HEIM

 Long term chart

Approaching LT support trend line going back to over 15-17 years old.

Fundamentals/Business Considerations

Past 10 years:

• RPS CAGR ~ 5.3% p.a. (decent i.e. C+)
• EPS CAGR ~ 7.3% p.a. (i.e. past 10 years management has worked to squeeze more profits from same revenue, decent i.e. B).
• DPS CAGR ~ 7.5% (close enough to EPS growth - it suggests nearly 100% dividend payout ratio - decent i.e. B).
• NAPS ~ 2.7% (suggesting that it does retain some earnings somehow due to differences between earnings vs cashflows.  Decent C).

Based on past 10 years stats, this stock can be reasonably expected to grow roughly inline with long term CPI+GDP growth i.e. say 3%+4.5% ~ 7.5% which is close to its EPS/DPS growth.   Clearly above average stock quality.  (Overall Grade is say B-)

My personal prudent estimate of its long term dividend ~ 125 sen.

(TTM is 128 sen i.e. higher.  Prior year 138 sen, i.e. price dips because TTM DY is lower than prior year).  

My guess on a decent accumulation zone is around RM22.

This gives a decent initial Dividend Yield of 1.25/22 = 5.7%.

Additionally, this Dividend has 50/50 chance of growing at 7.5% per annum long term.

It's a business worth owning when the price is low, when pessimism is higher than normal.

Investment Targets

As usual, we consider Dividend Yield plus reasonable Price Gains.

1. Expected Dividend Yield around 5.5%-6% (say 5.5% for prudent).

2. I'm looking for a conservative 4% p.a. price gains over next 5 years.  Allowing for 1% in and out commission, assuming a Buy Price of RM22, the target prices after year 1, 2, 3, 4, 5 in order to deliver 4% p.a. are as follows:

From the above long term chart, the highest price is higher than RM30.

To get 4% p.a. price gains alone in 5 years only requires the stock to exceed RM27.1.

This looks like a very high probability of happening over the next 5 years.

In short, this passes my criteria of beating my 9% p.a. benchmark return.

Target Position Size

My neutral position size is 3% capital.  (roughly correspond to 33 diversified businesses).

I am currently slightly underweighted at 2.2% capital only.   However, I also owned CARLSBG at similar sizes.   I slightly prefer HEIM over CARLSBG.  It's probably not so prudent to exceed 5% capital for both given the 33 diversified businesses.

Hence, I hope to be able to add 0.6% capital as price approaches my buy zone.

What if Price breaks below the long term trend line support?

My purchase is based on fundamentals/business considerations.

So, charts are mainly for indicative entry price, and give more colour on probably long term price gains with high probability.   

Therefore, if price breaks below the long term trend line support drawn, I will not cut loss.

Instead, I'd be more interested to add more, to get my position here to be slightly higher than neutral (after price settles).  

Summary

HEIM just reported its last quarter report.  

It finished the year at a slightly weaker note, compared to a strong 2022 rebound after the economy reopened.  

The company viewed the dip as a form of "market correction".  

It is cautiously optimistic for 2024.  

My gut feel is the company's guidance is about right.  

It's not going to be a star performer in 2024.

But it is above average quality business.

It's the kind of company that I will consider owning in its entirity at RM22 and hold for at least 5 years.

I believe there is better than 50/50 chance, maybe as high as 80% chance, that it is able to deliver at least 9% p.a. over the next 5 years or longer.     

I like it that it is a boring stock.    

It means I can own this, together with my other 30+ investing stocks (excluding trading stocks) in my diversified portfolio, to grow my net worth slowly and safely.  

My gut says very high odds of beating EPF over the next 5 years too.

However, nothing is certain in investing.

Hence, I am not planning to own this more than 3% of my capital, only because I already have CARLSBG too.

Mathematics of Long Term Personal Savings - 2

Continuing the series from the last article here.

