Did HeveaBoard CEO execute what he planned?

Behind the Numbers —— Have a story.

By getting a clue from the below statement, it states that HeveaBoard CEO Mr. Yoong Hau Chun said that HeveaGro Sdn Bhd (a new business venture, cultivation of King Oyster mushroom) is aiming for a RM 3 million profit on the back of RM 10 million revenue for FY18.

Did HeveaBoard CEO execute what he planned? Let's see the Figure 1.0 that the cultivation of King Oyster mushroom segment recorded a RM 0.418 million revenue for FY18 (against the budgeted revenue of RM 10 million —— the actual result was very far behind the budgeted result). Was his business venture plan viable?

『Extract』The Edge, 5th September 2017

Going forward, HeveaBoard is seeking to add value to its existing core business by venturing into cultivation of gourmet fungi, through its new wholly-owned subsidiary HeveaGro Sdn Bhd.

With the company currently producing 100 tonnes of low-quality raw materials daily, which are currently sold to boiler users at a discount, Yoong said the company plans to utilise its existing waste for King Oyster mushroom cultivation.

“It (mushroom cultivation) not going to be a very big revenue [or] profit generator, but I think, on the margin side, it’s quite attractive because we are able to use our own raw materials. I also think that there’s a very good prospect for healthy food [and] organic produce,” said Yoong.

While HeveaBoard has allocated about RM10.5 million for factory and equipment to cultivate King Oyster mushroom, Yoong said the company is aiming for a RM10 million revenue and RM3 million profit for FY18.

Yoong said the factory should be ready by year end and HeveaBoard is hoping to start production in the first quarter of 2018.

Source: HeveaBoard faces challenges to sustain growth

Figure 1.0 Cultivation and Trading of Fungi Segment

Source: 2018 Annual Report, Page 139 (PDF Page 141) —— Operating Segments

Why Mestron dispose of two (2) one-half-storey factories?

Wondering why Mestron to dispose of two (2) one-half storey linked factories to fund working capital?

The question here: Mestron just raised RM 25.28 million on 18th June 2019, but on 1st August 2019, they proposed to dispose of two (2) one-half storey linked factories -- Isn't it strange that within very short period, Mestron required the working capital again after listing of forty five (45) days?

18th June 2019

Under the listing exercise, Mestron has raised RM 25.28 million from its public issue of 158 million new shares at 16 sen per share.

1st August 2019

The Board of Directors of Mestron Holdings Berhad (“MHB” or “the Company”) is pleased to announce that Mestron Engineering Sdn. Bhd. (“MESB”) and Meslite Sdn. Bhd. (“MSB”) (collectively as “Vendors”), had on 1 August 2019 entered into two (2) separate Sale and Purchase Agreements (“SPAs”) with Lim Jii Yan and Lim Woan Yun (the “Purchasers”) respectively for the disposal of the following properties for a total cash consideration of RM2,250,000 (“Disposal Price”) (“Proposed Disposal”):

(a) all that piece of freehold land held under individual title Geran 150625, Lot 16732, Mukim Dengkil, Daerah Sepang, Negeri Selangor measuring in area of 186 square metres together with one and half (1½) storey linked factory erected thereon and bearing postal address No. 41, Jalan Meranti Jaya 12, Taman Meranti Jaya, 47120 Puchong, Selangor Darul Ehsan for a cash consideration of RM1,125,000.00 (“Property 1”); and

(b) all that piece of freehold land held under individual title Geran 150626, Lot 16733, Mukim Dengkil, Daerah Sepang, Negeri Selangor measuring in area of 186 square metres together with one and half (1½) storey linked factory erected thereon and bearing postal address No. 39, Jalan Meranti Jaya 12, Taman Meranti Jaya, 47120 Puchong, Selangor Darul Ehsan for a cash consideration of RM1,125,000.00 (“Property 2”),

(collectively referred to as “the Properties”).

Source: Bursa Malaysia Announcement on 1st August 2019

Newly-listed Mestron Holding Berhad

What caught my attention on Mestron Holding Berhad?

One of my friends sought my opinion as to the newly-listed Mestron Holding Bhd, which is a steel pole maker. By the way, he said that he was able to communicate with the management to seek for the related listing and business operation information.

Therefore, I searched the respective prospectus to do some studies on its business operations and financial analysis. After doing some studies, I listed down few questions for my friend to get answers from the management.

