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On 3rd July 2019, London Biscuits Berhad (LB) made the following announcement in Bursa,

“The Board of Directors of London Biscuits Berhad (Company) wishes to announce that the Company had on 4th June 2019 received a Notice of Demand (NOD) from the Bank of Nova Scotia Berhad (BNSB) for the sum of RM9,830,000. The NOD arose due to failure of the Company to pay the amounts due after the maturity dates under the facilities granted by BNSB to the Company.”

http://www.bursamalaysia.com/market/listed-companies/company-announcements/6212873

The Company further stated that,

“There will not be any significant impact of the default in payment on the business, financial and operations of the remaining business of the Group.”

Following that, there was a further announcement on 5th July 2019 in the link below,

http://www.bursamalaysia.com/market/listed-companies/company-announcements/6215837

It states that,

The Board of Directors of London Biscuits Berhad (“Company”) wishes to furnish the following additional information:

“1. After due deliberation with the management on the impact of the Notice of Demand from Bank of Nova Scotia Berhad (“BNSB”), the Company feels that this incident will put a strain on its short term cashflow position. Nonetheless, the Board and management will continue to actively engage with BNSB as well as all other lenders to minimise any further financial impact to the operations and business activities of the Company.

2. Since the Company is unable to meet BNSB’s repayment obligation in the immediate term, the Board is of the opinion that the Company may not be solvent.”

The share price of LB dropped sharply to close at 24 sen this afternoon on 8th July 2019. Year-to-date, its share price has dropped a whopping 65%, in just half a year as shown in Figure 1 below.

Figure 1: Share price movement of London Biscuits



What happens to an once high-flier in Bursa?



The over-emphasis of earnings in the Street of Bursa

If one were to read any touting of stocks in the internet space, it invariably talks about earnings, and growth of earnings, and nothing else; nothing about the business, its competitive advantage, how is the business funded and if it earns return higher than the costs, its financial health, and if it earns cash, etc. Think of the Golden Rule; this quarter’s earnings must be better than the last, and the following quarter must be better than this quarter; or this quarter’s earnings must be better than the corresponding quarter earnings last year, and the following quarter earnings must be better than the same corresponding quarter the previous year, etc., and the PE ratio must be below 10, or whatever, totally disregarding what the “E” in the ratio is made up of, whether there is one-time-off and non-operating item. Why a PE of 10? Why not 5, 15, 20, 30, or even 50?

This is in fact, normal. What else do you expect a normal investor does, as analysis reports from professional analysts and investment bankers do the same thing, by projecting earnings and arbitrary inject a PE ratio of 10, 12, or even 12.53 to come out with a “target price”.

Here was one by investment bank for LB 5 years ago, “London Biscuits, the irresistible bite”.

https://klse.i3investor.com/servlets/ptres/22855.jsp

“BUY with a Target Price of RM1.18 based on Fwd. PE of 10x on its FY15E EPS of 11.8 sen. Our Fwd. PE of 10x is based on a 10%-discount to current FBM Small Cap Fwd. PE valuation of 11x. The 10% discount is applied due to its relatively smaller market cap and lower dividend payout. Overall, we expect a potential total return of 30.6% from here (Upside 29.0% and dividend yield 1.6%.)”

I did provide some words of caution on the above analyst report in the link below,

https://klse.i3investor.com/blogs/kcchongnz/60180.jsp

London Biscuits has also been used as a case study for my online investment course on how to avoid investing in lemons.



Earnings of London Biscuits

Table 1 in the Appendix shows the consistent positive profit of LB for the last 13 years up to the last financial year in 2018. In fact, there has been a good growth of its revenue and earnings from 2006 until 2016. From year 2012 to 2016, the “Golden Rule” also applied nicely for LB as the year net income was higher than the previous year, and LB was selling at an average price of about 80 sen as shown in Table 1 below, or a PE ratio of below 10.

Also look at the quarterly results for London Biscuits in Table 3 in the Appendix. For the last 5 quarters, the profit went up every quarter for the last 5 quarters. London Biscuits made RM13.66 million, or 6.6 sen per share. At the close of 24 sen today, the price is just 3.6 times its latest annual earning. LB is indeed a perfect “Golden Rule” stock to invest in and become a super multi-millionaire!

But why is that the Board made a statement that LB may have become insolvent last Friday?

The usual suspect, the cash flow problems.



Cash flows of London Biscuits

Table 2 in the Appendix shows LB made a total of RM102m profit for the last 7 years. Yes, and hooray, profit every year without fail. However, the cash flows do not tally with the accounting profit. There was actually a cash deficit of RM49m over the seven years period, due to the steep increase of receivables of 287% in just 6 years to RM286m. This means LB takes 318 days to collect its debts. The question is, how much of these debts will finally collected, and how much of them will turn into bad debts?

Worse still, the company spent a total of RM278m in the last 7 years, or RM40m a year for purchasing of property, plant and equipment, and yields just RM14m in net income in 2018! What kind of food business is that which requires such extremely heavy capital expenses? As a result, the operation sucks cash like nobody’s business, resulting a net cash outflows of RM305m in the last 7 years.

As the result of poor cash flows from operations, the company has to issue more shares with rights issues and private placements, and hence dilute earnings, and borrow more and more money from banks. As at to date, it can’t even pay the minute RM9.83 million loan as demanded by BNSB, and likely to become insolvent, as reported by the Board of Directors. Mind you, LB still has a total of RM400m bank borrowings in its balance sheet, and RM22m interest payment to be made every year.

Profit of a company is just a piece of the jigsaw puzzle for the performance of the company. PE ratio is just a simplistic way to value a company. There are many other things which are more important to look out for, if you wish to survive investing in your own in the stock market.



Do you own any other stock with the same characteristics as London Biscuits with profit, but poor cash flows and a precarious balance sheet? Have you read other articles of mine discussing some of those stocks recently? In fact, I have written a number of those stocks before as published in i3investor. Aren’t you worried if you have some? Are you able to analyze yourself first before buying those stocks as touted by interested individuals, analysts and investment bankers?

For those who are interested to learn more about investing by looking at investing in a stock as participating in part of a business, you may email me for a copy of eBook on personal finance and investing at,

ckc13invest@gmail.com

It is free.

KC Chong



Appendix



Table 1: Financial performance of London Biscuit from 2012 to 2018


Year
2018
2017
2016
2015
2014
2013
2012
Revenue
308703
426021
436508
402539
359995
289979
253520
Net Income
13658
1734
22375
18198
17312
15079
13764
EPS, sen
6.6
0.8
10.4
8.1
8.8
8.7
8.4

Table 2: Cash flows of London Biscuits




Table 3: Quarterly Results of London Biscuits



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