Recap Summary

• The graduate is 22 year old when starting work as a professional in a multi-national organization.
• Work for 38 years (age 22, retire age 60)
• Starting monthly salary of 3.5k in the first year, and eventually end with 30.3k monthly salary at age 60 in the final year.  
• Total salary received over working lifetime ~ RM8m
• Saving 20% monthly salary in EPF for 38 years (assumed to earn 6% p.a. long term) gives the final accumulation at age 60 of RM4.6m.
• Saving a further 10% monthly salary in a self managed stock portfolio (assumed to earn 10% p.a. long term), despite only half the EPF savings, gives a final accumulation at age 60 works of RM4.9m, bigger than EPF.
• The total combined savings of 30% of monthly salary every month for 38 years will accumulate to the sum of RM9.6m at age 60.
• This is roughly equal to 26 times final annual salary.
• The  amount should be able to last the retiree and partner for a lifetime, assuming both lives up to age 100.

Education Spend - say RM1 million

Imagine a scenario where the parent of the child is thinking to spend RM1 million, to send the child to overseas to study.  

• Assume study period is 5 years (1 year matriculation, 4 years university, or 3 years Bachelor's degree, 2 years Masters/higher degree).  
• Let say total costs is RM1 million for now.  If your actual number is different, you may pro-rate / scale this number up or down.
• Actual amount will differ, and will vary depending on many factors.

The question is - how much will RM1 million today accumulate to 38 years and to 43 years (add another 5 years), if saved in EPF to earn 6% p.a. interest instead?

The answer may shock you!

Just 38 years of accumulation (starting at age 22) at 6% p.a. interest turns the RM1 million today into RM9.7 million at age 60!

This accumulation is LARGER than the graduate working, saving, self-investing for 38 years!

Saving RM1 million in FD

If you are a salaried person planning for your child's future education, how long will it take you to save RM1 million in FD?

Recall the previous article which assumes the same graduate saving for RM1 million.

This is not identical, but assume the parent saved 30% of their monthly salary into FD.  The table above showed that it would take up to 19 years to be able to save RM1 million.

What if the education spend is halved to RM500,000 instead?

1. It would take the parent around 13 years to save, if the parent salary progression is the same as the graduate child.  (it takes longer for compound interest to work).

2. The investment of RM500k over 38 years in EPF will grow to half of 9.7m, i.e. RM4.8m i.e. half of the child's accumulated retirement savings after 38 years of working, saving and investing.

The Question

Knowing these financial mathematics, would you reconsider saving for 13/19 years, to accumulate either RM500k/RM1 million, so that in 13/19 years time, you are able to afford to "invest" in your child's education?

How much of the RM500k/RM1 million is really an "investment"?

What is the ROI / outcome of the "investment"?

Is the outcome really an investment if to match the EPF savings, it will require the child to work for the next 38 years, saves 30% of monthly salary for 38 years, invest and learn self-investing for 38 years, in order to accumulate a final amount 38 years later to equal the alternative of "Do Nothing but invest RM1 million for 38 years in EPF".

How much of the RM500k/RM1 milliion really is an "investment"?

The Reflection

For those of us who received overseas education 3-4 decades ago where the cost of overseas education was extremely cheap and when the Ringgit was so much stronger, studying overseas was a viable option to more Malaysian parents back then.

However, today, when the Ringgit has weakened so much, and the cost of overseas education has risen faster than normal inflation, is sending our child overseas still a viable option as before, or only available to a constantly reducing group of hardworking Malaysians barely making into the elite group?

Clearly the world and Malaysia today is no longer the same as 30-40 years ago.

Mathematics of Long Term Personal Savings

Background

I am always fascinated with the mathematics of personal savings, from the time a graduate enters the workforce, until s/he retires at the age of 60.  

I start with 4 groups of questions first:

1. Salary progression.  What is a typical salary progression of such a graduate, if s/he gets a professional job, climb his career until mid level manager and then never made higher until retirement?  How much total salaries made over lifetime?
2. EPF savings only.  If he were to only save in EPF to earn a long term interest rate of 6% per annum, how big would such an accumulation grow to?
3. Long term equity investing.  What if he supplements with long term investing, to earn 10% per annum?  How big would such an accumulation grow to?
4. Only FD investing.  What if he only save in FD to earn 3% per annum, without EPF, without investing?  How much would that kind of accumulation grow into?

