Monday, August 30, 2010

Lonbisc Still Worth Investing ??

The long awaited Lonbisc's result is finally here. Lets drill down more details on its result and recent development on Lonbisc. We will look at these 2 angles to assess the possibility of its future perspective, after all, shares investment is theoretically only making so call future "prediction" or assumption on its growth and earnings, though we know that for one to have an entirety details understanding of it, is far more harder than one can really achieved. Gosh, who have the luxury time to read the company result and understand them thoroughly each time the company result was published ??? I for one is damn lazy bump on this but again there is no free lunch in this world. You reap what you sow and blame no one.

I've previously written two posts on this here.

Okay, lets start the ball rolling...............

FIRST, lets work on its recent development :-

1) DISPOSAL BY LONDON BISCUITS BERHAD OF ITS ENTIRE EQUITY INTEREST IN LAY HONG BERHAD (“DISPOSAL”)

Summary :-
  • LBB has invested in LHB since 2006 and  the original investment cost of RM12,088,798.
  • The loss on the disposal of 11,272,200 ordinary shares of LHB under the Company’s level  is RM130,737.11. 
  • The purchaser of the 11 million ordinary shares of LHB was QL Resources Berhad which is currently listed in the Main Market under Bursa Securities Malaysia Berhad.
  • The justification for disposing at a consideration price that is lower than the cost of investment is the historical share price and share liquidity constraint of LHB in addition to the strategic overlap in respect of the investments into TPC and LHB.  In this instance, the proceeds accrued as a result of this disposal could be used to enhance the value of the Company and its shareholders.
My verdict #1 :-
Invested since 2006 and disposing it with a loss !!!
-1 point from me.

2) The Company had on 1st March, 2010,acquired 25,600,000 ordinary shares of RM0.50 each in TPC Plus Berhad (“TPC”) for a cash consideration of RM7,680,000 or RM0.30 per TPC Share representing approximately 32% or the issued and paid-up share capital of TPC. The Company on 9th April, 2010 and 27th May, 2010, acquired additional 888,900 TPC shares and 429,100 TPC shares, respectively, at RM0.30 per TPC Share. These acquisitions effectively increased the Company’s percentage of shareholding in TPC to 33.65%.


My verdict #2 :-
Active acquiring and having 11th factory in placed for expansion, also trying to list Kino, that show the growth part.
+1 point from me.

3) High gearing leads to high financial risk coz of the potentially exaggerated fluctuations in the returns to shareholders. I believed, the total risk of a company is made up of its financial risk and business risk. For a company base that represent a paid up capital of 96millions shares of Lonbisc, this consider relatively small base. So, there is an advantage towards this, as the high geared would mean high financial leveraging but this would mean high financial risk as well, if this is not turn out well by way of increasing its revenue and profit to service the finance cost then, high chance will lead to uncontrollable default payment in future. This is serious stuff and no laughing matter. You put yor investment at steak. !!!!

Lets come back, if a highly geared company couple with increase revenue and profits every year then the profits will be magnified dramatically. This is one of the advantage i meant for having high geared but it is also a two way edged sword though. A company can be brought down by just having too much of unrecoverable debt if not managed properly.

I am not worry about business risk for Lonbisc as Lonbisc is the consumer type of business, where the demand for consumer products would probably be more stable. Hence, this would experience smaller fluctuations in profit and therefore a lower lever of business risk.
Unless the management of Lonbisc has abused the loaned money else, it is healthy to acquire for expansion with the borrowed money, company can not just stay stagnant, these activities are meant for increasing shareholders value. But, sad to say, we some how have seen 2 investments not being very fruitful so far;

a) disposal of LHB at a loss
b) 32% KheeSan purchase at high price

What more disappointments they gonna bring ??

We certainly would hope that the TPC investment will pay off and leverage them to maximise the profit on Lonbisc. The Management of Lonbisc has to put in full alert in such situation that the current gearing as mentioned in my previous post is just way too worrying. So, the Management has the responsibility to bring in greater value to shareholder by increasing the revenue and profit, since the "financial aid" has been utilised and we have yet to see any leveraging effect from it.

