Saturday, November 30, 2013

Kawan Food Berhad: One delicious Malaysian stock?

Please read the disclaimer here: Enjoy the article, bitches!

In this article, I will be analysing Kawan Food Berhad. Kawan Food Berhad trades on the Bursa Malaysia with the stock code 7216. The stock closed at RM 1.28 (around USD 0.40) this Friday. I’m a kind of guy that lives to eat and nothing will make me happier than being able to invest in a great food company. Kawan Food manufactures frozen Asian food delicacies such as paratha, samosa, curry puff, oriental buns and etc. For foreign readers who don’t know what a paratha or curry puff is, try to score some of it in your countries as they’re fucking awesome.  Is Kawan Food that great food stock that I’ve been dying to find? Let’s find out.

Kawan Food has trailing twelve months (TTM) return on assets (ROA) and return on equity (ROE) of 10.75% and 12.63% respectively. While not on the level of Nestle, the company’s returns on capital are not bad at all. For the 5-year period of 2008-12, the company’s ROA was between 9.60% and 12.44%. This indicates that Kawan Food has consistently been achieving this level of profitability and that it wasn’t the strong performance for the 9 months ended September 30, 2013 that pushed up ROA.

For the 9 months ended September 30, 2013 Kawan Food grew its revenue and profit before tax by 14.67% and 34.79% respectively which is really good. The problem I have is that the company’s growth rate has slowed down over the 3-year period of 2010-12. Revenue grew at a compounded annual rate of 7.95% which is still alright. However, profit before tax actually declined marginally because of stuff like higher raw material costs. The company’s profits also fluctuate with movements in the USD. Higher USD equals more expensive products for customers not living in the U.S. and therefore lower demand for the company’s products. Macroeconomics 101, bitches! According to the company’s 2011 annual report, 50% of the company’s revenue was billed in USD.

As at September 30, 2013, Kawan Food had a rock solid balance sheet. The company had RM 32.45 million in cash with only RM 22.81 million in total liabilities. So, the risk of debt crushing the company is minimal.  

In my opinion, the main risks to Kawan Food’s profitability are a strengthening of the U.S. Dollar, rising costs of raw materials and increased competition. However, even based on 2012 earnings, the company has a P/E ratio of 11.34 which is really reasonable these days for a business with the quality of Kawan Food. So, I guess the current price of the stock makes accepting the risks worth it.

One of my irrational reservations about the stock is that it had a large run up this year and that I should wait for the price to come down a bit. But it was this mentality that caused me to miss out on a ton of money in the past. Right now I’m just wondering why the fuck I didn’t know about this stock when it was trading below RM 1. Probably watching e-sports… Oh, well…

Kawan Food may not be able to replace my true love that got away (Nestle during the financial crisis), but it will make me feel a little less lonely. I plan to take a small position in Kawan Food next week. If Kawan Food does pull back significantly after I buy it, I would chuck more of the stock into my account the same way I chuck down “roti telur” in a mamak restaurant (assuming that business fundamentals stay intact). Thank you for reading. Take care and stay rational  

Side note for my foreign readers: If you ever visit Malaysia or Singapore, do try to visit a mamak (Indian Muslim) restaurant and sample “roti telur”, “mee goreng” and “nasi lemak ayam.” When it comes to food, once you go mamak you never go back. The food is a bit spicy though, so be careful if you have a weak stomach.   

Monday, November 25, 2013

Kumpulan Fima Part II: Business fundamentals

Please read the disclaimer here: Enjoy the article, bitches!

In part 1 of this series, I discussed why I thought Kumpulan Fima is undervalued. In this article, I will be talking about Kumpulan Fima’s business performance. Kumpulan Fima’s stable of businesses collectively generate decent return on average assets and return on average equity of 11.11% and 13.16% respectively. But what are the business divisions that drive the company’s profitability and how sustainable are their profits? Let’s find out.

Manufacturing Division:

This is the crown jewel of the group, the Adriana Lima of supermodels, the Madam Kwan of Nasi Lemak. According to my calculations, this cash cow generates really healthy return on assets of 15.35% for fiscal year 2013 (A company would be doing well if it can achieve return on equity of 15% let alone a return on assets of 15%). The company’s fiscal year ends on March 31.

