Padini- Finally it came back to the limelight again?

Padini Holding Bhd has just released its quarter result ended 31st December 2013 which is highly anticipated by many as i believe investors can't wait to monitor its performance.

Analysis for the quarter alone compare to last year corresponding quarter, revenue has up 12.7% and net profit has up 48.4%. According to the report, the increase of revenue are due to the strong sales of brand outlets. At the same times, the same store sales growth (SSSG) for the quarter reached more than 30%. It is tremendously strong growth, given the competition arise from foreign brand especially in Klang Valley area. A slight increase of gross margin coupled with the increase of revenue drive the net profit growth. Having considered that current quarter is seasonally strong quarter due to festive season, the performance is still out of my expectation.




Valuation

Padini closed at 1.78 today (27 Feb 2014), with its net cash of 24 cents and last 4 quarters (L4Q) earning per share (EPS) of 14.69 cents, it is trading at cheap valuation.

To get the actual price we are paying by buying Padini shares, we take 1.78 to minus the net cash per share of 24 cents and we get 1.54 dollar per share. Divide it with L4Q EPS, we got a PE of around 10.5. For a company with strong brand name and solid growth, it definitely worth more for me.

Let's have a look on its PE range throughout this few years.

As shown, PE of around 14.5 is the highest (without taking the net cash in consideration), personally i think market will give Padini a higher valuation than what it is trading now.



Future Prospect

From the report, 3 Brand Outlet stores and an additional Padini Concept Store have added in current FY 2014. The coming months until the end of this financial year, the management is planning to add another 3 Brand outlet stores and 2 Padini Concept Store. After the rationalization of subsidies by our government, the living cost has increased and consumers are more willing to delay their purchase on discretionary items. The focus on growing Brand Outlets with the purpose to bring in value in design and price to consumers help to grow the business. I would think that the management are trying to keep themselves remain competitive to fight with the foreign brands, while at the same time creating value to shareholders with their consistent dividend payout. Under the section "Commentary on Prospect", the management said that "These new openings together with changes made in the past year to merchandise development and pricing strategies would go a long way to improving the Group’s competitive abilities." 




Conclusion

So far i think Padini is doing well to compete with the foreign brands, it seems that they can do well in the future too. One good part for retail business is, when you have been growing your business so well in a place, you stand a foothold where when the competitors came in, it might takes a long time for them to catch you up. Another things is, Padini has been partner with AEON to grow their business, you would not be surprise to see Padini Concept Store when you went to AEON. However, i have seen no sight of  Uniqlo, Debanhams or H&M appearance in AEON, probably because of their different strategies or retail model? With that, i think it is not easy to catch up with Padini's pace in Malaysia retail market. While the business is growing well with good prospect, and the valuation is cheap for me, i would think that Padini is quite attractive now. 

V.S Industries- World Top Electronic Manufacturing Service Provider - PART 2

V.S Industries is enjoying a growing electronic manufacturing services (EMS) market due to the increasingly outsourcing of those multinational company to their partner in southeast Asia. This trend is an great opportunity for V.S to increase their market share. In an interview with TheEdge, V.S managing director, Datuk Gan Sem Yam stated that " For a company that provides supply-chain services and fully integrated contract manufacturing services to companies such as Panasonic, Sony, Canon, Mitsubishi, Kenwood and Dyson, V.S has yet to reach its full potential."

Business Risk

1) One of the factors that drives on V.S profit growth is the growing demand of consumer electronic products, and the switching trend to outsource the manufacturing services to southeast Asia companies. With that, the consumer spending power might determine the performance of V.S. The possibility of European countries revival will keep the demand growing. However, if the economic is not doing good or remain uncertainty, consumers will delay their consumption which directly affect the orders for EMS providers.

2) As an EMS provider, V.S had to allocate some portion of money as capital expenditure (CAPEX) to cope with the growing of technology in order to remain innovative and competitive enough in EMS industry. Besides that, V.S has to spend to increase their capacity.In annual report 2013, V.S states that extensive research and development will be carried out with their key customers to meet the evolving trend of the industry. V.S aims to establish higher-value added manufacturing processes in their operation while keeping the cost at an optimized level. Due to the high CAPEX consumption, we can see that free cash flow generated by V.S is not consistent.