1. Salary Progression

Let's consider a typical case of an "average person" who graduates, find a professional job, and work his way up to middle management/specialist i.e. not a particularly ambitious career person.

• Graduated at the age of 22.
• Obtained a professional job immediately (such as an engineer, an accountant, IT, etc.).
• Say a monthly starting salary of RM3,500 per month in the private sector.  
• Say a yearly salary increment of RM1,000 per month each year up to age 29 (up to RM10,500 per month), as he diligently work and climb up the professional ranks in a bank/multi-national organization.
• Say 5% per annum salary increment from age 30-34
• Say 4% per annum salary increment from age 35-39
• Say 3% per annum salary increment from age 40 onwards

The questions are what would the salary progression looks like?

In short, the individual would be looking to triple his/her salary by the time he reaches age 30 to earn a 5 digit salary.  After that he just cruises till retirement.  In this scenario, total salaries made is nearly RM8 million over 38 years of working!

Quite a substantial sum isn't it?

2. The Power of Saving in EPF

Let's assume that this individual made 20% savings into EPF, where 9% is member contribution and 11% is Employer contribution.

This is on the lower side, as some employers made higher EPF contributions.

Assume EPF earns 6% per annum interest historically, which is a very good long term returns.

In this scenario, how much will have this person's EPF have accumulated?  What is the multiple of the Accumulation relative to his Annual Current Salary?

Here's what it would look like:

By the time he hits age 30, his EPF balance will have grown to 200k, or 1.5 times annual salary.

By age 40, 813k EPF balance equal to 4 times annual salary.

By age 50, 2.1 million EPF balance equal to 7.7 times annual salary.

By age 60, 4.6 million EPF balance equal to 12.7 times annual salary.

Not too shabby right?  

So, what's the learnings here?

EPF is not a bad savings vehicle.  You can actually accumulate to large amounts of monies for an average person, with just EPF.  The key factor is have a good job that provides a lasting salary and time.  Without a salary and the ability to save in EPF, this avenue will not be available to you.

3. What if it's just FD savings?

What if you don't have the opportunity to save in EPF, but only save in FD?

What if you increase your savings by 50% bigger, but only sock it in FD?

Let's assume FD pays 3% per annum interest over the long term.

What does the comparison looks like?

So, over this 38 year period, total EPF savings is 1.6 million, vs FD savings of 2.4 million i.e. the FD saver saved 50% more.

However, despite saving 50% more, his accumulation by the age of 60 is smaller.

In short, not a very smart way of saving for the long term isn't it?

4. What if you learn how to invest safely?

What if you could learn how to invest and earn 10% per annum safely over the long term?

What if, instead of saving 30% of your salaries to sock into FD, you put 20% in EPF and 10% into a portfolio of very sound stocks that pays say 4%-6% dividends and the rest via price gains?

This is actually not far fetched and is very doable.  But what would your accumulation looks like?

The answer boggles one's mind!

The extra 10% savings only works out to be 808k total.
But with 10% per annum returns, it is able to grow to 4.9 million!  Exceeding EPF despite just half the savings.

The total accumulation (20% EPF + 10% diversified shares) is RM9.6 million.
This equals 26.2 years of last annual salary drawn.
This should be able to last for a lifetime - even if you retire at age 60 to live up to a ripe old age of 100.

Summary and Conclusion

1. It is possible for an average person to accumulate a massive amount provided there is discipline and commitment.   It starts with having a good, stable job.

2. Then, the habit of saving something everytime.  If you start saving as soon as you graduated and learn how to live within your means, the first year is the hardest, but after that, the rest becomes habitual and easy.  Learn good habits early.

