Equity Research - Latitude Tree Holdings (7006.KL)

Latitude Tree Holdings (7006.KL)


Latitude Tree Holdings is a company incorporated in Malaysia and principal place of business is in Kapar, Selangor Darul Ehsan. It is listed on the Bursa Malaysia under the stock code 7006.


Please click here for the research report and make sure you read the investment research disclaimers at the end of the report.




Kind Regards and Happy Trading,

KapitalWise

Comments on Kim Hin Berhad (using Bloomberg)

On 14/08/2016, we have posted a research on Kim Hin with a target price of RM 2.06. This article aims to show the investors, with the aid of Bloomberg data, the relative valuation of Kim Hin against the overall market.




Currently, the EV/EBITDA and P/E are trading at 4.2x and 13.57x. With an increase in borrowing, it raises the enterprise value by 0.6x which is not significant.




Bench-marking its P/E ratio against KLCI. Previously the gap was wider but has narrowed down significantly. With the growth prospects, we could potentially see an expansion in P/E multiples going forward.




P/CF is also at a discount of c. 35% to KLCI. We would expect the recent cash flow to be weaker due to the heightened capital expenditure as it pushes the P/CF multiple higher. However, we do not know which cash flow item Bloomberg looks at so we cannot comment further. Our cash flow would have considered the capital expenditure (Capex) whereas Bloomberg may be use the Cash Flow from Operations (which does not take into account the capex).




Huge deviation from the average P/B multiples. Currently it is at 0.47x against 1.73x (KLCI). It does not automatically means it is undervalued.The general market usually assume the value should trade closer to the equity value (i.e. Close to 1.0x) which may not necessary be true. White horse is currently trading at 0.6x, Seacera Group is trading at 0.3x and Yi-Lai is trading at 0.6x (source from Bloomberg).




Historical financial showed that the firm has improved gradually. We expect that its expansion plan will contribute positively to its top and bottom lines as it expands into foreign countries such as Vietnam. We also expect that the Vietnam division will start to contribute to the bottom line by end of 2017 as it has shows improvement in operating efficiency.




Lastly, the peers identified by Bloomberg. We have try to sort the peers domiciled in Malaysia and surprisingly the list is empty. Hence, these companies might provide little value for comparison purposes (due to geographical and operational differences).



Summary:
- The P/B although suggests that the KLCI in general is trading at 1.7x but our identified peers are trading less than 0.7x hence we believe it might not be valuing it close to P/B 1.0x in foreseeable time.
- The leverage does not materially impact the valuation hence we will continue to monitor the borrowings that could potentially erode the cash flow.
- The valuation multiples that we looked at are at discounts to the KLCI.


The information provided by Bloomberg have not been verified by us hence we assume the data is correct. Our research report can be found by clicking on this link. It is worth pointed out that the above relative valuations are measured against the general market rather than the specific industry (Ceramic tiles manufacturers for instance) hence it could be materially different. The above only serves as an information purpose with no attempt to value the company.



Kind Regards and Happy Trading,

KapitalWise


Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.

Comments on Favelle Favco Berhad (using Bloomberg)

On 29/08/2016, we have posted a research on Favco with a target price of RM 2.75. The share price during this period has been trading sideways possibly due to the lack of re-rating catalysts to boost investors' confidence.

This article aims to show the investors, with the aid of Bloomberg data, the relative valuation of Favco against the overall market.




At the moment, there are three investment houses covering Favelle Favco Bhd with an average target price of RM 2.52 (upside potential of 6.8%). And all are currently having neutral recommendations on the stock.




The EV / EBITDA currently at 1.95x which we believe is at deep discount. Its ample cash reserves despite of its generous dividend distribution provides it sufficient strength to overcome its tough trading conditions. P/E is trading at 6x and free cash flow although deteriorated, we believe it still demonstrates the company is good at generating cash flow from operations.





Currently P/Es of Favco and KLCI are trading at 5.9x and 18.0x respectively. That is representing close to 70% discount.




When compared it against small cap index, the discount is almost at 80% (P/E of small cap index is 32.4x which is deem to be high end). However, this is only for illustration purposes as we do not want investors to be fool by the deep discount in this instance. The reason is because small cap stocks, in generally, have higher growth prospects hence stocks deserve to be valued at higher multiples. The benchmark against small cap is for information only.




With P/B, KLCI on average is around 1.73x while Favco is 0.96x.




P/S suggests a much deeper discount as the KLCI is currently trading at 2.6x Price to Sales while Favco is 0.7x.




