We have discovered nine stocks that recorded continuous growth in pre-tax profit for the past 10 years and are at least listed for nine years on Bursa Malaysia Securities. These nine stocks are Guinness Anchor Bhd, Hock Seng Lee Bhd (HSL), KPJ Healthcare Bhd, Aeon Co (M) Bhd, QL Resources Bhd, Top Glove Corporation Bhd, Fraser & Neave Holdings Bhd (F&N), Kossan Rubber Industries Bhd and LPI Capital Bhd.
There are limitations to our stock selection methodology which we have considered.
The qualified stocks selected do not necessary mean they will continue to do well in future as it depends on the management, core competencies and the competitive environment etc.
The purpose of this report is to allow investors to gain an insight into stocks which stood the test of time and recorded continuous profitability each year without fail.
We hope from our analysis, investors can understand the business model, core competencies and other winning edge that these stocks possess for them to prosper over the past 10 years and hopefully they continue to perform in the future if the traits for their success remain.
We have done some strict selection criteria using data from Bloomberg and an analysis of the selected stocks’ winning formula. From all the stocks listed on Bursa Securities, we select only those that are listed for at least nine years and recorded continuous positive growth in pre-tax profit for the past 10 years.
Out of this criteria, only nine stocks qualified. Out of these nine qualified stocks, three were recommended by us in 2009.
In addition, we found that out of the nine stocks, only five stocks recorded continuous growth in Ebitda (earnings before interest, tax, depreciation and amortisation). They are Kossan, F&N, QL, Top Glove and possibly LPI. In LPI’s case, there is no Ebitda measure as Ebitda is not applicable for financial stocks.
The stock price volatility is calculated from the standard deviation of the movement in prices of the stock on a monthly basis for the past 10 years up to Dec 31, 2009. All computations are adjusted for bonus and rights issues.
From our analysis, we discovered that all the nine Prosperity Stocks have recorded an average compounded annual growth return (CAGR) of 16.1% in revenue and 19.5% CAGR in pretax profit.
Almost all the stocks’ pretax profit CAGR is higher than their respective revenue CAGR, implying the benefit from economies of scale and cost efficiencies as the companies’ businesses grew.
Further, we noticed that the price CAGR for most stocks has gone ahead of their respective pretax profit CAGR, except for Kossan, HSL, KPJ and QL which means that there is more catching-up for these four stocks going forward.
Among the nine stocks selected, two are rubber glove producers. Kossan tops the list in profit growth (+38%).
Top Glove performed well in both profit growth (+33.2% pa) and price appreciation (+50.2% pa). QL also did well with compound growth exceeding 20% which is the target set by the management. Another strong performer is LPI. If we reinvest all the dividends of LPI, the compound gain of the stock is also as good as that of QL.
Other than blue chips like Guinness and F&N, other blue chips did not pass our screening. Although the other seven stocks are mid-caps and are not generally regarded as blue chips, they definitely qualified for light blue for the time being.
Limitations to the analysis
- The obvious one would be using profitability as a measure as this is subject to distortion via creative accounting practices to smooth out any deterioration in respective companies’ pretax profit. However, it is arguable that this can be done consistently over a long time frame of 10 years, therefore in a way this limitation is mitigated.
- Non-recurring items like gains/losses on disposals of assets or investments not excluded from the pretax profit measure may distort the selection of stocks based on profitability alone.
- Profitability may not be cash flow as it includes non-cash items like depreciation, provisions, bad debt writeback etc. A business that is profitable may not have the cash to repay its debts. Healthy cash flow is vital for a business’ survival. Nevertheless, considering the fact that the qualified companies are still around and growing strong despite the dotcom crisis in 2001 and the recent 2008-2009 financial crisis, indicates strong sustainability of these companies’ operations with healthy cash flow generating ability. All of the nine stocks are paying reasonable dividends.
- The analysis only takes into account companies that have minimum nine years’ listing track record which means companies that have profitability growing each year, but only listed less than nine years are not included. Some of the good stocks excluded due to their short-listing history include Dayang Enterprise Bhd and Aeon Credit Service Bhd.
- One stock which missed the 10-year impeccable records is Mah Sing Group Bhd as the company incurred losses in FY2000.
- There are a few stocks which also missed the 10-year track record, due mainly to the recent financial crisis that caused a dip in their profits in 2009. These stocks are United Plantations Bhd, Bonia Corporation Bhd, Harrisons Holdings (M) Bhd, DiGi.Com Bhd and CB Industrial Product Holding Bhd.
