50SMA is above 200SMA - this means mid-term trend has become bullish 2. 200SMA shows uptrend - this means the counter is turning from bear to bull 3. price uptrend is supported by increasing trading volume 4. my Process #2 indicates buy 5. other positive macro and micro factors that might arise This is a good example of a good counter that is being ignored by the market with unreasonable price movement. To me, as long as it is a good counter, I will continue to keep it in view.
** Please note that this article is purely based on my personal observation, analysis and judgement. It is purely for information sharing and educational purposes only. I do not recommend any buy or sell of this counter. I disclaim any responsibility, liability, loss or risk which may arise as a result of this illustration.
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