Friday, September 03, 2010

Lonbisc- why the excessive Fixed Assets?

Lonbisc's bullish breakout has come & is nearly gone. What happened?


Chart: Lonbisc's weekly chart as at Sept 3, 2010 (Source: Quickcharts)

I revisited my earlier piece on Lonbisc (here) and examined its balance sheet thoroughly- something that I should have done previously. I was surprised that Lonbisc has a poor balance sheet as at 30/6/2010. Its current ratio was very low at 0.7 times- which means that if the company were to sell off all its stocks & collect back all its receivable, these proceeds plus the cash & bank balances, is only equivalent to 70% of its current liabilities. Its gearing ratio [or bank borrowings to shareholders' funds] is also fairly high at about 0.7 times. How did this come about? On closer study, it seems that the group has excessive Fixed Assets ('FA'). As at 30/6/2010, its FA stood at RM392 million or 79% of its Total Assets of RM499 million. This looks excessive when compared to its turnover of RM220 million for FY2010 (unaudited).

According to its annual report for FY2009, Plant & Machinery ('P&M') & P&M under installation totaled RM241 million or accounted for 76% of Total Assets. Even if we stripped off the P&M under installation of RM42 million, Lonbisc's P&M of RM199 million looks excessively high when compared to a turnover of RM184 million! This means that Lonbisc required RM1.00 of P&M to generate 92 sen of sales in FY2009.

If we look at Lonbisc a few years earlier, the situation is only slightly better. For FY2006, Lonbisc has P&M of RM71 million & P&M under installation of RM56 million and it achieved a turnover of RM108 million. This means that for every RM1.00 of P&M owned, Lonbisc generated RM1.52 of sales in FY2006. So, Lonbisc's assets utilization deteriorated from FY2006 to FY2009!

Let's compare Lonbisc with Mamee. If we look at Mamee's annual report for FY2009, we would see that Mamee had FA of RM117 million (of which P&M amounted to RM27 million). It recorded a turnover of RM411 million. This means that for every RM1.00 of P&M owned, Mamee generated RM15.22 of sales in FY2009.

Another company we can compared with is Cocoaland. Based on its results for FY2009, Cocoaland had FA of RM50 million (of which P&M amounted to RM13 million). It recorded a turnover of RM133 million. This means that for every RM1.00 of P&M owned, Cocoaland generated RM10.23 of sales in FY2009.

Despite the deterioration in its assets utilization, Lonbisc continued to increase its investment in FA. As noted earlier, its FA stood at RM392 million as compared to its turnover of RM220 million for FY2010 (unaudited).

This very odd situation raised many questions. Among them are:

1. Why does Lonbisc require so much P&M as compared to Mame & Cocoaland?
2. Why is Lonbisc acquiring more P&M as reflected in the presence of P&M under installation in FY2006 as well as in FY2009?
3. Is the recent sale of its stake in Lay Hong part of a program to address the imbalance in its Assets & Liabilities?

Until some of these hard questions are answered satisfactory, I doubt investors would want to invest more in this stock. As such, I believe Lonbisc should be rated a SELL ON STRENGTH.

17 comments:

cheer said...

Published: Friday September 3, 2010 MYT 12:04:00 PM
Updated: Friday September 3, 2010 MYT 12:07:53 PM
Malaysian rubber outlook to improve

KUALA LUMPUR: The country’s rubber industry outlook is expected to improve this year as glovemakers draw an additional RM400 million in investments in 2010 and exports expanded.

International Trade and Industry Minister Datuk Seri Mustapa Mohamed told reporters on Friday that the glove industry has seen a strong performance this year.

He added that rubber-product exports is expected to reach RM11.1 billion this year on the back of an improving outlook.

**********************************
What is your opinion on the glove stocks base on above news ?

teh said...

Hi Alex,

Wat do think about SAAG? Can you explain more about its rights isuue? Is that a good news or bad news?

sangkancil said...

hi alex,
do your mind to analyse on kpj -warrant?
i am holding it coz i think in long term health care industry is good ...

Alex Lu said...

Hi cheer

Rubber glove sector is under the cloud as supply has caught up with demand and with each passing month, more supply is added while demand growth has been marginal. This will lead to fierce competition in the near future with profit margin continued to erode. This sector is likely to have made a top- maybe a temporary top- and it will be a few more quarters before I can get a picture of the true state of the sector.

Alex Lu said...

Hi teh

Saag is a company to be AVOIDED. Its financial performance has been very disappointing with no sign of improvement. What's alarming is its financial position- with high leverage & very suspicious current assets.

As at 30/6/2010, its gearing ratio or borrowings to shareholders' funds stood at 1.9 times. Most investors avoid companies with gearing ratio half that number. So you can expect very little buying interest in Saag.

