YOCB- Is it normal or something fishy to you?

Yoong Onn Corporation Berhad(Yocb) has released its quarter result ended 31st December 2013. The revenue is quite flattish but  profit before tax was up around 29% compare to last year corresponding quarter. If we compare to immediate preceding quarter, revenue was up 9% and profit before tax was up 37.9%, quite a strong result achieved due to the festive season. Despite the good result, the inventories and receivables in the balance sheet are increasing. If you read my previous post on YOCB, this is the problem that i am worry about. 

As you can see



Quarter result ended 30th September 2013

Quarter result ended 31st December 2013

Since FY2009 until now, the inventories and receivable are growing non-stop.




I have done some calculations to analyse the company's working capital efficiency from FY 2010 to FY 2013.


On inventories

In FY2013, it takes the company roughly 196 days, or 6.5 months in order to clear off all the inventories(roughly 157 days in FY2010) . As you can see, the inventory turnover ratio has became lower and lower year on year. If you take a look on YOCB 2013 annual report, you will find out that most of the inventory held are finished products. I deemed this a bad signal as products will deteriorate. When the inventories piled up too much, it takes up more spaces in the warehouses and incur unnecessary storage cost too.




On receivables

As you can see, it takes the company roughly 65 days to collect back the debts. Please be extra careful when the rate of increase in receivable is greater than the sales growth. When a company has its receivable outgrows its revenue, it might signify that a company is trying to boost up its revenue by selling more goods on credit. It is one of the famous financial shenanigans where a company trying to cheat the investors so that investors believe the company business has turnaround. In YOCB case, i believe the company is doing good and with its strong balance sheet and brand name , there is no reason that it will involve in this financial shenanigan.



On Payable

I am not worry on payable side. Shorten of payable period is a good sign where the company ability to pay off the debts increase, however, lengthen of payable days could signify that the company has  better control of their money by delaying their payment while at the same time bring no adverse effect on their credit reputation.




Cash Conversion Cycle (CCC)

As you can see, it is a clear uptrend on its cash conversion days. It takes around 229 days for YOCB to convert the inventories to sales and collect back the receivables, from around 171 days in FY 2010. The rate of increasing is surprisingly high for me.



Conclusion

It is understandable that the company is trying to grow the business but still I am very much concern of the non-stop growing of receivables and inventories. I have tried to compare the working capital between YOCB and Padini and  found out that Padini is way more efficient that YOCB's. I believe that is because Padini generated most of its revenue through its own outlet while YOCB is more dependent on consignment sales. YOCB should try to increase their working capital efficiency as inventories and receivables cannot be growing forever. At the time i am writing, the share price went up 7 cents to close at 1.22, or market cap of around 200M (11/03/2014) which is the all time high.

YOCB - Is it a true gem waiting to be revealed?

Yoong Onn Corporation Berhad, a company which involved in design, manufacture, distribute and retail of home linen products and bedding accessories.  When talk about Yoong onn, it is not a famous name, however, I believe most of the household are familiar with the brand Novelle or Jean Perry . This few years, the company has been opening more retail outlets under the name “ Home’s Harmony” which mostly located around Kl and Selangor area.   As we know, it is not easy to build up a brand and I believe the company is doing a right thing in forming up own retail outlets to gain more recognition from consumers. In Malaysia, Yoong Onn is having a whopping 30% market share according to sources, which is surprisingly huge in such a competitive market. Yoong Onn is having its profit growing at 5 years compounded annual growth rate of 14%. The management have found their niche market and been working hard in R&D as well as growing their distribution network. The company has been partner with department stores to grow their business.

('000)	2009	2010	2011	2012	2013
REVENUE	130084	127541	141002	153913	178607
PATAMI	13881	15528	18302	17277	20453

  

Having a 5 years CAGR of 14% is considered as  a high growing stock for me. According to Kenanga report, the company is planning to grow even further in years to come

In 2013 annual report the management said

If one is having a quick look on this company, definitely it is attracting. The company is growing fast, the ROE is 14%, company is in a net cash position, current P/E is considered low(is it?) compared to its peers, current price is close to book value even without considered the intangible asset( the value of its long established brand), the management is not a stingy one and paying out dividend year on year. All the financial data is showing it a good buy, and one might starts screaming to buy buy buy. Now, is it a true gem to be discovered? Is it a good company which can keep up its growth consistently in years to come?