3. Then, save in EPF to earn 6% per annum long term interest.

4. Then, learn to invest safely in equities to target 9%-10% per annum long term interest.  Here, the strategy is simple - invests in a diversified stock where the underlying business is good, generally grows its EPS, DPS and Net Assets over long periods of time, aim for stocks that pays at least 3%-6% dividend yields and grows them sustainably.  Diversify to 20-30 of such stocks.  Buy them when the price is lower.  Basically, learn from Warren Buffett (who achieved so much more than 10% per annum).   Dividend stocks with a long history of paying out dividends to shareholders are generally safer - they may be boring, but with commitment and discipline, you can amass a good fortune over your lifetime.  And this strategy is scaleable - you can do this with 100k, 1 million or even 10 million.

Final Reflections

The thing with time, is we all have the same amount of time everyday that we are alive.
(if we die earlier, it doesn't matter that we die broke, because we'll be already dead).

The thing with living a long life, is that we only have 1 shot at life to make monies when we are in our productive years.
(squander this, and your old age will be miserable).

Live a good life, enjoy life, but put aside some monies too for the future (and make that opportunities count, because if you plan to invest for 20, 30, 40 years, you probably only have 1 shot in your life to do this).

HLIND

Long Term Charts 

Here's what I'm looking at with HLIND over the past 25 years.

Massive Net Cash

There's no question that HLIND business is a cash generating machine.  HLIND grows its Net Cash at the rate of 33% per annum CAGR compounding.  This is a crazy company!

The value of the Net Cash is nearly RM5.  The stock trades at RM9.40.   The rest of the business is only sold for RM4.40, which is cheap considering 1 year EPS is typically around 90 sen or thereabout.  Doesn't take much to realize there's massive value there, as the business is only sold for a P/E of less than 5 times.

Summary Financials

Since 2015:

1. Dividend growth is impressive with CAGR of 8.8%.  That is very nice.

The only time when it lowered dividend is during COVID pandemic year in 2020 - that is understandable.

2. EPS growth is generally growing.  Which is nice.  

It is more volatile than dividends which is normal.  

CAGR of 6.4% is decent, but not great, as it is dragged by the high cash balances.  Not efficient capital management.  

This type of cash hoarding raises eyebrows.  It is not normal professional business decision, but likely a strategic decision by Quek for something else that we don't know.   A non-zero risk is that it may not be for HLIND benefit per se if one goes by history, but I really have no clue what he is thinking.

3. Average Dividend Payout ratio is nice, around 60% - that's almost the sweet spot.

One time in 2017, it earned less but chose to raise dividends - I like this kind of dividend management.

However, given the huge growth in cash balance, if it does a regular Special Dividend, then, I would give top marks for Dividend management.  However, it hasn't done this and is really long over-due given how much that Cash Balance has grown.  Hence, it's not run as professionally as I like, but it's not a strong complain.

4. This business is under-valued (except for the high Net Cash).  The business is available for a low P/E of 5 (excluding Net Cash), when it grows Net Cash at 33% CAGR.   Clearly under-valued.

Market Response to this Rising Cash

Up to 2020, the fast rising Net Cash coincided with stock price rising massively.
But market is forward looking.  When COVID pandemic came, market already anticipated a fall, long before the fall actually happens.

My Investment Thesis

The best investment thesis jumps out at you, and HLIND certainly jumps out.

1. HLIND Dividend yield is attractive - the yield is double FD rate.  No complaints here!

2. HLIND stock is under-valued.  

3. A must own stock for long term dividend investors.  If earnings grow, dividends grow.

4. Own it when it is cheap.  This reduces your odds of losing.  Remember Buffett rule.

5. I would like this company to do more with the Cash Balance i.e. give back to shareholders because it is not natural to hoard for 8-9 years or longer.   After 3 years, one should already start thinking about Special Dividends, unless it has plans to use this, but this company is not very transparent, leading to questions about whether Quek has his own plans for this cash that is outside/may not necessarily benefit HLIND shareholderss (one would argue that if so, he would have already gave to shareholders via higher dividends, but chose not to do so).  At the very least, it should explain, give a bit more transparency, rather than leading investors to speculate.

