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适用于股票投资的“5件事”/冷眼

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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: 





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