Conclusion
The qualified stocks listed in Table 1 do not necessarily mean they are the best stocks to invest for the future despite their continuous growth in profitability in the past. We are quite confident that they will continue to excel in the future. From the consensus forward price-to-earnings (PE), valuations of these nine stocks are reasonable, meaning they are still good for investment as a whole. — March 11, 2010
Aeon
Aeon is basically the superstore and shopping centre operator under the famous brand name of Jusco that retails a broad range of goods from clothing to household goods and earns rental income and management fees from the malls they own or manage. Aeon is led by a group of experienced management. Some of them have worked in the Japanese parent company, Aeon Co Ltd for more than 20 years bringing with them extensive Japanese expertise.
Core competencies
Aeon has more than 20 years’ operating history in Malaysia. Its operating outlets are mainly in densely populated suburban areas ensuring Jusco of a sustainable demand.
Aeon is unique from its peers because its market segment is more towards the middle-income consumer group rather than competing with many retail hypermarket operators like Tesco, Giant and Carrefour which focus on the bargain-hunting market segment.
Although Aeon’s closest competitors are Isetan, Parkson and Metrojaya, the management distincts itself by managing or owning the entire shopping mall instead of just selling merchandise. This not only provides the company another source of income but also allows the creation of synergies between various tenants to create a shoppers’ paradise, catering for all walks of life. To succinctly put it, a one-stop recreational shopping avenue for Jusco visitors.
Aeon generally does not operate in the city; it prefers established residential areas with ample parking facilities. By collaborating with property developers, they have managed to gain first mover advantage to locate their malls in popular housing areas. Aeon’s success stories from this strategy are evident from 1Utama, Equine Park, IOI Puchong etc.
Comment
We recommended Aeon in July 2009 at the price of RM4.44 which has since gone up by 9.9%. We further reiterate our long-term buy call on Aeon due to further growth expected from Aeon as long as there are new townships to be developed in Malaysia and as Malaysia’s gross domestic product (GDP) continues to grow positively along with better economic outlook.
F&N
F&N, a subsidiary of Singapore-listed Fraser and Neave Ltd, manufactures and distributes many popular beverage brand names from Coca-Cola and its own house brand, Seasons. Recently, F&N was awarded the exclusive distributorship and marketing of the popular energy drink, Red Bull.
In addition, it has been manufacturing and distributing famous dairy products under the brand names of F&N, Magnolia, Daisy and Farmhouse. Apart from manufacturing and distributing beverages and dairy products F&N via its subsidiary, Malaya Glass Products, is a leading producer of glass packaging containers in the Asian region. From its old landbanks, F&N also dabbles in property development and investment. Besides Nestle, F&N is the only other blue-chip food and beverage counter listed on Bursa Malaysia.
Core competencies
F&N has a very strong brand name in the food and beverage industry in the region. Due to its reputable operating history, consumers have taken comfort in buying F&N products. As the nation grows over time, F&N with its solid brand name also benefits from increased domestic consumption. This is reflected in its steady growth in sales and earnings over the years. In addition, the food and beverage industry is a recession-proof industry; therefore F&N has thus managed to remain resilient throughout the dotcom crash in 2001 and 2008-2009 financial crisis.
Over the years, F&N has maintained a minimum 70% dividend payout which partly explains the steady share price performance. The high dividend payout did not hinder F&N’s continuous growth.
Comment
We have no rating for F&N. However, for investors who like stocks that pay consistent high dividends, F&N is a stock to buy. An important negative point to note is that, come September 2011, F&N’s licence to manufacture and distribute Coca-Cola-related beverages will expire and its financial performance thereon might be affected.
Guinness
Guinness needs no introduction as it is a well-known brewery with operations worldwide, of which the Malaysian operation is listed here. The management is well experienced and has specialised expertise, and the board is represented by different nationals, from Britain, New Zealand and even Holland.
Core competencies
Guinness speaks for itself loud in the beer market and is one of the dominating brand names in the beer industry, apart from Carlsberg. In Malaysia itself, Guinness controls 57% market share. Under its stable, it produces a few alcoholic beverages with brands like Guinness Stout, Tiger, Heineken, Anchor Smooth, Anchor Strong, Kilkenny, Anglia Shandy and Malta. It appears that Guinness is the first and only brewery in Malaysia to receive the Hazard Analysis Critical Control Point (HACCP) certification and ISO 9001:2000 Quality Certification from Malaysia’s Ministry of Health.
Another strong point is that although non-Muslims account for 48% of the Malaysian population, Guinness was able to increase its revenue and profitability CAGR of 7.6% and 11%, respectively.
Similar to F&N, Guinness has maintained minimum dividend payouts of 70% and above in the past which partly explains the strong share price performance. Despite the high dividend payout, it did not hinder Guinness’ continuous growth.