The following table shows the manufacturing division’s revenue and profit before tax (PBT) for the five year period of fiscal year 2009-13:

Profit before tax

As you can see, there was good growth in revenue and profits in the earlier part of the period. Profits did experience a sharp drop in fiscal year 2012, but has since stabilised. I know that PBT experienced a 13.4% year-on-year drop for the quarter ended June 30, 2013, but that’s just the first quarter of fiscal year 2014. Anyway, I based my calculations of true earnings in part 1 of this series on the results for the quarter ended June 30, 2013. So, I already made the assumption that the downward trend in PBT for the first quarter will persist throughout the fiscal year.

Having government contracts to print security documents should ensure that this division is able to consistently generate decent profits. The main risk is that the contracts won’t be renewed when they expire. However, I think that Kumpulan Fima should have an edge if it puts in competitive bids as it already has the expertise, infrastructure and track record for printing security documents.

Plantation Division:

I’m the kind of guy who believes that if you can just grow something, then its value wouldn’t hold over the long-term. But marijuana, poppy and the happy mushrooms obviously proved me wrong. I hope crude palm oil (CPO) proves me wrong as well, but I would be happy if it just stays at current prices. Kumpulan Firma experienced average net CIF (cost, insurance, freight) selling price, net of duty of RM 1959 per metric ton for the quarter ended June 30, 2013.  The company experienced average net CIF selling price, net of duty of RM 2,155 and RM 2,430 per metric ton for fiscal year 2013 and 2012 respectively. In this chart from Index Mundi, we can see that CPO prices are way off from early 2011 levels which make me feel a bit better, but what I feel is irrelevant as CPO prices can fall even further.

I really don’t have a clue where CPO prices will go from here; there are just too many variables involved. Heck, I don’t even know what I’m going to have for breakfast tomorrow. What I do know is that to get a competitive edge and earn relatively superior profits in a commodity business like palm oil, Kumpulan Fima needs to be more efficient than its competitors. The following are Kumpulan Fima’s key performance indicators in relation to Sime Darby’s and Wilmar’s palm oil divisions:

Sime Darby
Fresh fruit bunch harvested per mature hectare

23.65 metric ton
18.89 metric ton
21.52 metric ton
Profit before tax as a percentage of revenue


Notes to the table:
Data in the table is calculated or taken from Kumpulan Fima’s fiscal year 2013 annual report, Sime Darby’s 2012 annual report and Wilmar’s 2012 annual report.

I did not include PBT as a percentage of revenue for Sime Darby as its plantation division included results from its downstream operations as well.

As you can see, Kumpulan Fima is currently more efficient than Wilmar and Sime Darby. The age profile of Kumpulan Fima’s planted area is also pretty attractive as it indicates that fresh fruit bunch harvested per mature hectare should reach a peak in a few years’ time. 66.6% of Kumpulan Fima’s planted area is between 4-9 years old which can be considered young while 24.7% of the planted area is between 10-18 years old which can be considered prime. Please refer to this post on KCLau’s blog to look at the chart of fresh fruit bunch yield against age of planted area.

Bulking division:

This is my second favourite business division. If the manufacturing division is Adriana Lima, the bulking division would be Erin Heatherton. Not as famous, but still really tight. The bulking division is a high margin business with high return on assets. The division’s PBT as a percentage of revenue was 57.82% for fiscal year 2013. According to my calculations, the bulking division return on assets was 28.50% for fiscal year 2013. While the bulking division experienced a sharp drop in revenue and PBT of 11.95% and 18% respectively in fiscal year 2010, profits and revenue have grown strongly since then. Revenue grew at a compounded annual rate of 16.59% for the 3-year period of fiscal year 2011-2013. PBT grew at a compounded annual rate of 24.23%. Growth was flat in the quarter ended June 30, 2013.

The main risk for this division is that industry players may create too much capacity by building too many storage tanks. This could cause intense rivalry and deplete industry profits. However, due to the bulking division’s high margins, revenue has to drop quite significantly before the division starts making losses.

Well, this concludes the series. I thank you for reading and I hope you liked my analysis. I think I’m going to go google up pictures of Adriana Lima and Erin Heatherton and “relieve” myself now. Take care.

