Earlier this year, the broader market rally was led by big-cap blue-chip stocks, which lifted the benchmark FBM KLCI 17.1% year-to-date. This was followed by rotational interest in the infrastructure, construction and building materials sectors on the back of the unveiling of several big government projects.
Plantation stocks then saw some renewed interest as crude palm oil prices bounded higher.
Of late, there was a noticeable shift in interest towards lower-liner stocks, which also carries a dose of speculative flavour. Trading volume jumped — the average daily on-market volume, so far this month, rose to roughly 1.18 billion shares, the highest recorded since January 2010.
Trading on the local bourse would probably remain fairly upbeat in the near term, in line with improved sentiment in the global markets. Nonetheless, some caution may be warranted. For stock prices to rise further, earnings will have to keep pace. But uncertainties continue to dog the global economic outlook while increased volatility in currencies and commodity prices would affect margins.
More risk-averse investors may turn to yield stocks for their steady dividend incomes. Some are looking further, beyond the usual suspects such as BAT, DiGi, Panasonic Malaysia and Berjaya Sports Toto, to smaller companies with high dividend payout that may offer better yields.
Apollo: Flattish growth but net yield at 5.7%
Apollo Food Holdings is one such company. The company distributed between 57% and 71% of its net profit to shareholders over the last five years.
Although earnings growth has been somewhat patchy, the company has maintained annual net dividends around 18 to 19 sen per share, except for FY09 ended April (at the height of the global financial crisis) when it was reduced to 15 sen per share.
The Johor-based company manufactures chocolate wafer products, layer cakes and Swiss roll products for both the domestic and overseas markets. Exports accounted for some 42% and 31% of the company’s sales and operating profit, respectively, in FY10.
Sales were up 11% year-on-year (y-o-y) in 1QFY11 but net profit was down 24% y-o-y, affected partly by lower gains from assets disposals as compared with the previous corresponding quarter. We expect full-year earnings will probably be flattish compared with FY10.
Despite the absence of a strong growth outlook, Apollo’s share price has fared quite well, having recovered smartly from the lows in December 2009. This is likely attributed, at least in part, to its higher than market average yields and strong balance sheet.
Apollo is sitting on net cash totalling RM56.9 million and net tangible assets of RM2.62 per share as at end-July 2010. Assuming net dividends totalling 19.3 sen per share, the same level as last year, shareholders will earn a net yield of 5.7% at the current share price of RM3.40. We estimate the stock is now trading at roughly 11 to 12 times forward earnings.
Past payments may not always be indicative of future dividends
Clearly, the sustainability of dividends is a key issue for yield stocks. Traditionally, high-yielding stocks tend to have steady and predictable income and cash flow streams and low capital expenditure requirements, for instance, independent power producers and mature industries like gaming. Consumer stocks too generally fit the profile but this is not always so. Investors will still have to assess their individual operational risks.
Take for instance, Hai-O Enterprise, which saw its share price fall sharply since hitting a high of about RM4.70 in March 2010. Established in 1975, the company has over the years morphed into a household name offering a wide range of Chinese medicines, medicated tonics, wellness, beauty and healthcare products.
Hai-O had done very well, with sales and net profit growing at compound annual rate of 36.6% and 62.2% from FY06 ending April and FY10, respectively — driven mainly by its multi-level marketing (MLM) business, which accounted for 82% of sales and 79% of pre-tax profits in the latest financial year. Other divisions, including wholesale, retailing and manufacturing make up the remaining balance.
Hai-O: Poor earnings outlook likely to affect dividends
However, both sales and earnings plunged sharply in 1QFY11, by about 63% and 58% y-o-y, respectively. The company’s MLM business was negatively affected by more stringent rules on member recruitment following amendments to the Direct Sales Act.
Outlook for the rest of the financial year remains poor as Hai-O restrategises its business. Hence, even though the company is maintaining its minimum 50% dividend payout policy — and has net cash totalling over RM96 million at end-July 2010 — the expected earnings contraction will almost certainly mean lower dividends in the foreseeable future.
At the pace of earnings decline in 1QFY11, net dividends this year would be less than half the 22.5 sen per share — which gave net yield of 5.6% at the prevailing price of RM3.22 — paid in FY10.
Brighter outlook for White Horse
The outlook for White Horse, on the other hand, is looking brighter. The company appears to be on track for another good year. Sales in 1H10 were up 17% y-o-y to RM254.7 million while net profit grew 39% y-o-y to RM29.6 million. At this pace, earnings will comfortably exceed last year’s RM60.5 million.
The company, established in 1992, is today one of the largest manufacturers of ceramic and homogenous tiles in the country. Demand is expected to remain robust given the prevailing upbeat outlook for the property sector.
White Horse upped net dividends to 10 sen per share last year, from seven sen per share in 2008, on the back of a 16% growth in net profit. Better earnings in the current year bode well for further increase in dividends.
But conservatively assuming dividends remain at 10 sen per share, the stock is still offering an attractive net yield of 5.8% at the current price of RM1.72. There appears limited downside given that its shares are now trading at little over six times estimated earnings and below its net assets per share of RM2.60. White Horse had marginal net debt of RM4.9 million at end-June 2010.
We will discuss a few other high-yielding stocks in our next piece.
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