Competitors

Before we come to a conclusion, let's at least have a look on one of its greatest competitors, Eastern Decorator(ED), which is the owner of Akemi brand. Whenever you see Novelle or Jean Perry in any department stores, you can always see Akemi there. Another famous brand you can see is Windsir. Akemi brand had been long established back in year 1992 and its the proud of ED and perhaps you might not know,

In fact, ED present is not only in Malaysia, it is also having operation in other SEA countries like Singapore, Thailand, Indonesia and etc. Its is famous in whole SEA in compare to YOCB which having more than 70% sales on local market. ED is having more than 30 brands and YOCB is having 14 home grown brands.
 In term of manufacturing capacity per day, Eastern Decorator is way larger than Yoong Onn. ED able to manufacture 12,000 set of bed linen daily while Yoong Onn can manufacture 3,000 set daily now. While YOCB is having 16 retail outlets and around 120 counters in department stores, ED is having :

One might think that such comparison is unfair as YOCB is just a small company with market cap around 140 million now. However what i trying to stress out is, can a small firm like YOCB continue to grow its market share for let's say, another 5 years? Can it grab more market shares from ED? Well, before one starts guessing, let's have a look on some "worrisome" part:

Working Capital Analysis

What does it mean to you when you spotted a company with continuous increasing in receivable and inventory? As for me, when a company having its inventory and receivable been increasing so aggressively, red flag should be raised. In fact if you notice, inventories and receivable are increasing every year from 2009 to 2013, in some years, receivable even outgrow the revenue which signify that the company is using credit sales to boost the revenue. Besides that, what went wrong to inventories?

If we know the business model of the company, it is not hard to find out the reason. First, the company is depend heavily on consignment counters to expand the business. The selling of goods through the premier department stores make up more than half of the sales. As when the company expands to more consignment counters, more inventories will be piling up. How about the receivable? Having partner with more department stores, the number of receivable should be increasing too, just like inventories. The good part is they are collaborating with big department stores like Isetan, Jusco, Parkson and etc which have high credibility. Personally, I would think that the management is not good in handling their inventory estimation or the whole working capital. Or is it? Let's have a look on its cash flow statement.

Cash Flow Analysis

Please have a look on the figures circled in red. Most of the cash generated are stuck in working capital which leads to a low operating cash flow, or a weak earning quality. (earning quality for 2013, 12578 divided by 27680 = 0.4544)


Valuation

Kenanga has put up a research report stating that YOCB is undervalued by comparing its PE against its peers, which is a norm in looking on the valuation of different companies in same industry. In my humble opinion, i always believe that price is driven by the market, and there is always a reason behind it. Example, there is a reason why the market favors Hartalega in the glove industry and thus, a higher PE. Having a look through its historical PE, YOCB is currently trading at its highest PE since 2010.

However, if we put in the growth factor in account by calculating PEG(taking 14% 5 years CAGR as norm), the figure we get is less than 1, which shows that the stock is undervalued.


Conclusion

Undeniably, Yoong Onn has showed a solid growth for the past few years amid a high competition industry.The good part is while the big department stores, hypermarkets, shopping malls are growing in Malaysia, it helps YOCB to grow further. On the other hand, it also means that YOCB growth will be capped if all these big players stop or slow down their growth, that's why the management had been growing their retail outlets aggressively on 2012 and certainly it is something worth to monitor for although current retail sales only constitute a small portion of earning. Having considered the high competition and the potential of housing market slow down, it is not easy for YOCB to have double digits growth for the next five years, nevertheless it is good to monitor its progress of future planning as well as earning.

Note: This write-up might consist some financial terms, please feel free to raise your question, if there is any.