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.