PPHB (8273) - Takeaways from PPHB's Annual Report 2016: Growing but Still Cheapest
In capital allocation, every choice presents opportunity costs.
Through our previous post, we understand that reinvesting in the company is the primary capital allocation choice. To generate a meaningful return, at least $1 value must be created (at its cost of capital) for each $1 retained.
In the case of PPHB, the management has entirely retained and reinvested its earnings for organic growth and moat-widening opportunities: RM2.07 value was created on each RM1 reinvestment.
Importantly, the excess value is realized in the form of free cash flow.
Although the rearview mirror is clear, it is (quality) earnings (cash flow) that count in business.
In this letter, we attempt to understand how PPHB has allocated its retained earnings (cash flow) to reinforce its organic growth.
Where to find these information?
PPHB published Annual Report 2016 on 27 April 2017.
Different from its previous annual reports, a new chapter is devoted for Management Discussion & Analysis and Key Senior Management separately.
These changes are likely to suggest that the management is more transparent and inclined to communicate with shareholders than before.
2017 outlook
In Management Discussion & Analysis, the management viewed the packaging industry is correlated with the manufacturing sector.
In the first two months of 2017, Malaysian manufacturing sector has grown at double digit from the base of comparable months of 2016.
The management also indicated that Ringgit appreciation will reduce its cost of materials:
Measures reinforcing organic growth
In FY16, PPHB invested RM13.59m for (1) factory building expansion and (2) machineries (operational facilities upgrade). Both measures aim to meet growing demands, orders, and customer base.
Executive Chairman's Statement gave positive notes:
Financial growth indicators
To cross-check whether PPHB is ramping up for increased demand, we turn to its Inventories that listed on Balance Sheet.
Its Inventories jumped from RM17.8m in FY15 to RM19.7m in FY16. These estimates are the aggregate of (1) Raw Materials, (2) Work-in-progress, (3) Finished Goods, and (4) Other Consumables.
The type of inventory matters even more than the overall quantity.
In assessing growth hypothesis, Raw Materials and Work-in-progress inventories are two particular types of inventory bulge that we like to see.
In meeting growing demand (or expecting robust future growth), PPHB has grown both Raw Materials (+14.6%) and Work-in-progress (+31.5%) inventories at a faster pace than Revenue.
While its Finished Goods (-4.1%) have slightly reduced, oversized growth in both Raw Materials and Work-in-progress inventories offers a clue to a brighter future.
Conclusion
It is clear that PPHB has made RM13.59m reinvestment for organic growth in FY16.
This amount is substantially larger than its previous average RM4.573m capital expenditure (FY11-FY15), which was proved effective in boosting its earnings.
Given its track record and various indicators listed in this letter, the growth outlook of PPHB is deemed bright and vincible.
To help you at the end of this letter, PPHB is still selling at a steep discount in relative to its intrinsic value and peers of paper and corrugated packaging industry.
PPHB (8273) - Takeaways from PPHB's Annual Report 2016: Growing but Still Cheapest
http://valueveins.blogspot.my/2017/04/takeaways-from-pphbs-annual-report-2016.html