If V.S does not spend on CAPEX, they will not able to cope with the rapidly growth of technology and hence, left behind of their competitors. Its business nature is quite capital extensive i would say.


Management

As when we discuss about the management of a company, i would like to take a look on its dividend payout. With the growing of earning per share, the management are being generous. The total amount of dividend payout are increasing year on year except for year 2013. V.S has a solid dividend payout history, and never did any cash call after its listing. Besides dividend, the company had been doing share buyback very often.

Share buy back is a very positive sign for me. It signifies that the share are cheap and having good potential in future. It is an alternative way to compensate shareholders besides dividend. On top of that, the management are confident on the company prospect.

As you can see from the table above, the directors of the company are holding substantial amount of shares. It is a good sign for me too as the management will try to do their best as to maximize the wealth of shareholders. Inabata & Co. Ltd held 10.34% of indirect stake on V.S Industries. Inabata emerges as the shareholder of V.S since 2006 and had been accumulating the shares. Inabata is the supplier of resin for V.S and i believe this relationship will create better synergies.

Valuation

Since 2010 to 2013, Price/earning ratio had been standing at the range of 5.2 to 10.2. If we are calculating the PE ratio with last 4 quarters EPS, the PE ratio we get is around 5.4, which is at the bottom of range. Having considered at its business risk, and looking on its future prospect, i will still think that the current valuation is rather cheap.Besides that, V.S is trading below its book value.


Conclusion

In short, I would think that V.S industry is involving in an unexciting industry as the CAPEX requirement is high, but somehow the management is capable enough to grow the company. The business will continue to remain tough, added by the implementation of minimum wages and others expenses hike. V.S is currently trading at market capitalization of around 274 Million. It  is a company that provides manufacturing services to big multinational companies like, Dyson, Sony, Panasonic, etc, doing business in a tough industry but the managements able to grow the business, been actively buying back its own shares, and trading at cheap valuation. If the macroeconomic factors turn in favor of V.S and the switching trend of EMS to southeast Asia persists, i have a gut feeling that the market cap might be doubled at least.

V.S Industries- World Top Electronic Manufacturing Service Provider - PART 1

V.S Industry Berhad (V.S) was founded in 1982 and listed on Bursa in 1998. It is now a leading integrated electronic manufacturing services (EMS) provider and successful ranked itself into the world's top 50 EMS providers from 2007 to 2012. V.S has its manufacturing facilities located at Malaysia, Vietnam, Indonesia and China, to cater for the demand of their clients which are mostly big multinational company. V.S manufacturing services included plastic injection mould design and fabrication, a wide range of injection tonnage and finishing processes, large scale production of printed circuit boards, automated assembly and final processes of packaging and logistics. Compare to before, V.S has expanded its operation to include products and services in the higher value-added chain. 

Let's have a quick glance on V.S financial performance.

The compounded annual growth rate (CAGR) for revenue and net profit are 13% and 70% respectively.

A quick glance on the financial ratio, ROE is improving, profit margin is low as 3.8%, Gearing ratio up solely because of the company increase their stake on V.S international group limited(VSIG), dividend payout ratio is considered high as the company is having a dividend policy of minimum 40% payout. 

Where is the revenue sources?

From the annual report 2013, we knew that Malaysia operation generated 88% of revenue, 8% are derived from Indonesia's operation, the balance are coming from China's operation. V.S increase of stake on VSIG making it one of their subsidiaries, and hereon will contribute to V.S top line and bottom line. The manufacturing plant in Malaysia and Indonesia primarily serve customers from Europe and US, while the China operation will be focus on Japan, Europe and US. We can see that most of the products of V.S are export oriented and apparently US Dollar will be the main currency been used. Despite of it, i don't think that V.S will be benefit on the strengthen of USD against MYR recently.

Taking a quick look on latest quarter result ended 31st October 2013, the outstanding performance is merely due to the consolidation of figures from VSIG. With that, China operation has increased its contribution to 33% of total revenue. However, it is still incurring a net loss for the quarter alone.