What truly worried me is for a company with 1H2010 turnover of RM55 million, it has accumulated Amount owing by customer for contract works of RM368 million; Trade Receivable of RM240 million and Inventory of RM172 million. These enormous sums raised questions about the company's working capital management as well as the quality of these assets. If some of them cannot be converted into cash via sales or debt collection, Saag would have a huge write-off. Can its share capital & reserve cushion such setback? I doubt it. Hence, the need for a Rights Issue.

Again, I reiterate what I said earlier- AVOID this stock!

Alex Lu said...

Hi sangkancil

Let's look at KPJ. It made a net profit of RM56.4 million for 1H2010. For full year, you can expect a EPS of about 20.7 sen (as it has 545.94 million outstanding shares). Based on its closing price of RM3.40 on Friday, it is trading at a PE of 16.4 times. For its robust growth & the stable industry that it operates in, this PE multiple is deemed reasonable. Other companies, such as Parkway, trade at higher PE multiple than KPJ.

KPJ-CA has the following terms:
1) Expiry date: July 2011
2) Exercise price: RM3.20
3) Exercise ratio: 5-for-1
Based on its closing price of RM0.125 last Friday, KPJ-CA is now trading at a premium of 12.5%, which is reasonable.

Chartwise, the stock has run up from about RM1.00 to the current price over the past 2 years. Some profit-taking is taking place in the stock now. You may want to wait for it to pullback to 100-day SMA line at RM3.23 before getting into the stock. Similarly, KPJ-CA would adjust lower in line with the share price.

wong said...

hi alex. since foreign funds and vincent tan keep buying BJCORP from market, then who selling ?? selling pressure so high, impossible from retailers. please comment ... thx alots.

jessy said...

Alex,

Could you kindly explain and analyse warrant for mudajya-ca and mudajya-cb

thank you

AlexP said...

Hi Alex,

I would like to call your attention to MNRB. It looks to me like a solid fundamental stock which may have finishing bottoming out and has no where to go but up. Their poor results last year was due to extraordinary losses. Latest quarter results looks decent. Please do share your advice, especially on the history of this company and the insurance industry.Thanks!

Layman said...

Dear Alex,

Hi.Good Day.

Would like to hear your view on Msports. Any TP for this counter. Thanks.

AC said...

Hi Alex,

You have raised a very good point and presented a very good figures comparison. May be their Auditor should thoroughly investigate and explain this. Or may be Bursa should query them this.

tan said...

hi alex,

are you having mediac in your radar, the stock have plunge since the financial result is out ,i have notice that most accumulation is done at 0.835 with heavy volume since last week.the unusual things is that there always isn't much seller in queue.alway give to buyer. is't the indication of syndicate/fund manager working at the back

Alex Lu said...

Hi wong

I have no idea who are the big sellers of BJCorp. The filings by Credit Suisse & Goldman Sach are mixed, with more buying than selling. The filings by UBG are mostly buying.

Alex Lu said...

Hi ysney26

You need to find out 3 terms in order to value a CW, i.e. expiry date, exercise price & exercise ratio.

Based on today's close for Mudajaya (RM4.49), Mudajaya-ca (RM0.215) & Mudajaya-cb (RM0.075), the premium of the CWs can be computed below:

(I) Mudajaya-ca has the following terms:
1) Expiry date: Jan 2011
2) Exercise price: RM4.7
3) Exercise ratio: 6-for-1

Premium = 25%

(II) Mudajaya-cb has the following terms:
1) Expiry date: Mar 2011
2) Exercise price: RM5.65
3) Exercise ratio: 8-for-1

Premium = 39%

While Mudajaya-ca is cheaper than Mudajaya-cb, both are trading at a large premium.

Alex Lu said...

Hi AlexP

Thank for the tip on MNRB. At the EPS of 12.30 sen for QE30/6/2010, MNRB's full year could potentially be 49.20 sen. At RM2.70, the stock could be trading at a PE of 5.5 times. I would look at it again later & possibly post on it in greater details.

Alex Lu said...

Hi Layman

Msports has dropped back to a strong support area, between RM0.46-48. The support comes from either the horizontal line at RM0.48 or the 50 or 200-day SMA lines at RM0.47 or RM0.46.

As for target price, I like to believe that the stock is still in a downward channel, with resistance at RM0.62-63.

Alex Lu said...

Hi ks

Mediac is an improvement over previous corresponding quarter (QE30/6/2009) with net profit of RM43 million compared to RM15 million while turnover increased from RM280 million to RM343 million. Compared to the immediate preceding quarter (QE31/3/2010), net profit & turnover increased from RM35 million & RM305 million previously.

Chartwise, Mediac is trapped in a triangle with resistance at RM0.88-89 & support at RM0.82-83. Until there is a breakout in either direction, Mediac will remain unexciting, as it moves sideway fashion.