6. So, it's not a question of not owning but how large a size.

7. If neutral position size is 3% capital, then, this one to be safe is maybe around 3% capital.

Reason to position higher = the Triangle Consolidation - something is about to happen in the next 1-2 years.

Reason not to position higher = Can you really trust Quek given if he really cared about shareholders, why aren't him sharing more of the RM1.6 billion cash over the past 8-9 years?  What if the triangle consolidation breakout is to the downside, after Quek does something else?

Remember Buffett Rule No 1 - Not lose money.

Never let Greed decides.  Stay professional, be rational, investment is best done when it is most business-like.

POHUAT

 Long Term Chart

5 Phases:
Phase 1: 2006-2013 sideways range (17 sen to 50 sen).
Phase 2: 2014-2015 strong Bull Run (50 sen to RM2.10)
Phase 3: 2016-Mar 2020 Covid bottom:  LT XYZ correction from RM2.10 peak down to 70 sen (nearly 2/3rds)
Phase 4: Mar 2020-Nov 2020 strong Covid Recovery from 70 sen to RM2.06 (not new high).
Today:  Sideways consolidation, trading at 1.33 (at the time of writing), nearly 50% of the 70sen to RM2.06 range (Fair technical value).

Price action reflects the cylical business partially.

Profile

POHUAT is a small to small mid cap company, primarily in the furniture business (both home and office).

North America exports, exposures to South Africa, Vietnam besides Malaysia. In general, whilst strengthening USD improves earnings and vice versa, the extent is relatively minor impact compared to total historical EPS volatility.

Large Cash Holdings

POHUAT has a hugeNet Cash position relative to stock price:

From 31/10/23 latest Quarterly Report: Cash + ST investments ~ RM309 million with no borrowings.  This is roughly equal to RM1.16 per share.

This means the business is severely under-valued since excluding Net Cash, the business is only valued at 17 sen (=1.33-1.16).  So, if you could buy POHUAT in its entirity at 1.33, odds are good that you could make back you money in just 1 year and own the entire company for free.  This is because its long term EPS is higher than 17 sen.  Obviously everyone in the market knows this, so, what's the catch?

Rapid Net Cash Growth since 2015

Except for 2021, the Net Cash grows every year.  The CAGR is 30.2% per annum, super amazing.

Past 10 Years Per Share Statistics - Cyclical

RPS, EPS, DPS has negative CAGR when measured over past 10 years, however, this is uneven due to high start year - FYE2014 - which was cycle high.

So, CAGR over 10 years is not suitable metric to cyclical business.

Cyclical business are better bought during cycle lows and sold during cycle highs.

Is it a long term superior business?

The long term business is cyclical.  It's Net Cash growth indicates that it is probably above average.  However, it may not be optimal to buy at any time and hold forever.  The investor can get better returns by timing his entry and exiting when price spikes more than x years of dividends.

Retained Profits

The 2% CAGR for NAPS is not inspiring, however, this is due to the cycle high starting period.  Over 9 years, it is inspiring.   

Dividend Payouts
DPS ranged from 7 sen to 9 sen 80% of the time (except for a couple of outliers in 2018 and 2021), long term DPS assumption of 7 sen is prudent.

Low Payout Ratio from 27% to 69%  suggesting conservative management.

Some insights into Management ultra conservative thinking that prioritizes growing Net Cash over shareholder payouts:

- In 2018, EPS dropped from 26 to 21 sen, still higher than 8 sen dividend paid prior year, but management chose to reduce to 6 sen and grow Net Cash.  This is clearly conservative, they prioritize cash balances over profit sharing with shareholders.
- In 2021, EPS crashed from 22 sen to 12 sen (still profitable), but management chose to cut DPS from 9 sen down to 5 sen, suggesting the same kind of very conservative thinking, when EPS is still larger than DPS and growing Cash Balances.

So, it is clear that management prioritizes cash balance over profit sharing with shareholders.   Until something changes to the dividend policy or management, whilst it is an undervalued company, you may not want to own it in a huge way.  Keep it a small % of your portfolio.