Despite the fact that it is a relatively small company, its cash flow generating ability allows it to pay dividend distribution. Dividend coverage is sustained at above 3x (based on net income and free cash flow). Dividend yield of 6.3% is quite attractive while the general market is paying 3% on average.

Lastly, the peer comparables identified by Bloomberg showed that on average, the P/E and ROE is at 27x and 7.23% respectively. It is worth pointed out that the average market is higher than that of Favco. The market cap is generally above RM 1b (those that we can see at least). The multiples discount is in the range of 40% to c. 90%.




Summary
- From the valuation metrics, majority of them suggest that Favco Berhad is a defensive counter currently trading at support and deep discount relative to the general market.
- Strong dividend coverage with attractive dividend yield.
- Well-positioned to benefit from the regional infrastructure growth with the establishment of Asian Infrastructure Investment Bank that committed to fund the infrastructure needs of the asian economies.
- Strong balance sheet with huge cash balance and low leverage.
- Good cash flow generating ability


Key Investment Risks
- Do not foresee any re-rating catalysts
- Any slow down in order book
- Fails to benefit from the regional infrastructure growth fueled by the credit from AIIB.
(In September 2016, AIIB has granted loans worth $320m to support energy projects in Pakistan and Myanmar which we believe more loans will be approved in the near future to support regional development which emerging markets are most needed).
- Any unexpected accidents that would weaken Favco's reputation.
- Relative small with no meaningful global presence



The information provided by Bloomberg have not been verified by us hence we assume the data is correct. Our research report can be found by clicking on this link. It is worth pointed out that the above relative valuations are measured against the general market rather than the specific industry (Cranes for instance) hence it could be materially different. The above only serves as an information purpose with no attempt to value the company.



Kind Regards and Happy Trading,

KapitalWise



Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.

Equity Research - Fima Corporation Berhad (3107.KL)

Fima Corporation Berhad (3107.KL)


Fima Corporation is a company incorporated in Malaysia and principal place of business is in Bukit Damansara, KL. It is listed on the Bursa Malaysia under the stock code 3107.


Please click here for the research report and make sure you read the investment research disclaimers at the end of the report.




Kind Regards and Happy Trading,

KapitalWise

Equity Research - Jaycorp Berhad (7152.KL)

Jaycorp Berhad (7152.KL)


Jaycorp is a company incorporated in Malaysia and registered office is in Sungai Rambai, Melaka. It is listed on the Bursa Malaysia under the stock code 7152.


Please click here for the research report and make sure you read the investment research disclaimers at the end of the report.




Kind Regards and Happy Trading,

KapitalWise

Equity Research - OKA Corporation Berhad (7140.KL)

OKA Corporation Berhad (7140.KL)


OKA Corporation Berhad is a company incorporated in Malaysia and registered office is in Ipoh, Perak. It is listed on the Bursa Malaysia under the stock code 7140.



We have researched this company and believe that the upside potential of the stock is c. 9% based on discounted cash flow model. We have a neutral rating on this stock as we believe the huge surge in share price in recent months would make the investors to be cautious (and the target price is consistent with our investment ratings).


Please click here for the research report and make sure you read the investment research disclaimers at the end of the report.




Kind Regards and Happy Trading,

KapitalWise

Quarterly Result Commentary - Favelle Favco Berhad

Favco's quarterly results have mixture of both good and bad. Overall, we can see the management is making good progress with regards to profit generation (in terms of margin, not absolute) in a challenging environment. Here are some key takeaways:


Negatives:
- Comparing cumulative six months result with previous six months, the fund from operations decreased from RM 53.6m to RM 34.2m (margin decreased from approx. 27% to 21%). The free cash flow declined from RM 80m to RM 43.6m (margin decreased from approx. 40.3% to 26.2%). It is worth noted that the free cash flow generation of previous six months was boosted by positive change in working capital (60% higher than current six months) hence temporarily increase its free cash flow. Margin in double-digit range which is still significantly higher than its competitors.
- Order book declined from Q1 RM605m to RM571m (5.6% declined).
- Overall, the revenue declined was due to bad performance in foreign sales while partially offset by robust domestic demand.


Positives:

- Despite the revenue declined by c. 16%, Favco managed to increase its profit (+15% compared to Q2 15) due to 1) better control over operating expense (down from 86% to 84%), 2) better profit contribution from associates and 3) low effective tax rate (down from 39% to 28%). It is worth noted that looking at six months cumulative results (instead of comparing individual quarter), it is still 23% lower than previous six month.
- Given its already low leverage, Favco's management decided to reduce its leverage further. Debt decreased from RM64m to RM28 (56% decreased). The justification could be its high cash holding which management attempts to cut unnecessary bank borrowing.
- Despite the debt repayment, cash went up by 9% in its recent quarter, from RM334m to RM365m.





