Yes, I am here to present what I consider probably the best investment blog in Malaysia and Singapore. No, its not this blog, lol, not so full of myself. I have been reading this blog for the past 3 months and found that his analysis is possibly a few rungs better than the best analyst reports circulating.
Its exceptional that he is not even an analyst and still a student, probably a top Malaysian student studying at a Singapore university (brain drain again).
http://www.goodstockbadstock.blogspot.com/
The title could have been better, but good stock bad stock should do for now. The only way my blog is better than his has to be my girlie photos... sigh. He aims to land a fund manager position, but my advice would be NOT to land a fund management position so early in your career. Its a passive way to put to use your intellect. Get into a research analysis position to prove your mettle, at a top house so that you get the right exposure by the big players in the markets - once you have done that well, you will have enormous choices at your disposal.
A fund management position may break your spirit because although you have the intellect, you have not gauged why stocks go up and down. You have not ascertained why certain good stocks don't move. You have not developed what is an under-owned stock and an over-owned stock. Everyone wants to be Buffett but there's ample time to do that.
Book knowledge and discerning analysis will only carry you so far. Being market savvy is something that needs to be learn from observing and being immersed in the markets. Life is not as simple as we like it to be. If not, the richest people working in financial markets will automatically be the smartest people as well - and let me assure you that that is certainly almost never the case.
Some readers complain that my postings may be a tad long, then have a read of his excellent review on Evergreen. Its long but easily the best analysis on the stock that I have ever read. I would like to hire him when he gets out of university, drop me an email.
--------------------------------------
Thursday, August 19, 2010
Result Update : Evergreen Fibreboard
Initially, I plan to write a review on all my portfolio holdings but found it too tiring to actually write it out as each company will probably take up 10 pages of A4 size material for a complete review. So, I would just review each of their result release. Evergreen Fibreboard (KLSE:5101) just released their 2Q FY2010 result on Monday.
First things first, this is not a stock recommendation by me. This is merely a review and for people to criticize the stock I hold so that I can cover my blind spots and do not become overconfident with my conviction. In any case, you should not let a clueless undergraduate to do stock picking for you. In addition, my entry cost is also much lower than the current level, so, my risk is substantially lower when I purchase it. What is an attractive valuation during my purchase level may not be attractive now. So, here's the review. (Note:Some of the stock price sensitive ratio here may be not up dated as I wrote this on Monday (16/7) and only published it on today.)
Evergreen's revenue is bogged down by USD strength against MYR. It is only up around 1% from previous quarter. Receivables expand at a faster pace than sales at 3%. But, the small percentage change do not cause much of a concern and days receivables is still at a very much manageable 24 days of sales. Profit is up 10% from last quarter largely due to a very good reduction in sales and administrative cost indicating that the operating leverage may be decreasing (SGA are mainly fixed cost) and the synergy between the new acquisition and the older ones is starting to show. Half year ROE stood at almost 9.0% making it 18% if annualized but if status quo remains, I believe the ROE may not be as high as the 18% as management is paying off debt, hence, reducing the leverage effect. ROA (calculated using net profit rather than operating income net of tax, so computation may be on the low side) is at more than 5.4% making it 10.8% if annualized. Gross profit margin is still decent at almost 32% and net profit margin is almost 15%, which is quite a good profit margin in terms of industrials as the normal range is below 10%. There is no significant pile up of inventory with it increasing 3% and the ability of Evergreen to increase prices every one or two months in this FY indicates that sales volume should be still satisfactory. If price increases stop when raw materials prices still increase, it may be a sign that sales may be suffering, so far, it does not seem to be the case. Cash flow is still healthy and is utilized to pay down debt as well as paying the dividend that is not being paid during the recession. However, non-cash working capital requirement increase by a bit due to increase in receivables and inventory.
Dividend remain constant from 1Q that is 2 cents per share. If annualized, then the rate would be 8 cents per share which results in an ok but not great dividend yield of around 5% at current prices. The next cycle for acquisition or capital expenditure come in at 2012 according to the management so dividends may not grow beyond current level unless there is significant increase in fibreboard prices similar to circa 2007. EPS to date is 13.5 cents which is still on track to achieve my estimated EPS of 24 cents. If current result is annualized, hence an EPS of 27 cents, the PE is 5.74 which is quite ok.
One point to concern is that the management have started hedging their USD exposure. The concern would be it is used for speculation purposes, but, a disclosure on the amount hedged is still very much in line with their sales and foreign currency exposure which is around 50% of their sales, hence, no serious concern in that area. Another thing to note is that short-term USD denominated loan have increase by RM4.15million or 26% to RM19.9million. This is another indirect method by the management to hedge against their USD exposure and to take advantage of the low USD interest rate.The loan amount plus the amount hedge via forward contracts is still below their total USD exposure. So, this should not pose any worries.