Okay, enough said. Lets do the math now :-

I would rate below,

Gearing > 1 - extremely high
Gearing 0.7 - 1 - High
Gearing 0.5 - 0.7 - Medium
Gearing 0 - 0.5 - Low

From the latest 4Q,
Share Capital = 96,014,000
Retaining Profit = 103,297,000

Current Borrowings = 192,914,000

Gearing = 192914/199311 = 0.97 (wow,,, this is serious case man. HIGH, HIGH & HIGH !!!!)

They are very much in debt, so whats now ??
Abandon the ship ???
Yeah, this is the right way to do, avoid this stock, there are other better stock waiting for us.
High gearing mean high speculation, coz, no one know what will happen next ???

oh dear....Lonbisc in deep shit !!!!!

NOT so fast. As i said before, Lonbisc is a consumer type of business, so long as there is no business risk, operation will continue to generate revenue and profit, i don't see is there any fear for now unless hanky-panky from the management of Lonbisc, then this will really caught us off guard.

BUT, what about the gearing part someone may ask ?? No choice loh, since damage already done, the only way is to tackle them "slowly"..... but how ???

I mentioned "slowly", so this stock is not meant for short term bid, instead a long haul struggle. Buy this stock, don't expect for overnight miracle. coz the gearing concerned would pretty much a factor making this stock unattractive.

So, What Lonbisc needs to do to gain investor confidence in a practical term......
a) continues to growth revenue and profit by leverage on the high geared
b) company must continue to pay dividend (which they did with a mere 1.5sen TE)
c) reduce the gearing, thinks the only right way to do is to give RI but this will further dilute the EPS.

Yes, item a) & c) would mean to reduce the gearing, these should be the practical ways for Lonbisc to bring down the gearing to a comfortable level and the current good valuation will continue to gain support on its share price.

BUT BUT BUT, what is bloody wrong with their 4Q earning now !!!! I would expect a better or equal Q result than its corresponding Q at least. See what happen here, only managed to grab through 4m gross profit NOT even half of corresponding Q. Gosh, something went wrong someway ???


See ? 96% of revenue on Operating Expenses !!!!!  DAMN IT ! (from toto :P )
Sugar gone up ? TELUR gone up ? Flour gone up ? what else you name it .......
What synergy have you done all these year with Lay Hong to maximise LBB's profit ??
What sort of profit margin are u talking here ? 4% ? Better off close the business. :P

Hey, this used to be my cup of tea but not anymore. You see what i see ?? I suspect there could be hanky-panky within LBB, since i don't know what it is, so better avoid.

My final verdict #3 :-
4Q result put me in puzzle and disappointment. EPS, dilution & NAV have all shrink.
-1 point from me.


FINAL RESULT : 1 +ve and 2 -ve
NOT MY CUP OF TEA ANYMORE.

3 comments:

elmo said...

horse,

a very interesting examination of the company. I didn't even look under the hood in this case. thanks for the details.

On one hand, I can see that the gearing is 0.97... that is high.

On the other, I find it difficult to understand the company's withholding it's shareholders fund of RM103 million together with a borrowing of RM192 million. Unless there is a use of that shareholder's fund for income/revenue generation. Otherwise what type of management will borrow 197million while sitting on a pile of 103million in hand!

Any investor will know that as of today's market environment of rising interest rate the above strategy cannot be in the best interest of the shareholders. If Bank Negara were to lift the interest rate a bit more, crackes will definitely show.

Like you, it's not my cup of tea.

Anonymous said...

Portfolio increase stake of kfima at 1.13-1.14 and PJD at 71sen

Portfolio 1
1. PJD 180% (cost: 71sen)
2. kfima 20% (cost 1.163)

Portfolio 2
1. PJD 150% (cost: 71sen)
2. kfima 32% (cost 1.145)

horse said...

elmo,
in fact i don't object with borrowing if the earnings is able to cover them but some time too high could be a disaster. lonbisc yearly profit is about 10m which is rather small comparing to its debt of near 200m. Imagine 20 years of 10m only can fully settled but is growth can counter the loan then i'm all for it but latest Q seem dissappointed. counter like bjtoto also a high loan base but 2 years of profit is enough to redeem all, that d diff.

hng, see yr trading has been slow lately. :)

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