Comment
We have no rating for Guinness. However, for investors who like stocks that pay consistently high dividends, Guinness is a stock to buy. In addition, come June 2010 the World Cup will provide Guinness a one-time jump in financial performance. We prefer Guinness to Carlsberg for its ability to gain market share.
HSL
HSL is a mid-cap construction company listed since 1996 but with more than 30 years’ experience in land reclamation, marine engineering, civil engineering and construction.
Core competencies
Unlike other construction outfits, HSL owns an extensive range of marine and land-based equipment, including multi-million ringgit computerised hydraulic suction dredging facilities. This enables HSL to handle the entire construction process from dredging, civil works and building construction.
Due to HSL’s reputed expertise and niche in dredging and land reclamation activities, the company was awarded many projects in Sarawak which is its home base. With more developments expected in Sarawak due to the launch of the Sarawak Corridor of Renewable Energy (SCORE) programme, HSL is in good stead to benefit.
In addition, HSL possesses a landbank of over 600 acres (243ha) in Sarawak with estimated gross development value (GDV) of RM1.5 billion. The landbank was obtained due to construction contracts completed for the state government. Going forward, property development will emerge as an important source of income for HSL. HSL is one of the few construction companies that command net cash position despite being heavily invested in the latest marine and land-based machinery and equipment, which strongly indicates its efficient cash management. HSL has a sound and proven management as evidenced by the awards won for KPMG/The Edge Shareholder Value Creation Awards for the Construction and Property category and also listed in Bursa Malaysia’s Top 100 for shareholder value creation from 2005 to 2008, respectively.
Comment
We recommended HSL in October 2009 at the price of RM1.07 which has since gone up by 27.1%. We further reiterate our buy call for HSL due to the SCORE factor and the huge amount of development budget allocated by the federal government.
KPJ
KPJ is the largest private hospital provider in Malaysia with network of 19 hospitals across the country. It also provides pathology and laboratory services, hospital management services, drug and medical distribution along with operating a nursing college.
Core competencies
KPJ’s management has the experience in building and commissioning new hospitals and has the reputation of successfully turning around loss-making hospitals to profitable hospitals upon their takeover within two years.
Great examples include Pusat Pakar Tawakal, Kuantan Specialist Hospital, Puteri Specialist Hospital and Bukit Mertajam Specialist Hospital.
On management system, KPJ practises centralised dispensing, billing and collection systems. All consultation fees charged by the doctors to patients, will be billed and collected directly by KPJ, of which KPJ will subsequently dispense the doctors’ portion of remuneration only after deducting the doctors’ practising right fee. This system is efficient for the financials as everything is centralised and doctors only receive their portions after the fees are collected by KPJ.
Like the food and beverage industry, the healthcare industry is recession proof. Currently, Malaysia’s healthcare industry is only 4% of GDP, whereas the developed countries like Australia and UK have approximately 8% of GDP spending on healthcare, meaning to say there is still plenty of room for growth for KPJ. Applying the same successful management policies, KPJ is expanding to Indonesia and Saudi Arabia which means more growth awaits KPJ apart from having a stronghold in Malaysia.
Comment
We have no rating for KPJ. However, in view of more growth to be expected in Malaysia’s healthcare industry and the fact it is in a recession-proof industry, KPJ is still a good medium-term buy.
Kossan
Kossan specialises in manufacturing latex and nitrile examination gloves. It also produces technical rubber products. Kossan marks its stamp in the industry by being one of the world’s largest powder-free medical glove producers with an annual capacity of 11 billion pieces. Credit for the successful diversification from technical rubber products to rubber gloves goes to Lim Kuang Sia, a professional engineer, who has more than 20 years of experience in the manufacture and trading of examination gloves business. Technical rubber products now account for about 10% of its revenue.
Its forex hedging caused a hefty RM53 milion loss in FY09. Despite that, the company still grew its FY09 profit by 19.9%. Excluding this non-recurring loss, Kossan FY09 pretax profit will surge to RM140 million and the net earnings per share (EPS) will likely jump to 71 sen per share. We believe all the forex losses have been expensed off in 2009.
Core competencies
Currently, Kossan has a balanced product mix of 60% natural rubber gloves and 40% nitrile gloves which will ensure them to benefit from higher margins from nitrile gloves. Kossan is known in the market for quality products.
Kossan has all its plants located in the Klang region which allows easy management and control.
Comment
We have no specific rating for Kossan but we like this stock as much as other rubber glove producers such as Top Glove and Supermax, despite the recent strong price performance.
LPI
LPI underwrites all classes of general insurance which includes fire, auto and marine insurances and provides lease financing services. Fire insurance constitutes 33% of total gross premium with auto and miscellaneous having 32% each and marine the remainder 4%. The company is led by Tan Sri Dr Teh Hong Piow who has helmed Public Bank Bhd (PBB) for more than 40 years.
