Monday, November 25, 2013

Kumpulan Fima Part II: Business fundamentals

Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. 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:

Manufacturing
2013
2012
2011
2010
2009
Revenue
201,869
193,688
203,403
179,569
160,447
Profit before tax
53,145
54,900
71,534
45,741
37,670

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:


K.Fima
Wilmar
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

30.06%
22.10%
n.a.


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.

3 comments:

  1. Nice analysis.. for the security printing business, the Finance Minister holds 1 golden share which can veto any board decision or company direction due to 'security', and it is the only company in Malaysia licensed to print givernment 'secret' documents. The security document printing division should continue to have steady business due to this factor.

    The sharp loss in income/profit is due to reducing the stake in Geisecke & Devrient from 30% to 20%, G&S specialize in printing currency and has already won tender to print some of MY new bills. The reduction of stake in a very profitable business is funny, but i suspect it is politically motivated as it is done just prior to the introduction of new currency.

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    Replies
    1. Hi, Gark thanks for your input and I'm glad you liked the analysis. Do you mind sharing where you got the information about the security document golden share thingy? The annual reports unfortunately didn't contain as much info as I would like for the manufacturing division.

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    2. Cant exactly remember.. i read it in one of the annual reports.

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