Regardless of the result, Evergreen's share price have been stagnant for quite some time. The reason for this stocks do not go up is Quek Leng Chan and LTH is selling. Quek have been selling for quite some time. He still have 5% on the stock, further selling will result him ceased to be a substantial shareholder. Regardless of whether he is a substantial shareholder or not, I think he will keep on selling as he would not want to involve in business that he have no control. He get Evergreen shares when he sold one of the fibreboard plant to Evergreen, his cost is around RM1.30. So anything above RM1.50, he is selling. Below that, he stop. It is the same case with LTH. So, this stock may remain depress for some time until Quek finish selling and LTH may sell down their exposure in Evergreen or exit completely. Both shareholders own 10% of the stocks, with such a low volume, it is very hard to absorb the selling and price will still be depress.
Nomura recently come out with a research report with a TP of more than RM3 on this stock. But, don't look too much into it as I find that rather over optimistic and it is one of the sloppiest valuation that I have ever seen. It is like they plug a number out of no where and come up with a target price. Unless we have another bull run, RM3 is i think quite a far fetch but RM 2 i think is still quite possible on this stock as the ROE and profit margin is quite good.
Since this is the first post on Evergreen, I may talk a bit about its management. Evergreen is a family-owned firm of the Kuo Family (note: it is Kuo not Kuok. It has no relationship with Tan Sri Robert Kuok). So, most of its top management are family members. One thing I like about the management is that it is focus on its core competency. The management have come out to say that they are will remain focus on doing what they are good at i.e. making fibreboard and will pay less attention to diversifying into other areas. From the current data, it seems that they are still following this mantra and the only non-core operation they have - furniture making - is still a small part of their operation. This is good news as far as I am concern as there are a few overconfident management team in Bursa that like to diversify from their core operations. Most of this cases would normally result in failure. Bursa have an egg company that fancy themselves to make industrial glasses , a clothing company that fancies itself to run a restaurant chain and some other firms that think building houses is a good addition to their core operations.
As an industrial firm which commoditize item with little differentiation is produced, you need to be a lowest cost producer to be successful and survive. Evergreen management is a good penny-pincher, they always tried to control and reduce their operating cost via vertical integration by building their own power plant and glue resin plant. No doubt, vertical integration can be overdone, but, currently, with the margins they are producing compared to their competitor worldwide, the vertical integration program seems to be working. However, I have to admit that the management may eventually overdo it. They are talks by the management that they are contemplating on investing in wood plantation (most likely rubber tree as rubber log is their core material). I am not really sure about this investment as it takes quite a long time for trees to grow. Further explanation on the reasoning behind such an investment (if they really proceed on with that) is needed.
As for the directors compensation, for such a focus management, I believe their paycheck is reasonable. There are one directors who draws salary between RM1-1.15mil, one from RM0.95-1mil, one from RM750-800k ( I believe all three are family members) and the last one draws a salary RM250-300k range( this should be the outside director). This is decent compensation as there are quite a few small cap that earns much less but receive twice as much. Another thing to note is that, the executive directors compensation decrease by around 20% during the crisis. This is quite a commendable move because prior to the crisis, Evergreen have been a good dividend payer. So, they do not pay themselves obscene salary to begin with. Pre-crisis, the Kuo family receives roughly around RM10mil+ per year from dividend. However, as the dividend was suspended during the crisis, the family have lost a RM10mil annual cash inflow which may create some cash flow problem within the family. With such a substantial lost in dividend income, they could have maintain their normal compensation or even increase it, however, they decide to take a 20% pay cut on top of the loss in dividend income. In total, the family lost or cut 75% or more of their regular income during the crisis. Perhaps our minister can emulate this management when our government face some budget deficit?
Something negative but perhaps not that relevant fact about management that I can find is that one of the person from the management team (an outside manager, not from the Kuo Family) , I believe may be engaging in an MBA program from an unaccredited institution i.e. the type of MBA that you can ..... (fill in the blanks yourself :-) [ It is my suspicion, not facts because this is the closest match I can find from google on the institution he/she claimed to be earning his/her MBA]. I believe this reflects badly on the character of one of the manager. No doubt the manager can study for it, but, he/she should have chosen a more reputable institution instead? I am not sure he/she in turn would harm the company as it seems to be normal nowadays for people to have that type of MBA or other royalty titles via errr... non-regular means.