Wednesday, November 20, 2013

Invested in KLCC Property Holdings Berhad

Please read the disclaimer here: Enjoy the article, bitches!

I picked up some shares in KLCC Property Holdings Berhad or KLCC stapled securities as they're called these days for RM6.10. KLCCP (we will refer to the company as KLCCP in this article) is listed on the Bursa Malaysia with the stock code 5235SS. I like the company because it owns high quality properties in strategic locations. You know that a real estate portfolio has some good stuff when one of its properties appears in postcards and “Visit Malaysia” advertisements. KLCCP is trading at a P/E ratio of 15.5 (based on annualized quarter 3, 2013 earnings) which is reasonable. The income-generating properties that KLCCP owns or have an interest in are: The Petronas Twin Towers, Suria KLCC, Kompleks Dayabumi, Menara ExxonMobil and Menara 3 Petronas.

One way to tell if a portfolio of properties is really the bomb is by looking at the average revenue it earns per square foot (psf). The following tables compare KLCCP’s average revenue psf against that of other real estate investment trusts (REITS):


Average annual revenue psf

(Ringgit Malaysia)










Average annual revenue psf

(Ringgit Malaysia)


236.0467 (its significantly higher than this, please see notes to tables)








Notes to the tables

I use the term average revenue psf instead of average rent psf as some of the REITs generates revenue from stuff like parking.

The average revenue psf figures are calculated from data in the prospectus of KLCCP and in the 2012 annual reports of the other REITs. 

KLCCP’s average revenue psf doesn’t include Suria KLCC as I couldn’t find the necessary data. A research report from Maybank estimates Suria KLCC’s average rental psf at RM 25 per month (RM 300 per year) for fiscal year 10/11. It may be even higher now. Most of the retail segment’s revenue is contributed by Suria KLCC. 

KLCCP’s average revenue psf doesn’t include Kompleks Dayabumi as I couldn’t find the necessary data. However, Kompleks Dayabumi’s contribution to the office segment’s revenue is not really significant so I guess its ok to exclude it.  

As you can see from the tables, KLCCP’s properties are able to command higher rental rates than its competitors. However, to determine the sustainability of a REIT’s revenue psf we have to look at the occupancy rate of its properties. A high occupancy rate obviously indicates high demand for space in the REIT’s properties. The higher the demand for space in a property, the more likely it is that rental rates can be maintained or even increased. Supply and demand, bitches! That’s what it’s all about.The Petronas Twin Towers, Menara ExxonMobil and Menara 3 Petronas office tower have 100% occupancy as at December 31, 2012. The Menara 3 Petronas retail podium has an occupancy rate of 92.20% and while I can’t find data on KLCC Suria’s occupancy rate, KLCCP expects it to be at 99% in 2013.

The Petronas Twin Towers and Menara 3 Petronas office tower is leased by a single tenant: Petronas, obviously. Menara Exxonmobil is also leased by a single tenant: Exxonmobil (bet you didn’t see that coming). My point is that these 2 industry giants are really high-quality tenants and it’s likely that they will keep renewing their leases over the long-term. The risk of KLCCP’s property portfolio experiencing significant vacancy rates is therefore limited. 

A good piece of real estate should be able to raise its rental rate at a pace that’s at least in line with inflation so that it maintains its value in real terms. KLCCP’s properties certainly have been able to increase their rental rates recently. Revenue from the office segment experienced a year-on-year increase of 17.8% for the third quarter, 2013 due to the renewal of the lease for the Petronas Twin Towers effective 1 October 2012. Higher rental rates from lease renewals contributed to a 14.9% increase in revenue from the retail segment. KLCCP has made provisions in its long-term lease contracts to revise rental rates upwards periodically. The rental rate of the Petronas Twin Towers and Menara 3 Petronas office tower will be reviewed every 3 years based on the formula of 3% per annum compounded for the preceding 3 years. 

KLCCP’s properties are all freehold with the exception of Kompleks Dayabumi which lease expires in 2079. So, there’s no need to worry about KLCCP losing its income sources anytime in the foreseeable future.

