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Source : OFI website
In
a blink of an eye, 2020 have passed and now we are on to the second
month of 2021. Many seniors I know in their golden years have lamented
to me how the Covid-19 pandemic have stolen the time of their life for
enjoyment, simply joys and peace of mind. In fact, majority worried
about contracting the virus (elderlies have higher propensity to
contract the virus) that they even reduced to staying at home fully, not
even going for morning walks or evening strolls anymore. The young ones
on the other hand would live through 2020 deprived of their proper
education, socialising with school mates and examination.
When
it comes to the economy, the number of companies especially SME which
have shuttered have reached levels unseen since the 1997 Asian Financial
Crisis. During times of uncertainty, volatility and distress, the
Government and agencies plays an important role to assist the people to
get through the darkest hours. We have to admit, like Covid-19 patients,
beating the virus is only the first stage. What comes after, long term
effects are what patients will need to battle with in the years to come.
Hence, if anything, investing in the midst of a pandemic driven
economic crisis has taught me the importance of investing in quality
business which can sustained over a long duration of time. There are
many companies listed in Bursa but not many companies are like that. To
be a good investor, we must do the necessary work to scour through the
stock exchange to find these hidden gems. It is not easy but when you do
find it, it is all worth it.
As we are approaching the end of Chinese New Year 2021, I would like to share a company
which fits the frame of my expectation, namely Oriental Food Industries
Holdings Berhad (OFI). Please do not confuse this company with Oriental
Holdings Berhad which was a conglomerate I have written about in 2020.
OFI is a consumer FMCG company with many years of track record and own
brands under its stable. I like the stock for a variety of reasons based
on a set metrics. To give a little background, OFI is the manufacturer
of these familiar food products :
Pic Source : OFI website
1. This is a confectionary products manufacturer and exporter. I
like the company because it is rebounding from multi-year lows and
returning back to steady consistent profitability. This provides some
level of earnings visibility. The products I have tried myself, it
is really quite good. Well, the best way to know if a company is worth
investing is if you try the product yourself. Additionally, despite MCO
and lockdown, they have done very well for themselves in 2020 with the
latest quarterly results with strong growth on Revenue and Profit YoY.
The first 3 quarterly results profit alone have exceeded last full year
results FY2020. Based on the trajectory of the recent quarterly results,
it would appear that OFI will likely deliver all time high revenue and
much improved earnings since 2018 despite the onslaught of the pandemic.
It shows the resilience in earnings for the FMCG sector despite the
weak economic climate. In comparison, its peers apart from Kawan have
all been somewhat affected by the pandemic including Hupseng, Poweroot
to name a few. Kawan remains to be growing and OFI is making new highs
in terms of revenue and profits.
2.
Management to me is very important when considering investing in
companies. OFI was founded by Dato Son and with decades of experience
under his belt, he has built OFI to be a household names with brands
like Jackers, Rota, Super Ring, Zess. Each of this brands are up against
Fortune 500 MNC products which caters a value alternative to local and
mass market consumers. Until today, Dato Son at 74 years old still
personally lead and take charge of the R&D of the business. This is what I value most in a business. Strong management running a quality business.
3. The expansion plan are in place. The
loans used previously were for expansion of facility and new production
line for further increased which will kick in soon. As of March 2020,
they were finishing the balance production line pending delivery of the
equipment and machineries. With the new expansion and facility in place,
it would raise their revenue and provide the growth trajectory which
this conservatively managed company requires. There is no point buying a
company purely because it is undervalued without any growth potential.
This will serve as a catalyst to the upward revision of the stock price
in line with growth rate.
4. Importantly, it is net cash company with good balance to of local and export markets. It
is currently RM 18 million net cash and cash position stands at 12.5%
of total market cap. For many years, the company have always maintain
healthy cash position and this allows consistent dividend payout ratio
policy of 35% for shareholders. Also, indication of stronger earnings is
from their increased in dividend payouts which also is consistent every
quarter. Based on the past year dividend trend, the conservative
estimate this year at current price of 86 sens would be a yield of 2.3%
assuming they continue the payout of 0.5 sens per quarter (full year 2
sens). The only downside is the low liquidity.
5. Prominent substantial shareholders including EPF, KWAP and Fidelity. As
per the latest list of 30 largest shareholders in the 2020 annual
report, we can spot notable names which to me is rather surprising
considering the company is a small cap stock with low liquidity. So this
would give confidence to investors that the company while not a major
cap stock, it still have the ability to draw institutional investors.
6.
The most significant reason I like OFI is because they have their own
brand and market standing in the country (or overseas). Having your
own brand with a dominant position in the market can lead to valuation
premium just as what Munchy's happened back in 2018 where the company
was bought by CVC Capital, a renown Private Equity fund at RM 1.1
Billion. According to Nielsen, Munchy's had a 21.5% share of
Peninsular Malaysia's RM1.044 billion biscuit market in 2017. Based on
this estimation, Munchy's revenue would be about RM 200 million. OFI
currently for the past 5 years have a revenue ranging from RM 226-288
million. I believe OFI with their wide range of products should have
comparable market value being offered as Munchy's as OFI have a wider
range of snacks and confectionary products. To put things into
perspective, OFI current market cap is only RM 211 million less than 5x
valuation offered for Munchy's. This reminds me the arbitrage value
difference example when I highlighted QL few years ago when they started
their venture into Family Mart. Back then, I highlighted that QL will
likely have a possible valuation rerating due to Jaya Grocer's valuation
paid by the acquisition of PE fund then as new benchmark. For those who
missed that article in 2018, feel free to read here :
Munchy's news :
7.
Regardless, I believe this is a mid to long term stock that has strong
share price growth potential. My calculation shows the long term Fair
Value of OFI would be around RM 1.25 at a 20x PER of latest QR compared
to peers which are more expensive like Hupseng, Power Root and Kawan.
Once the new production goes full force, there is a further potential
for rerating and to me, there is a solid grounds for the stock to be a
multibagger. Lastly, the Price to sales ratio (P/S ratio) is 0.79x,
less than 1 which is rather attractive. But using P/S ratio must be
considered sparingly and in tandem with other metrics, like net cash
position. This brings to the conclusion that OFI is attractive.
Of
course, there is the argument that FMCG companies having specific
client base due to the price point of their products will limit its
potential reach. What I like about OFI products is the wide range it
caters to, not only the lower middle class but even the elites. Our
former Prime Minister is a big endorser of their product. Assuming you
can't recall, let me refresh your memory :
Whenever
I write about Long Term Value Stocks, the most frequent questions I
receive from readers are, how Long is "Long" ? I can understand the
frustration of waiting and sitting compared to active trading. Investing
in fundamental stocks require very different set of skillset but most
importantly, the difference is in the mindset. Active trading gives
you a faux sense that you are doing something, working on making money.
Investing in long term stocks feels boring. However, if your goal is to
invest large sum of money and build wealth, then there is only one real
way to do it, investing long term. Hence, long term can be anything more than years to decades so long as structurally and fundamentally, nothing has changed.
Again, when choosing long term stocks to be in your portfolio for many years, it must meet my 5 metrics :
1. Strong, honest and capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / cash flow
4.Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors
At this juncture, OFI is beginning to meet the metrics.
To
those who are celebrating Chinese New Year, Happy Chap Goh Meh. May the
new year usher in prosperity, good healthy and plenty of joy. For those
who aren't celebrating, happy holidays. Let us looking forward to a
better year ahead for all.
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Food for thought:
https://www.tradeview.my/2021/02/tradeview-2021-long-term-value-stock-1.html