Core competencies
LPI has won various awards locally and internationally for their excellent performance in the insurance industry. LPI’s claim ratios of 41.8% to 62.7% are lower than industry average’s 55.4% to 66.3% for FY05-08. This is attributed to LPI’s more diversified portfolio with higher exposure to fire insurance. LPI’s fire insurance has very low claims ratio of 20.7% vis-a-vis industry average’s 40.9% for FY05-08 period. In addition, due to its close association with its sister company, PBB, many of its insurance deals are referred by PBB, which made up 26% of their total premium, with the rest from direct distribution and brokers. Further, LPI benefits directly from tying up with PBB on banncassurance and from PBB’s loan growth as it can tap on the insurance business from there increasing LPI’s premium and profitability.
LPI has invested heavily in PBB share which has yielded steady dividend over the years. Its cost of investment in PBB is RM4.30 per share against present PBB price of RM11.90.
We believe LPI’s generous dividend policy over the years exceeding 50% has helped in its strong price performance. Despite the generous dividend payout, LPI’s profit still grew by 25%pa over the past 10 years.
Comment
Although we have no rating for LPI, we like the impeccable track record. It is an excellent long-term investment stock.
QL
QL has three main businesses: (a) manufactures and sells fishmeal, surimi and surimi-based products, (b) distributes animal feed raw materials and layer farming, and (c) palm oil milling and plantation. QL is founded and led by Chia Song Kun, an ex-mathematics lecturer, who commenced the business of distributing fishmeal and other feed meal raw materials back in 1984.
Core competencies
QL is a full-fledged soft commodities player in the marine product manufacturing (MPM), integrated livestock farming (ILF) and palm oil activities (POA). Its staple food products enjoy inelastic demand as world population grows and emerging markets prosper.
MPM — QL is the largest producer of semi-processed raw fish paste (surimi) and the largest producer of fishmeal and surimi-based products in Malaysia. The surimis are exported to countries such as Japan, Korea and Singapore. In addition, the company is also a leading deep-sea fishing operator in Malaysia, allowing them to secure not only a steady supply of fishes, but also to maintain its margin.
ILF — QL is the leading egg producer in Malaysia producing 2.1 million eggs/day. Other income is derived from distributing livestock feed, selling day-old chicks and broiler meat. The company has six poultry farms, geographically spread out in Kulim, Rawang, Nilai, Kota Kinabalu, Kuching and Tawau to mitigate any risks of diseases. QL is also a key local distributor of corn and soyabean meal for commercial animal feed products.
Going forward, its growth driver will come from expansion in Indonesia.
POA — The POA unit currently has 3,000 acres of fully matured oil palm plantation in Sabah with 50,000 acres of plantation land in eastern Kalimantan. The Kalimantan fields are still very much in the greenfield stages with an estimated 13,000 acres of land planted. Further downstream, QL owns two palm oil mills that can process 120,000 million tonnes of fruits per year.
The POA unit is not expected to be a significant contributor for the next three years. However, come FY12, the maturing trees in Kalimantan will start to bear fruits..
Comment
We recommended QL in May 2009 at the price of RM2.61 (ex 1:5 bonus) which has since appreciated by 33%. We further reiterate our buy call on QL as a solid commodity play led by prudent management.
Top Glove
Top Glove manufactures a wide range of latex gloves which includes latex examination powdered, latex examination powder free, nitrile examination gloves, soft nitrile examination gloves, vinyl examination gloves, surgical gloves and other related products. It is the world’s largest rubber glove manufacturer with 23% market share. Top Glove is founded by Tan Sri Dr Lim Wee Chai who has more than 20 years’ experience in the rubber and latex manufacturing business.
Top Glove has 10,000 employees working in 19 factories including two vinyl glove factories in China, two rubber glove factories and two latex concentrate plants in Thailand. Its products are exported to 180 countries worldwide. As it caters to a wider customer base, it has a higher proportion of powdered rubber glove, 56% against 25% for power free gloves.
Core competencies
Top Glove adopted a low-cost high-volume strategy to achieve the economies of scale. Currently, there is inelastic demand for examination gloves for medical purpose, with demand exceeding supply.
Comment
We have no specific rating for Top Glove but we like this stock as much as other rubber glove producers such as Kossan and Supermax, despite the recent strong price performance. The premium given to Top Glove is justifiable since its market cap is much larger than its peers. As a result of which, Top Glove is the favourite among foreign fund managers.
This article appeared in The Edge Financial Daily, March 15, 2010. |
No comments:
Post a Comment