If you annualize KLCCP’s net profit attributable to stapled securities holders for the third quarter, 2013, you would get RM 711.22 million or RM 0.394 per stapled security. At its current price of around RM 6.10, the stock would have a P/E ratio of 15.5 which also translates to an earnings yield of 6.45%. I think it’s a reasonable deal as I don’t believe it will be easy to find a property with a 6.45% rental yield after subtracting costs for maintenance, negotiating leases with clients and etc. The stapled security should also give you more liquidity. When you invest in KLCCP, you will also be buying into a portfolio of top quality properties which should really pay off over the long-term. 

KLCCP also owns the Mandarin Oriental hotel. According to KLCCP’s 2012 annual report, the hotel has the largest market share amongst Kuala Lumpur’s luxury hotels, so they must be doing something right. If you’re ever visiting Kuala Lumpur, help a brother out and stay the night at the Mandarin Oriental! Thank you for reading, take care.

Monday, November 18, 2013

Invested in Singapore-Based Boardroom Limited

Please read the disclaimer here: Enjoy the article, bitches!

I recently purchased stock in Boardroom Limited, a Singapore-based company for 0.63 Singapore Dollar (SGD) per share. The company is listed on the Singapore stock exchange with the stock code B10. Boardroom limited provides business solutions, corporate secretarial and shareholder services to its clients. The company earns very high returns on tangible assets and is currently trading at a reasonable valuation of 13.33 times earnings. The company also has a solid dividend yield of 5.08%. In times when the market is fairly valued, it’s especially good to have sources of income to build up your cash hoard to take advantage of future downturns.  
Background story (feel free to skip): Now I live in a city in Malaysia called Johor Bahru which is just a bridge away from Singapore. As a kid, my homeboys and I hated Singapore because we thought that Singaporeans were kiasu (afraid of losing). To quote Thorin Oakenshield from the hobbit: “I was never more wrong in my life.” Apparently having the kiasu spirit resulted in the creation of many ultra-productive companies in Singapore. As an admirer of superlative ability, I must say that being kiasu is a respectable trait when it comes to business.

While the company’s return on average assets (ROA) and return on average equity (ROE) of 7.60% and 12.21% respectively for the year ended June 30, 2013 is decent, it’s nowhere near the level that would get you hard or wet. However, Boardroom Limited generates tremendous returns on tangible assets (ROTA). For the year ended June 30, 2013, the company achieved ROTA of 27.59%. If you add amortization of customer relationships back to profits, the ROTA goes up further to 31.53%. As at June 30, 2013, the company had SGD 102.01 million in total assets of which SGD 72.98 million is made up of intangible assets such as goodwill and customer relationships.

Side note: Yes, certain intangible assets such as software are related to the company’s ongoing operations and we need to take into account those intangible assets and related charges to earnings when calculating ROTA.

Now I know that some of you may be thinking that its guys like me with their assumptions and fancy mathematics that cause shit like Enron to happen. But please let me explain. I’m judging Boardroom as a cash cow so intangible assets like goodwill and customer relationships shouldn’t matter as it just represents investments made in the past and are not employed in the day-to-day operations. It is tangible assets like accounts receivable and plant, property & equipment that the company has to tie up its cash in or reinvest in. Therefore, it’s the ROTA that determines the company’s ability to throw off cash to shareholders. For example: An asset-intensive company like a car manufacturer has limited ability to pay out dividends as it needs to continuously reinvest a lot of its profits in  plant and equipment.

I’m not discarding the conventional ROA and ROE ratios when judging a company’s performance. They’re very important when it comes to evaluating management’s ability to allocate capital, especially when the company is still aggressively expanding. While Boardroom’s management doesn’t have Peter Lynch’s or Warren Buffett’s mad skills when it comes to capital allocation, they’re still doing alright.

As an added bonus, Boardroom’s geographical exposures are just the thing I really need to manage my portfolio’s concentration risk. The following is the geographical breakdown of the company’s profit before tax: Singapore 31%, Malaysia 15.7%, Hong Kong 4.8%, China -7.5%, Australia 56%. This is awesome for me as I currently have a large exposure to the United States.

At the end of the day, I think Boardroom will fit well in my portfolio as an excellent cash generator which will help me fund many of my future investments. Thank you for reading and may the breasts of your cash cows never run dry.

