This is my Long Term Value Pick for 2020.
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Long Term Value Pick 2020 : Oriental Holdings Bhd. (Fair Value RM 8)
As
you all know, the team and myself have been writing for quite some time
and over the years have accumulated a published track record for all to
cross check / verify. There are some stock picks much more successful
than others and have stood the test of time. These stocks are those I
would say to buy and leave for your children / grandchildren. For
example, I have called to buy QL Resources back in 2015 at RM2.40, Magni Tech in end 2015 at RM4.49 (before 1:3 Bonus Issue & 1:2 Stock Split), CCK in early 2016 at RM0.645 (before 1:2 Bonus Issue & 1:2 Stock Split) and Allianz in early 2017 at RM10.80 amongst many others. For ease of reference, I call it “Long Term Value Pick”.
Recently,
as it was the birthday of my child, I would like to share with you all a
company that I would invest and leave for her as a gift. This kind of
long term investment is something that transcends generations and
carries my investment philosophy through the passage of time. More
importantly, I hope through this investment she can share a bond with me
and understand the thoughts I have as I was writing about this fabled
company.
1. History & Background
When it comes to Penang, the number of legendary and successful individuals are countless. The list consist of many brilliant Malaysians who have accomplished great things locally and globally. It includes names like Lee Chong Wei, Nicol David, Tun Lim Chong Eu, Jimmy Choo, Tan Hock Eng and of course Tan Sri Loh Boon Siew.
Have
you all heard of Boon Siew Honda? Well Tan Sri Loh Boon Siew was the
man who was synonymous with Honda so much so people call him “Mr.
Honda”. He was the man who brought in Honda to Malaysia and Southeast
Asia as the sole distributor and grew it to what it is. The founder,
Soichiro Honda had amazing relationship with Tan Sri Loh who grew their
business empire together for many years. Until today, even after the
passing of late Tan Sri Loh, Honda Motors Co. Ltd still hold significant
share in Oriental and even have a board representative.
Tan Sri Loh was revered and respected by many because he was a poor immigrant who started from humble beginnings of repairing buses to building an empire and becoming probably the richest man Penang have ever seen. Oriental Holdings Bhd. is owned by the low profile Loh family and is now in the hands of the 3rd generation Datuk Loh Kian Chung, Tan Sri Loh Boon Siew’s grandson.
Tan Sri Loh was revered and respected by many because he was a poor immigrant who started from humble beginnings of repairing buses to building an empire and becoming probably the richest man Penang have ever seen. Oriental Holdings Bhd. is owned by the low profile Loh family and is now in the hands of the 3rd generation Datuk Loh Kian Chung, Tan Sri Loh Boon Siew’s grandson.
Oriental
Holdings Bhd is one of the soundest and most established family owned
conglomerate which is keeping on a strong legacy. Some of course would
regard Oriental as “old money”. It has a diversified business interest
across plantation, property, hotel and resorts, automotive, healthcare,
plastics, building materials and trading. It has large land banks and I
would presume to be among the biggest landowner in Penang Island besides
the state government, GLC and other institutions funds. Rumours has it
that when Tan Sri Loh was in the car passing by a particular location in
the later years, he asked his aide “that is a beautiful piece of land, I
think we should find out the owner and potentially make an offer to
acquire”. The aide smiled and softly replied “but Tan Sri, the owner of
that nice piece of land is you.” This rumoured story shows 2 things to
us, 1. Tan Sri has a good eye for investment and remain steadfast in his
vision 2. He has such vast land holdings that he didn’t recall that he
was actually the rightful owner.
Moving
on, for the core business segments, outside of Malaysia, Oriental has
large investments overseas. For plantation, their biggest investment is
in Bangka Island and Sumatra Indonesia with close to 80,000 Hectare and 4
palm oil mills. For hotel and resorts, they have 10 investments in UK,
Australia, New Zealand, Singapore and Thailand combined. For automotive,
the government engaged hostile takeover of Boon Siew Honda and gave the
master distributorship of Honda to DRB Hicom (like how Toyota was taken
from Inchcape to be given to UMW) many years ago, hence today, Boon
Siew Honda and Kah Motors distributes Honda in Singapore, Brunei and
have over 92 dealerships across Malaysia. They have dealership for
Mitsubishi as well. For plastics, Teck See is the oldest plastics spare
parts manufacturers. In addition, for Malacca, Oriental has the rights
of reclamation in Klebang of almost 1125 acres (completed 85%) and a 300
bed medical healthcare hospital.
3. Outstanding Financials and Balance Sheet
A nice story aside, Oriental Holdings Berhad has very sound financial numbers and balance sheet to weather the current economic crisis. It has after all done so for many years. When people mention Oriental, they think of it being a net cash - cash rich company. A simple overview below would suffice to exhibit their financial muscle in this trying times.
Oriental
has cash and equivalent of RM 3.8 billion and borrowings of RM 2
billion, which means it is net cash of RM1.8 billion. At current share
price of RM5.03, the market capital of the company is RM3.1 billion.