Future Prospect

The management of V.S is ambitious. They always focus on expanding their operation to higher value-added chain, while at the same time they need to keep their cost managed well to remain competitive.The company has allocated 20M as capital expenditure (CAPEX) for plastic injection machine for new coffee machine models and assembly lines on FY2014. Besides that, with the consolidation effect, we can expect an increase on the top line and bottom line for subsequent quarter on FY2014.

On PART 2, i will talk more on its business risk, management and valuation. 

The Store- A potential asset play or a value trap?

The Store Corporation Berhad is a leading operator of supermarket, department stores and hypermarket in Malaysia. It is operated through three store formats, The Store Supermarket & Department Stores, Pacific Hypermarket & Department Stores, and Milimewa Supermarket & Department Stores.In Malaysia, The Stores is operating under a competitive industry, we have a lot of huge supermarket/hypermarket like Mydin, Tesco,Aeon, Aeon Big(previously Carrefour), Giant, Econsave and so on. The Store is having a wide presence in Malaysia, it has it outlets located at all the states in Peninsular Malaysia.

Financial Performance

Having a look on its revenue for past 9 years, i would say it is flattish.

Its net profit for past 9 years is inconsistent, fall dramatically after 2008 but improving gradually after that. (no adjustment had been made, all the figures is purely extracted from annual report). Although The Store is well known among the household, its financial performance is so so only. The profit margin is quite fluctuate, dropping from around 2% to around 0.5%. It raised to above 1% in FYE 2013.  

As an investor, we would like to grow our capital, hence we always prefer those company with solid business, good management with growing potential. The best is at the same time we could buy in low valuation. Although it is not a foolproof method but by far its the greatest chance we ever had. In this case, The Store is having a solid business as a prominent retailer in Malaysia, however, it shows no sign of growing in terms of revenue and gradually rebound on its earning in recent years. Let's us have a look on the stock valuation, price over net tangible asset per share. (NTA per share)

Total Asset

As we can see, the asset quality for the company is quite good. Property, plant and equipment constitute 43% of total asset. Other major portion are cash and bank deposits, inventories as well as investment properties. When one trying to value a company's NTA, the quality of asset is important. We should not blindly follow the accounting figure but instead, understand what is the component behind the figures. 

Net Tangible asset per share

To calculate NTA, we took Total Asset to minus Total liabilities and Intangible Assets. The figure we get is 439,557,000. Divide it with the share base of 68.503 Million shares, we get NTA per share of RM6.42 or price over NTA per share of 0.4. (using share price of RM2.55 as reference for date 5/02/14). Current price is trading at 60% discount to its NTA per share, which is deeply undervalued in book. 

Is it a value trap or a value buy? 

Now we know that theoretically The Store is deeply undervalued. If we look into its closest comparison in Bursa stock, Aeon is trading at price to book value of above 2. So, are we finally found a super value stock to buy? Are we going to "huat" this time? When we decide to buy a stock solely because of book value, we need to be extra careful as the stated book value might bear less or no relationship to the company true worth. Why? Let's imagine, when a company went bankrupt, how much can a company assets worth? If most of the assets for a company are inventories, do you think it can still sell at normal prices? During bankruptcy, inventories can be worthless especially for finished goods. As for The Store, I believe the building and investment properties are worth much more than before due to the property boom on recent years.  Let's have a glance on the historical share price against book value. 

From the above table we can see that since FYE 2009 until now, the share price is trading way below the NTA per share. While the assets are valuable, Mr. Market had been ignoring it for years. So what are the chances that the value will be realized? How long do we have to wait? I believe this is the case where many investors got frustrated because in Bursa, we can always spot on this kinda companies. Sometimes, what we need is to be patient and wait for some "Catalysts". If you happen to buy into a cyclical stock, you might need to wait for the upswing of the cycle, just like properties or furniture companies. More often that not it is highly dependent on the management of the company to unlock the value. 

Tan Sri Dato' Sri Tang Yeam Soon and his wife, Puan Sri Datin Khor Guik Lee are the major shareholders through their holding on Equatorial Century Sdn.Bhd. However, 

One of the Malaysia tycoon, Vincent Tan is the substantial shareholder of the company. I believe for some people they know this tycoon well. When we bought into a company' shares, we entrusted our money to the company and hopefully the management will create wealth for the shareholders, be it minority or majority shareholders.