Thursday, November 7, 2013

Took a position in Monster Beverage

Please read the disclaimer here: Enjoy the article, bitches!

In the past few weeks I added Monster Beverage Corp to my portfolio at USD 52.09 per share. In short, I invested in the stock because I think it’s a great business and has huge growth opportunities. I also bought shares in Ebay, DeNA Co and Boardroom limited over the past few weeks. However, I’m a fucking sloth and it would take me just as long to put out an article as it would take a hipster to finish his organic coffee and leave Starbucks. So I can’t promise when I will publish articles discussing those stock picks.

Monster Beverage is incredibly profitable as evidenced by its high return on assets and equity of 22.23% and 31.75% respectively for the 12 months ended June 30, 2013. Management has also grown the company astronomically. Monster Beverage grew revenue and operating profits (after I made adjustments for one-time items) at a compounded annual rate of 14.79% and 19.16% respectively for the 5-year period of 2008-2012. The company has been able to reinvest its profits at a high rate of return as evidenced by the 42.3% returns its earning on the additional equity employed in the business over the 5-year period of 2008-2012. The return on additional equity is an important metric for companies that reinvest most if not all of their earnings. I don’t want management to do weird stuff with my money like building wind farms or sticking it in a bank and jerking off at the 1% interest rate per annum. If you can’t profitably reinvest my money, pay me a dividend so I can go do my own weird stuff like buying all of Julia Sheer’s and Tiffany Alvord’s songs so I can listen to them while driving around the country aimlessly.

Benjamin Graham pioneered the following formula to value growth stocks: Intrinsic value = (8.5 + 2 x earnings growth over the next 7 to 10 years) x earnings per share. You can read more about this formula in this Wall Street Journal article. After adjusting for one-time items and the dilutive effect of stock options, I estimate that Monster Beverage had earnings per share of $ 1.96 for the 12 months ended June 30, 2013. I bought the stock at $52.09. So, after performing some basic algebra with Ben Graham’s formula I find that the company needs to grow profits by 9.04% for the next 7 to 10 years for me to get a fair deal out of the price I paid. Here are my calculations:

52.09 = (8.5 + 2 x G) x 1.96
52.09/1.96= 8.5 + 2 x G
26.58 – 8.5 = 2 x G
18.08/2 = G
G = 9.04%

Obvious side note: G represents growth

Did I get value for my money or did I overpay for the stock the same way shmucks overpay for “socially responsible goods”? Let’s find out. The following excerpt from an article on Yahoo! Finance highlights the growth opportunities of the energy drink market in the United States. You can read the article here.

“At present, energy drinks have the lowest consumption rates of any RTD (ready-to-drink) beverage—a point which reflects the market's relative infancy but also its growth potential. Experian Simmons analysis shows the growth trend of this market, with the incidence of energy drink usage among adults rising from nearly 13% in 2006 to 17% in 2012. In addition, there is a modest segment of heavy users: 5% of adults consume energy drinks 5-7 times per month and less than 2% drink energy drinks 10 or more times.”

As you can see, there are a lot of opportunities for energy drink makers to grow their business by increasing the number of times customers drink energy beverages in a given period. For the quarter ended June 30, 2013, Monster Beverage only generated 22% of its gross revenue internationally, giving the company a lot of room to grow by continuing to build market share outside of the United States. So, yes a 9.04% growth in revenue and profits for the next 7 to 10 years is certainly within the realms of possibility. I know that revenue growth has slowed down to only 6.4% for the second quarter ended June 30, 2013. But I’m a long-term investor and short-term slowdowns don’t worry me. It’s the big picture I’m concerned about and it looks promising for Monster Beverage.

Is there a chance that I overestimated the company’s growth prospects and made a mistake of not requiring a margin of safety? Sure. But if the stock ever experiences a sharp correction, then I will be like a rich China woman in a Louis Vuitton store and load up on the stock (assuming that the business fundamentals remain intact). That’s just how good I think the business is and that’s just how I roll, bitches. Thank you for reading, stay rational and take care.

Side note:  Some if not all of the figures in this article are calculated by myself and may differ from the actual figures that you may get using conventional formulas. Please let me know in the comments section if you’re interested to know how I calculate any of the figures in this article.