Effectively, the company net cash position is 0.58x. That is
unbelievable. If the saying Cash is King, then it is especially apt at
times like this. Some may be concern about the borrowings of RM 2
billion, well Oriental has managed to obtained predominantly extremely
low interest Japanese loan for the purposes of business expansion. The
low interest rate environment due to quantitative easing is perfect time
to borrow funds and this is especially so where central brands around
the world including Federal Reserves, European Central Bank and Bank of
Japan continue to maintain low interest policies to stimulate economy.
You can refer here :
If you look at the past 8 years chart, Oriental have been growing topline and bottom line continuously whilst maintaining a margin above 6%. From RM2.7 billion in revenue to a peak of RM6.4 billion before a recent dip in the 2019 financial year easing to RM5.2 billion. Even in a challenging time where the company was probably affected on all fronts such as trade war, low CPO price, dampened consumer spending sentiment, the company was still able to deliver RM 5.2 billion in revenue and profits of RM351 million. On top of that, Oriental has managed to deliver consistent dividend growth for the past 8 years from 9 sens to 40 sens per annum. This translates to 8% dividend yield at current share price. For financial year 2019, so far 12 sens have been declared awaiting the final dividend announcement in coming QR. One of the most important factors to consider when investing is to study the dividend growth model as that is the way to assess whether the company is sharing profits with the shareholders.
PER = 8.8x
Dividend Yield = 8%
NTA = RM10.75
PTBV = 0.47x
Beta = 0.7
Net Cash = RM 1.8 Billion / 0.58x of market capital
ROE = 5.26%
4. Potential Risk / Downside
It
is quite obvious Oriental suffered a bit of set back in terms of
performance growth in financial year 2019. Whilst last year affected
many companies especially a company like Oriental which is a
conglomerate cutting across sectors, we believe it has been factored in
the share price. In addition, Oriental has always been undervalued all
these years probably due to the fact that institutional funds &
investors prefer the company to be more aggressive in deploying capital
for expansion. This can be seen from the weak ROE number. The public
float is about 25% which is the bare minimum required by Bursa, so this
indicates low liquidity.
With Covid-19 causing demand destruction and affecting the economic landscape globally, we see Oriental being affected as well across all their industries. Automotive is still the biggest contributor to the group with Plantation coming in second. Hotel & resorts and investment properties are third and fourth respectively. We believe management is well aware of the economic repercussions from Covid-19 and will be affected in the next quarter as well due to their exposure in all sectors affected.
With Covid-19 causing demand destruction and affecting the economic landscape globally, we see Oriental being affected as well across all their industries. Automotive is still the biggest contributor to the group with Plantation coming in second. Hotel & resorts and investment properties are third and fourth respectively. We believe management is well aware of the economic repercussions from Covid-19 and will be affected in the next quarter as well due to their exposure in all sectors affected.
5. Legacy Investment
Conglomerates are usually valued lesser and unless they break into parts for separate listing in order to unlock value, it will always be trading at a discount. This is a consideration that one has to understand when investing in Oriental. Our long term fair valuation for Oriental Holdings Bhd is RM8 based on the back of EPS of 60 sens at 12x future PER for FY21/22. This is excluding the positive of their substantial cash holdings, net tangible asset, high dividend yield, near completion of their land reclamation in Malacca and positive contribution from their healthcare arm. This is our prudent estimation without taking into account of the growth of the other businesses within the group.
Tan Sri Loh Boon Siew have built a sprawling business empire from rags to riches which has endured the toughest of time through economic upheavals, politics and personal family tragedies. Despite so, the second generation worked closely together and united, they ensured the family business was intact. When it came to the time to pass on the rein, the second generation did so with Datuk Loh Kian Chung emerging as the new third generation leader for this low profile family conglomerate. As we are a financial writer, we do not like to comment unnecessarily on non-business / financial matters.
However, our humble view is that this company is unlike many other rich business dynasty where the second and third generations are openly flaunting their wealth on social media, boasting about the new toy or expensive jet setting lifestyle they enjoy whilst the society’s B40 suffers economically. This family conglomerate have good moral values instilled in them and their offsprings from their founding patriarch. Business challenges and personal tragedy has held the family closely together to weather tough times together. It is a clear example that a united family do ensure wealth last beyond 3 generations. In our view, Oriental Holdings Bhd is an ideal vehicle of wealth preservation with capital growth.
After all, those who who had acquired 1,000 Oriental shares at its initial public offering in 1964 would have 48,306 shares worth RM298,048 based on its share price of RM6.17 as at the end of FY2018. In addition, the shares would have earned a total gross dividend of RM228,801.02. The gross dividends received and appreciation in value work out to an average rate of return of 12.07% for each of the 55 years. (Source edgemarkets)
For those who likes a company with honest management, substantial land and cash holdings, a fundamental business with a strong legacy that has stood the test of time, one can consider Oriental Holdings Bhd. as your long term value pick. We are personally invested and we are rooting for this company to continue to do well. This is one stock I would invest and leave it as a legacy gift for my child.
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Food for thought:
http://www.tradeview.my/2020/05/tradeview-2020-long-term-value-pick.html