Another thing about the management which may view as postive or negative depending on people is that the management tend to do an acquisition every few years. However, the acquisition that they have been doing is well within their core-competency i.e. buying other fiberboard plant. So, it is very much similar to the capital expenditure by buying property,plant and equipment from scratch. So far, all the acquisition works out fine and they manage to integrate this acquisition very well. As long as it is not something crazy like buying an unrelated business, such acquisition is fine and can be treated as normal capital expenditure as such, do not pose too much of a concern. Again, a note of caution is that the management made one of their acquisition on almost the peak of the fiberboard price cycle. The acquisition I believe saddled them with quite some debt. As housing crash, the whole fiberboard industry crash too and they are operating at around 40-50% capacity partly due to the extra capacity from acquisition. It is amazing feat that they actually manage to be marginally profitable during that period with such a low capacity when their competitor are facing the risk of bankruptcy. Even though they are marginally profitable, they still break some debt covenant and the banks require them to paid back the debt of around RM50mil in a very short period of time. They manage to paid back the debt as required by eliminating dividend. This is not an example to show how great the management is in handling the crisis but is to show that there are dangers that the management may again do an acquisition on the top of the cycle and thus, pose some danger if there is another badly timed acquisition. Currently, they seem focus to paid down their debt and integrating their acquisition before talking about further expansion (which is a good thing as Evergreen have basically doubled their capacity in the last 5 years). A point to note is that none of the analyst that cover the company seems to talk about this breach of debt covenant. Either the analyst do not read the financial statement or they thought this is not relevant as Evergreen have already paid back the debt for a few months when they resume coverage.
As an industrial firm, the barriers of entry is relatively low as there are not much of brand awareness and differentiation going on. A mild form of barriers of entry that can protect the industrial firms may be the huge capital requirement needed to set up a plant with the economies of scale to operate profitably. In the fiberboard industry, the scale needed to operate relatively profitably is 200000 cubic meters per annum with an initial start up cost of RM200million. (I got this figure by asking the management, so, as usual, practice caution whenever it is statement from the management but they seems to be quite honest.) I would not said RM200million as a huge capital requirement, but, it is quite a large number to deter quite a number of people.
Valuation
I am not going to do some sort of DCF or normal relative valuation here as you can find it in research report. I will try to do a simple Private Market Value (PMV) valuation. I have been trying to learn and do this sort of valuation but can't really do much because of the lack of data. A private market valuation is a valuation that is the value of what an informed private investors (vs Public) would pay for the asset in a private market transaction.
The method of my PMV valuation may be completely wrong and too rudimentary. However, I am posting it here so that people can tell me which area that it can be improve or is plain wrong. I will use some data of some acquisition made by Evergreen from the private players as my valuation point. Some sharp readers would said that this is a stupid exercise. Yes, I admit this is stupid as I am basically assuming that Evergreen is paying the correct price for its acquisition and the amount of data is certainly not enough to justify such valuation. However, the decent performance by Evergreen all this while may suggest that they do not overpaid for the asset. They did not impair any of the goodwill so far and the assumption they made on the goodwill impairment test seems fairly reasonable to me. But, again, it is still quite stupid of me to base it on such data but I am trying something new so as to improve on it. It is something that I wish to learn. I am warning you berforehand that the valuation is stupid, so don't look too much into it.
Based on the acquisition data, a normal MDF plant should be valued at RM1million / 000'cubic meter per annum. Evergreen have a production capacity of almost 1.3million cubic meter p.a. (after adjusting for their half interest in Indonesian operations) . As the price paid for a plant I think is differs by the machinery i.e. the thickness of medium density fibreboard that it can produce, I will be more conservative and used RM900K/'000 cubic meter per annum instead. By using that, I get a total PMV of RM1.17billion. By netting off long term debt of RM280million on Evergreen balance sheet, I get PMV of RM890million or RM1.73/share, slightly above the current market price of RM1.60/share. However, this is I believe the low end of the valuation as most of Evergreen plant is actually rather new and its Thai plant has some quite recent technology on it which produces very thin fibreboard.
So, my 10% discount of RM100k/ cubic meter per annum may actually undervalued its production capacity. Plus, this valuation actually ignore the rest of Evergreen's glue and power plant they have as well as the small particle board plant. In addition, it ignores the synergy and economies of scale that Evergreen had (biggest in Malaysia and I believe in Asia) and the higher margin they manage to generate using this plant from that of prior owners. However, I admit that my view may be bias, so I welcome comments who think that my valuation may have actually overvalued this stock. In fact, I am not sure whether PMV is done using such a way. So, any comments are welcome.
0 comments:
Post a Comment