Does POHUAT beat MAYBANK to deliver > 9% per annum?

Dividend yield ~ 5% to 5.5%

Historically, POHUAT pays 5 to 9 sen (averaging 7 sen) per year.  At RM1.33, the long term DY is probably around 7 / 133 ~ 5 to 5.5%, but probably on the lower side longer term, as management prioritizes growing its cash balances over profit sharing with shareholders. 

Price gains depends on entry price 

A few scenarios -see above table.

Some conservative price targets from RM1.33 entry showed that it is easy to achieve 4%-5% p.a. price returns.  In fact, when I first wrote this article it was trading at RM1.33 and today, it is already RM1.43 delivering 7.5% returns in less than a month. 

Caution:  Company / Management is not trustworthy to share profits fairly with shareholders

Why?  Their actions over the past 8 years speak louder than words.

Compare 2015 to 2023 looking at DPS vs Net Cash

- At FYE 2015, DPS = 8 sen and Net Cash = RM37 million.

- At FYE 2023, DPS = 7 sen and Net Cash = RM309 million.

Over the 8 year period, DPS is flat/decline, but Net Cash grow by 8 times, or nearly 1 order of magnitude.

Can you trust management to share profits fairly with you?  It pays higher DY than FD, so, it rates at least 5/10, however the flat DPS scores poorly and maybe 5.5/10 due to high Net Cash growth.

Valuations - Undervalued

It is clearly undervalued by Book Value - NAPS > RM2 vs current price of RM1.33.  
It is clearly undervalued vs Net Cash - Net Cash RM1.16 vs current price of RM1.33.
It is undervalued by EPS which ranged from 10 sen to 32 sen.  Net of Net Cash, the business P/E ranges from 1-2 times only.
It is fair valued by DPS which ranged from 5 to 9 sen averaging say 7 sen giving 5%-5.5% DY which beats FD but doesn't quite beat EPF.

A skeptic may say that Market may be telegraphing that this company may be sunsetting, as the founder gets older.  It is a pessimistic view, but not impossible.

Forex Exposure

For noting/ future reference only.

Capital Commitment

As of 31/10/2023, no capital commitments.

This company has a clearly superior cash generating machine - the problem though is that it is "stingy" and "doesn't share profits with minority shareholders".  No future plans to grow?

Director's Shareholding

Uncle Tay Kim Huat (Group CEO) clearly wears the pants in the Board since founding the company, or at least as far back as 2000, 23 years ago.  Back then, he already owned 21% and his share has remained relatively constant % till today.

Last Insider trading

Uncle Tay Kim Huat added 20,000 shares at Open Market at RM1.28!

Despite owning 56.6 million shares (at constant 21% shares), he still can't help himself to go into Open Market to add 0.02 million shares when price is RM1.28 i.e. when it is cheap.  

This kind of action speaks volumes about the kind of person that Uncle Tay is.  

In short, he probably counted pennies in the old days, and probably still count pennies today.  He is a big hoarder, and likely to continue to hoard in the future.  Why?  It's in his DNA and don't count on DNA changing.

Will Buffett buy POHUAT at RM1.33 when he was starting out?

Recall, Buffett is a Buy and Hold investor so his criteria for Berkshire buying are:

(1) Superior business company (one that generates free cash flows), 

(2) Trustworthy (treat shareholder fairly) management, and 

(3) Attractive Price.   

POHUAT clearly meets (1) but probably barely passing in (2).  And today's Price at RM1.33 is midrange.

Target Position Sizing

Some of you may be aware that as of today, I own around 49 stocks, but you may not know that only 33  stocks has DY > 4% per annum.  So my neutral position size is around 3% capital.   

So, if I like the stock very much, I will own it bigger than 3% to perhaps 4.5% to 5% capital.  What about this stock?

Currently, it's around 2.4% of my capital, so, slightly below 3% neutral.   My target was perhaps 2.8%, and I was trying to accumulate just a little bit more but price ran up before I had the chance to get more.  But not a big difference.  I'm not a chaser for the remaining 0.4%.

