CSCENIC (7202) CLASSIC SCENIC BHD
KUALA LUMPUR: Wooden frame maker Classic Scenic has come under CIMB Equities Research’s spotlight as it is a typical Warren Buffett-type company.
The research house pointed out on Friday Classic Scenic operates in a profitable niche industry with minimal capex and strong free cashflow.
Interestingly, US picture framing giant, Larson Juhl is Classic Scenic’s third-largest customer. Buffett bought Larson Juhl in 2002, citing superior economics as his reason.
As for dividends, Classic Scenic paid out 47 sen over the past five years, representing 40% of its current market cap.
“Combined with its net cash of 13 sen a share, this solid dividend-yielder could be worth RM1.53-RM2.06, based on sum-of-parts, offering investors 31%-76% upside,” said the research house.
CIMB Research said the wooden picture frame industry is a very niche but highly profitable industry.
Global market demand is driven primarily by North America given the prevalence of the use of wooden picture frames in America, not seen in many parts of the world.
Classic Scenic’s margins (23%-24%) are more than double that of other downstream wood-related consumer products, such as furniture (9-11%).
With access to the abundance of cheap timber and labour in Malaysia, its cost base is more competitive than its developed-country counterparts and even China.
Classic Scenic exports 80% of its products to North America. Its main customers are major US arts and crafts materials chain stores, such as Michaels Stores, Hobby Lobby and Larson Juhl. These three customers collectively account for 50%-60% of Classic Scenic’s annual revenue.
With business relationships built over the past 20 years, Classic Scenic is usually the largest foreign supplier of high-end wooden frames to its customers.
“With minimal capex requirements, Classic Scenic generates free cashflow of 8 sen to 12 sen a share per annum and its dividend payout ratio has been above 90% since FY09; we expect this to continue.
“Combined with a net cash/ share of 13 sen, this easy-to- understand business is a cash machine, with an option value of earnings kickers from a strong US$ and a recovering US consumer,” it said.
CIMB Research pointed out that historically, Classic Scenic yielded 6%-9%.
“We expect full-year FY14 yield of 9-10%. We do not rule out commencement of quarterly dividend payments, which should further boost its dividend appeal,” it said.
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