To summarise, the outlook for Favco is neutral (short term) but positive in the medium term as we believe negative factors might dominate the positives for a while and infrastructure spending may be evident in the coming months in under-developed countries (AIIB approved $500million loans in June 2016). We believe that it would facilitate the already weak global economy by boosting spending on necessary developments which cranes manufacturers and rental companies are expected to benefit from such demand.

We are of the opinion that its low relative valuation provides a good investment opportunity with good upside potential (to recap, our relative valuation only focus on discount on multiple while ignoring the potential multiple expansion. Hence the upside potential could be higher but we are being conservative in our estimation). It is currently trading at close to its support, low PE ratio of around 6x, high cash holdings and good dividend yield (which currently the firm has good dividend coverage, we would assess the sustainability in its upcoming financials and report whether there is material change).



Feel free to comment and contact me with any contradictory views.


Thanks and Happy Trading,



KapitalWise



Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.

Quarterly Result Commentary - Kim Hin Industry Berhad

Since the release of Q2 2016 result, the market has been reacted negatively as expected but there is no sign of oversold at the moment. Checking through the quarterly report, here are some key takeaways:

Negatives:

- Kim Hin has tough time growing its bottom line as reflected by gross profit margin deteriorated from 34% to c. 30% in recent quarter which maybe associated with surge in fuel price. 

- Leverage, surprisingly, increased due to bank borrowings (increase by around RM20m) which is still within acceptable range. Debt / EBITDA increased from 0.2x to 0.63x (approximately) which is still consider low. We are of the opinion that leverage below 3x is acceptable.

- Most investors must have noticed that the negative movements in FX eroded much of its profit in previous quarter. But recent spike in MYR has made a small translation gain. FX movements still remain a factor which cannot be fully mitigate.

- Although we expect the Capex remains heightened in short to medium term, Q2 2016 showed that the increase in Capex is beyond our expectation. Further RM20m+ was spent in addition to the previous quarter's expenditure. With some funding coming from disposal of assets and bank debt. We remain optimistic that the Capex might payoff in the future with its expansion plan. Temporarily weakening cash flow metrics is not a major concern given its cash holding of RM59m against RM52m current liabilities and low leverage.

- Non core operating expense dragged its profit down which there was no break down or information. Nevertheless, we believe some costs are not recurring in nature due to its treatment under other expenses rather than in core expenses.

Positives:

- SG&A slightly reduced from 23.7% to 23.4% which reflects better operational efficiency. However, it is still far from offsetting the surge in cost of sales.

- Segment analysis shows that the company is very successfully growing its top line but not its bottom line. Noticeable growth in China, Australia and Vietnam but dragged down by sluggish domestic demand. 

- Bottom line result for Vietnam has been positive with loss narrowing. We believe that Vietnam unit is on track and as our expectation, it could be a profit contributor by 2017.

Overall, reduced margin combined with non operating expenses have reduced the bottom line result, our model has reflected weakening cash flow generation. To recap, we recognise the need to be pessimistic hence we have incorporated worst case scenario which shows that the value may be around RM1.50 (worst case). Outlook is positive due to its growth prospects (which at the moment, top line growth seems to be on track with disappointing bottom line result). However, we will continue to pay attention to its upcoming financials to look out for any material adverse change in cash flow generation and profit margins.



Feel free to comment and contact me with any contradictory views.


Thanks and Happy Trading,


KapitalWise



Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.

Equity Research - Favelle Favco Berhad (7229.KL)

Favelle Favco Berhad (7229.KL)


Favco is a company incorporated in Malaysia and registered office is in Klang, Selangor.
It is listed on the Bursa Malaysia under the stock code 7229.

We have researched this company and believe that the upside potential of the stock is c. 18% based on relative valuation.

Please click here for the research report and make sure you read the investment research disclaimers at the end of the report.




Kind Regards and Happy Trading,

KapitalWise

Equity Research - Kim Hin Industry Berhad (5371.KL)

Kim Hin Industry Berhad (5371.KL)


Kim Hin is a company incorporated in Malaysia and registered office is in Kuching, Sarawak.
It is listed on the Bursa Malaysia under the stock code 5371.

KapitalWise has researched this company and believes that the upside potential of the stock is exceeding 20% based on discounted cash flow model.

Please click here for the research report and make sure you read the investment research disclaimers at the end of the report.




Kind Regards and Happy Trading,

KapitalWise