Dear fellow readers,
This is my No. 9 Value Pick for 2017.
Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :
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Value Pick No. 9: Peterlabs Holdings Bhd. (Initial Valuation RM 0.40)
While we are familiar with many stocks in the KLCI, however, there are times some stocks will just slip our radar. We manage to catch hold of this only because one of our subscriber picked this up and asked us about it.
Once
again, we will give an upfront warning, as this is a small cap stock,
this stock has higher risk compared to our other value picks. So for
those who have low risk tolerance, you can skip this. Peterlabs is in the business of manufacturing
varieties of animal health products, animal nutritional feed additive
and veterinary pharmaceutical to serve the livestock industry. It has
its own R&D facilities and team which develop award winning products
in this sector.
We like Peterlabs for its track record of over 30 years and market leading position on supplying
animal nutrition and health products to the poultry farms locally and
abroad such as Pakistan and Taiwan. Due to its niche sector, the
barriers of entry is higher as it requires technical expertise and
experienced veterinarians.
For
the past 5 years, Peterlabs has consistently delivered continuous
growth in revenue and positive bottomline. Looking at the revenue trend,
the trajectory has been amazing with growth of more than 10%+ per
annum. However, despite the growth in revenue, it did not translate to
the bottomline due to the narrowing profit margin every year. The latest
financial year, Peterlabs delivered RM83 million in revenue but only
RM3.3 million in net profit which is lesser than even 5 years ago. As
you are reading, you must be wondering why would we call Peterlabs as
our value pick then? This is because the key is in the details, not what
meets the eyes.
Looking
at the profit trend, one would be depressed. Because no matter how
strong the revenue grew, the profit could not follow in tandem. However,
this is in part due to capacity as well as FOREX. The company has been
consistently expanding their plant and facilities to manufacture more,
incurring higher expense as well penetrating new regions through
marketing activities. While it was time for them to reap some rewards,
the weaker MYR affected their bottomline as their raw materials required
import. The company faced eroding margin, but at least it is still a
decent 4%. We believe with the MYR finding a bottom and the new plant
coming on soon, the company should be able to improve its profit margin
for this coming financial year.
Nonetheless, this respectable management continue to declare dividend to reward shareholders through the ups and downs. No matter how bad things are, they will still declare dividend. This is a rare feat among listed companies these days where many has no respect for the company's dividend policy. The latest dividend declared was 0.7 sens which is equivalent to a Dividend Yield of 2.5%. For a penny stock that is still growing, this is very generous of the company. Some bigger caps stock cant even declare 2.5% dividend.
Nonetheless, this respectable management continue to declare dividend to reward shareholders through the ups and downs. No matter how bad things are, they will still declare dividend. This is a rare feat among listed companies these days where many has no respect for the company's dividend policy. The latest dividend declared was 0.7 sens which is equivalent to a Dividend Yield of 2.5%. For a penny stock that is still growing, this is very generous of the company. Some bigger caps stock cant even declare 2.5% dividend.
We
like Peterlabs for many reason. Firstly, it has a management which is
professional and competent. Although they faced many challenges
including higher operating cost, FOREX exposure, they still manage to
maintain profitability throughout the years. Secondly, it is in a sector
with high barriers of entry and shows actual revenue growth. So long
they can rationalise their operational cost, they should be able to
improve their bottomline. Thirdly, the company is expanding with a new
factory and looking to penetrate new markets. Hence, we believe the
future prospect is intact. We are cautiously optimistic for it to
improve its profitability in the coming QR. The 2017 prospects by Peterlabs looks promising as well. Given
the management confidence of being able to deliver a positive
performance to FY 2017, I think it is worthwhile to consider investing
in the company for the long term basis. If Peterlabs successfully pulls it off, there may be a re-rating to the stock.
Another point to note is a substantial shareholder recently bought back a huge position. http://www.fatfish.co/
With the latest QR, it is now consolidating at near the 52 week high. If Peterlabs can maintain their growth, there is no reason it cannot challenge it's 52 week high. Currently at 28.5 sens, it is trading at a multiple of 17.7x. It's NTA stands at 19 sens with ROE of 8.53% for the past year. We believe in the mid to long term growth trajectory of Peterlabs and estimate the coming full year result with EPS between 1.8 to 2.2 sens. Applying a multiple of 20x (factor in the net cash position and the 2.5% DY), there is a possibility that it can move towards 40 sens. For now, this will be the initial TP pending observations of coming quarter results.
*Please note this is a penny stock with erratic earnings. Hence the risk is higher. For those who do not have such appetite, feel free to skip.
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Food for thought:
