QL Resources| Is it undervalued? How to justify its valuation.

From The Edge's article: Earnings growth anticipation heats up at QL Resources, I would like to highlight the following points to ponder:

1. Its present share price has already surpassed the 12-month consensus target price of RM 7.52 (based on Bloomberg data). It implied that the market growth rate was an approximately 21% and the analysts had the same consensus that QL Resources could continue to grow the businesses by double-digit year-on-year (y-o-y).

2. If QL Resources can register double-digit y-o-y profit growth of 15% to 20%...it'll be enough to justify its valuation. If assuming the growth of 15% and 20% respectively, it derives the calculated price of RM 5.69 (PE 38.50, PEG 2.57) and RM 7.16 (PE 48.50, PEG 2.43) respectively. 

3. Some investors are buying the stock on the possibility that QL would spin off the subsidiary that houses its Family Mart franchise business for listing. It's the market expectation.

4. QL Resources has been deemed as sustainable staple-based food and generally recession-proof. It's the market perception.

5. AffinHwang Capital expects Family Mart to post its maiden earnings contribution to QL:

FY20: Estimated pretax earnings of RM 24 million

FY21: Estimated pretax earnings of RM 42 million

FY22: Estimated pretax earnings of RM 77 million

For your information, QL's subsidiary, Maxincome Resources Sdn. Bhd. [199601010973 (383322-D)] which runs the Family Mart convenience business. As at 31st March 2018, it registered an operating loss of RM 7,111,561 on the back of  its revenue of RM 75,158,046 (source: CTOS). On 28th August 2018, it had opened 59 outlets if deriving from this, its revenue would be RM 1.274 million per store.

6. AffinHwang Capital puts a 'buy' call with a higher target price of RM 9.30 (from RM 8.50 previously). According to AffinHwang Capital's target price of RM 9.30, it implies a market growth rate of an approximately 27% (PE 62.50, PEG 2.31 but the industry PE 24.90). Does it make sense?

In conclusion, I have nothing to add...

Whether HeveaBoard Berhad is operated by candid and competent management?

Recently, HeveaBoard Bhd's 2Q19 financial result just released and recalled me something related to 1Q19 quarterly result as I did put some comments on KLSE i3 (Search Genghis Hoe if you're interested to know what I commented). 

When reading the Notes to Financial Statements of the respective quarterly reports, I sensed that the management weren't be frank with the problems that they faced and also looking for excuses on the poor financial performance:

Figure 1.0: 2Q16 Quarterly Result

Figure 2.0: 3Q16 Quarterly Result

Figure 3.0: 1Q19 Quarterly Result

Figure 4.0: 2Q19 Quarterly Result

From the above Figure 1.0 to 4.0, it's obvious that the management provided the similar reason while the financial results' release didn't meet the expectations -- why it had a major shutdown for preventive maintenance, couldn't it be avoided during the operation? I'm not sure that whether the management did highlight the 'cyclical factors' during the AGM or any interview before. Would the preventive maintenance be one of the  major business risks?

To recall, let's refer to the past 5-year Financial Highlights to assess whether the management is candid to face the issues and competent to resolve it.

From the past 5-year revenue, it's obvious that revenue FY2018 was plunged by RM 96.58 million (down by 17.74%) and net assets were squeezed by RM 16.69 million (down by 3.65%) as compared to the previous financial year. In hindsight, the management might be aware that its core business operations would be impacted by inherent risks, therefore proposed to venture into King Oyster mushroom cultivation by giving the reason that those residual wastes could be utilised to cultivate the mushroom, in order to create extra income stream in future.

"We select our marketable securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can easily understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at an attractive price."

Were HeveaBoard's key management also losing their confidence?

When comes into the investment decision -- how much efforts that you really put on to do your thorough research?

I would like to point out some clues that HeveaBoard key management's actions may hold on your investment decision.

There are some points to ponder, before putting on your bet:

1. An analysis of shareholding of two (2) key management in the past.

2. A land deal with an insider on 11 January 2017 and completed on 19 June 2017.

3. A key management resigned on 23 February 2019.

First of all, let's briefly introduce the two (2) key management's background (please refer to below picture).

Figure 1: HeveaBoard Key Management

 Who're the two (2) key management? Management No. 3 and No. 4.

Figure 2: Key Management at a Glance

After going through their brief background, what would you get related to? Would you think that whether they had their stakes in HeveaBoard? Let's have a look at the summary of the analysis of their shareholdings in the past to date:

Figure 3: Key Management's Shareholding Statistics

How do you look at the above shareholding statistics? 

Think deeply: 

1. What're the reasons behind both of them divested all their shares prior to the second round of 10% of private placement exercise in April 2014 (completed on 21 July 2014). 

2. Did they also feel that they're lack of confidence on the future prospects since they didn't own any shares of HeveaBoard? Weird, right?

Secondly, the land acquisition deal was between HeveaBoard and one of the key management, Mr. Yee Kong Yin on 11 January 2017. This insider's deal was about RM 13.46 million for a leasehold vacant land measuring 3.127 hectares (7.7269 acres) in Negeri Sembilan. The reason given that this land acquisition was to expand the RTA segment by building a new factory and to acquire new machineries. The questions here are: 

1. Whether the offer price of the deal was reasonable.
2. Are the RTA segment's prospect very firm in future since it'd spent a large sum on it? Time will tell.

Lastly, after 21 months of the deal, Mr. Yee Kong Yin resigned on 23 February 2019. Why suddenly resigned since he's aged 56? However, there's no smoke without fire!

If you have your own thought, kindly share with me as well.

Can we simply trust the business/financial media press?

Behind the News —— Have their own Agenda.

In the world, who can be trusted? Yourself. 

Let's take this for example.

From the news published on 23 July 2018 (Monday, 12:00 a.m.), it claimed that "Furniture and glove makers winners in US-China trade war" -- For wood-based panel makers, potential beneficiaries would be:

1. Mieco Chipboard Bhd

2. Evergreen Fibreboard Bhd

3. HeveaBoard Bhd

As for glove makers, they are:

1. Top Glove Corp Bhd

2. Hartalega Holdings Bhd

3. Kossan Rubber Industries Bhd

On 28 February 2019, HeveaBoard Bhd released the FY2018 4th quarterly financial results. From the notes to financial results, the management claimed that the lower revenue and profit before tax were mainly due to the soft particleboard market sentiment caused by: 

1. the trade war between USA and China

2. weakened USD/MYR exchange rate
3. increase in direct raw material cost

Figure 1.0: HeveaBoard FY2018 4th Quarterly Financial Results

Figure 2.0: Evergreen Fibreboard Bhd's Financial Results Summary

Figure 3.0: Top Glove Corp Bhd's Financial Results Summary

Figure 4.0: Hartalega Holdings Bhd's Financial Results Summary

From the above examples, we have to be rational while reading the business or financial news as sometimes their write-ups may have their own agenda behind or they may be ignorant, but still have to come up some works to show their bosses. 

However, we have to exercise our own judgements to verify the information sources that we obtained nowadays.

"No matter the situation, never let your emotions overpower your intelligence."

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