1. How do the management ensure that Mestron can stay competitive? 

A: On pole business. Instead of offering pole only on passive basis, we step to provide solution of lighting requirement by offer lighting + pole + related accessories. Lighting business through Max Lighting Solution we are partnering industry leading lighting company like Osram, GE, Gruppe to provide professional lighting service. Lastly on non lighting Specialty pole business, we are aggressively establishing network in Oil & Gas business through Korean EPC like Samsung and Hyundai whereas Telecommunications industry we work closely w Telco companies to co develop the optimize design for their infrastructure need.

2. What's kind of the strategy that the management will apply to venture into Brunei, New Zealand and Sri Lanka? How confident are you, Gary? In how many years, the overseas sales can overtake Malaysia?

A: We are developing overseas business partner to actively promote our products at their respective countries. At the peak in 2011, we were having 40% of our sales exporting to Australia during the mining boom in Australia. As our business concentrates locally, we do not foresee Export to overtake local sales in near future.

3. From the past three-year financial data, it could be interpreted that the Company's core business has apparently been shifted from the manufacturing to the trading by referring to the revenue segment. The question here is: Did the management lose their focus or not aware of the shift of the business strategy?

A: Past few yrs witnessed the emergence of LED technology into lighting. From a 500 rm lantern it became 3k+ each. Growth on lighting and pole business will grow together in tandem. If we succeeded in a project, chances is that it will be Lantern + Pole. Both products complement each other to make themselves stronger.

 It will not an isolated case

4. Would your business be involved in bribing the government officers or related authorities to get the projects?

A: Since our listing exercises started 18 mths ago, we were subjected to audit and checking by various professionals from different background in ensuring Mestron conduct business in Legal and Professional manner. We do not practise illegal activities as mentioned.

5. Why piling up the inventories from FY2016 onwards?

A: We finally relocated to our self owned factory in 2016. The larger factory allows us to increase our inventory to improve our supply competitiveness.

The above highlighted in blue, it's the answers were given by the management. As for No. 5, it sounds like the reason was not that specific and convincing.

Figure 1.0

By the way, from the Figure 1.0 -- hot rolled price movement, it shows that the price had been skyrocketing from mid of the year 2016 onwards but Mestron appeared to go against the steel price hike and still able to produce the excellent financial results -- the gross margin had been trending up from 15.70% to 33.20% -- actually, what's something behind the numbers?

My concern here: whether the increasing gross margin (Figure 2.0) was driven by piling inventories or Mestron management is very good at running business?

Figure 2.0

Other than the above, the below few things that as an investor, you may ponder but I won't add on my comments (due to...you know one):

Suspect#01

Suspect#02

我的過去

我略述下我個人故事。

在2011年期間，因機緣巧合接觸了股市。之前，父母告訴我不好碰股票——會傾家蕩產的。那時的我，還在就讀著我最後一年的本科專業，資本不多但卻嘗試跟朋友學習短線炒了幾個股。最終發現這樣的方式不符合我的性格和個人原則，所以決定再找較有經驗的人或高手請教。結果發現股市的專家大多數都是不大行才賣課程“賺外快”，不然早就賺翻了還累垮自己來教笨蛋啊呵呵！

事後，我就開始看書自學並尋找個人投資方向和方式。幾個月後，正式畢業並慶幸地被中國公司錄用了，將會在北京工作。出國後，打算在中國這個地方尋找投資啟蒙老師，不過事情不是自己想得那麼妙。所以，決定暫時抽離股市再找機會尋找正確的方向。在北京期間，我就沒有再接觸股市了，便開始去嘗試了解中國文化和本土習俗。

在華將近兩年，我決定辭職離開回國迎接大選並打算回國發展。2013年5月1日，抵達大馬後開始想要做什麼。在那段期間，我設下了自己的最新計劃並開始慢慢實踐。第一計劃是重新進入股市再專注價值投資（因為較符合我個人的性格和原則）。經過幾個月的琢磨，理清了自己的投資思路，接著全靠的都是實踐經驗了。

故事就在此開始……

The Brotherhood between London Biscuits and Khee San

Let's briefly introduce the two listed Malaysian companies in the following:

London Biscuits Berhad

London Biscuits is engaged in manufacturing and trading of confectionery and other related foodstuffs. The Company offers packed and ready-to-eat products, which can be categorised into corn-based snacks and cake products, such as Swiss rolls, pie cakes and layer cakes. 

Khee San Berhad

Khee San is engaged in manufacturing of confectionery products. The Company offers a variety of products, such as candies, sweets and wafers, which include household brands, such as Fruitplus, Torrone and Bento.

The above two listed companies have their similarities like the nature of business and the management style/pattern.

The purpose of this article is to share about my points of view on the brotherhood's management style/pattern.

Figure 1: London Biscuits and Khee San

London Biscuits' revenue growth compounded 15.77% (RM117 million in FY2007 to RM437 million in FY2016) annually in the past 10 years. Meanwhile, Khee San's revenue growth compounded 9.39% annually (RM70 million to RM157 million). Both companies showed an impressive growth in the past 10 years but particularly, in the past 5 years (FY2012 - 2016) both companies' revenue had grown significantly —— this triggers my curiosity: why was the revenue mushrooming? How so?

Highlight 1:

Both revenues were mushrooming, how about the trade receivables? In past 5 years (FY2012 - 2016), it indicated that its days sales outstanding (see the Figure 1) was rising drastically. The question here is: Do you like a business making a lot of sales but being highly receivable?

Highlight 2:

Since both companies are the manufacturer, the fixed asset turnover would be a great fundamental indicator to see whether they effectively utilise the investment in fixed assets to generate revenue. 

To dissect the fixed asset turnover, from the net fixed assets we can see the plant and machinery was accounting for the largest portion of its overall. For example, London Biscuits' net fixed assets in FY2016 was totalled RM524.9 million, in which the plant and machinery accounted for RM419.9 million, approx. 80%. London Biscuits heavily invested a lot of plant and machinery to just generate the FY2016 revenue of RM437 million. What's cookin'?

As for Khee San, its FY2016 net book value of plant and machinery accounted for approx. 74%, amounted to RM122.9 million. Against FY2016 revenue of RM157 million, did the Company effectively utilise the investment in plant and machinery to generate revenue?

Before ending this post, ask yourself a question: are those above two companies fundamentally sound and are both managements' interest aligned with the interest of shareholders? —— why loosening the credit terms and how come keep buying the plant and machinery?

"Financial ratios can tell you about the management attitude/behaviours."

What's wrong with the RHB analyst report of VS Industry?

On 7th December 2016 20:xx, my friend, KY texted me through Whatsapp to tell  that her broker (actually her friend, JO) asked her to buy the shares of V.S Industry and Gadang.

Hmmmm...these shares were being 'hot' (strongly recommended and promoted by KYY) and I did not have the knowledge of these two listed companies, therefore I did not comment on it but just felt curious about what's the so-called theme play on these two shares that the brokerage houses took advantage of promoting it.

After she forwarded to me those messages and a picture that she received from JO, I was not interested to read but clicking on the picture as to the research report provided by RHB analyst. After glancing through the RHB research report, I discovered an error on the published report. 

Extracted from: RHB Malaysia Company Update - VS Industry 26 July 2016

"Maintain BUY with a higher SOP-derived MYR1.72 TP (from MYR1.68, 24% upside) based on an unchanged 11x P/E."

Do you discover that error after glancing through my extracted statement?

The answer is: There's a potential upside of 24% to the target price of RM1.72 from RM1.68. RM1.68? Is it something wrong? 

I do not know what has been gone wrong with this published company update report but I strongly believe that every written report shall be critically reviewed by the authorised person, prior to leaking to the public.

Accounting Numbers and Financial Ratios

After reading an article from i3 forum, I'd like to share the article with all of you who are interested in value investing.

From the article, the author applies the accounting numbers and financial ratios (i.e. dupont ROE) to interpret the accounting datas from the annual reports of furniture-related companies, eg. Homeritz, Hevea, etc. so as to tell stories and analyse the business operations.

Bear in mind, the accounting is the language of business, so what are you still waiting for?

To those, who wanna learn it, you may refer to the link provided here: http://klse.i3investor.com/blogs/JTYeo/96888.jsp

Extract:

"These are the fixed assets extracted from the reports. When you look at plant, machineries & equipments (PPE), Hevea needs around RM170 mil of PPE to generate RM503 mil of revenue, or 2.95x. In contrast, Homeritz can generate RM146 mil of revenue with only RM4 mil worth of PPE. That's 32.95x.

Is that because Hevea is inferior? No, it is simply because they are in a different business. For a particleboard manufacturer like Hevea, the amount of machineries they need to chip, flake, dry, mat forming, hot pressing, sanding, sizing, laminating, to turn timber into particleboard are a lot. 

In comparison, the machineries you need to turn particleboard into an upholstered sofa is very little. Sanding, polishing and some cutting tools should do the work. In saying that, the workmanship needed to turn the sofa into a high-end quality product will translate into higher expenses too. Pohuat & Latitude would have more similiarities to Homeritz than Hevea, while Hevea's business is more similar to Mieco."