Why less than neutral?  Despite being a very attractive business, market has not valued this stock properly for a decade and unlikely to revalue it because it knows the owner is stingy.  So, you can reliably expect 5%-5.5% DY, but as for price gains, that's very dependent on market whilst the business keeps growing its Net Cash.   The owner has been like this for 23 years, there's no rule to say that he can't continue doing this till his death bed.  A pessimistic view for sure, but it's better to be prudent when planning, so that when things turns out better than you plan, it's a bonus.   My style of thinking has given me huge bonuses across many stocks.

When to Exit?  Is this a stock we can hold forever?  What are the risks?

In general, my exits will be guided by charts on profit taking.

There's no stop loss for this business as it is hugely under-valued.

As a rough rule of thumb, if price runs up too fast to give me say 3-5 year dividends in 3-5 months, sure, I'll be tempted to take some partial profits.

I won't hold this stock forever, based on long term charts - it's a cyclical industry.

 

Risks are plenty as always, even if majority of times it doesn't eventuate:

1. Market risks - all I know is over next 5-10 years, markets are sure to crash.  However, Malaysia stocks need to rise first, as past 5-9 years, it has been flat/downtrending.  Foreigners haven't yet come in in full like before.

2. Industry/sector risks - the furniture business is cyclical but I don't have special skills to predict this.  My strategy is simple - as I am still under-weighted slightly, lower price is a buy.  Higher prices, is a partial profit take.

3. Company specific risks - Uncle Tay is probably the largest risk here.  He is elderly now.  How good is his successor and does his successor have the same business acumen and drive as he?  

Because of all these risks that can theoretically give rise to losses (and potentially permanent losses too for some), our only protection is Position Sizing - hence, around 2.8% or so.

Summary and Conclusion

1. I want to own this business when it's "cheap" (after net cash basis and > 5% dividend yield).  It's a cash generating machine, proven with 30.2% CAGR growth in Net cash since 2015.  

2. The yearly dividend yields is solid, stable, most of the time, ranging from 5 to 9 sen, extremely well supported by the business, giving 5%-5.5% dividend yield per annum long term.  Beats FD.  If we do nothing, very likely we'll beat FD in the long term here, but no single stock is full-proof, hence, 2.8%-3% capital target position size.

3. Don't get too greedy - remember, Board/CEO have proven many times that they prioritize growing Net Cash more than sharing profits with shareholders.   

4. Lack of capital commitment tingles our spider sense.  Where will future growth come from without capital investment?  Is this company sun-setting, as the founder is getting older and should already by retiring?

BJFOOD

 Long Term Charts

Key observations:
1. First listed Mar 2011, coming to 13 years.
2. Currently on 4th wave down.
3. The earlier 3 major waves takes many years to play out.

a. Wave 1:  Mar 2011-Dec 2014 (3.75 years):  From 8 sen to 65 sen or +700%
b. Wave 2:  Dec 2014-Jun 2020 (5.5 years):  From 65 sen down to 20 sen or -70%
c. Wave 3:  Jun 2020-Feb 2023 (2.5 years):  From 20 sen up to RM1.16 or +480%

4. Current Wave 4 down:  Feb 2023-today (1 year+?):  From 1.16 down to current 0.54 or -53% - fall not over yet.

5. This long term chart pattern is not typical - normally, in a healthy free market / business, the upwave tend to rise gradually over a long period, the downwave shorter period, but here it's reverse.  Typically due to man-made factors rather than free market factors - e.g. something plus substantial shareholders.  Long term investors need to be careful (not normal full position sizing).  

Some interim questions - Downtrending is clear, but where is the bottom?

Chart wise, 2 possible magnets - 52 sen, and 45.5 sen.

Investment Thesis - What prompted to look closer?

BJCorp is often associated with Starbucks, Israel-Hamas conflict, Boycotting of Starbucks with adverse Revenue and profitability impact.

Temporary war causing temporary depressed prices is often a good reason to look closer, if the conflict is indeed a temporary one and a recovery to follow.  

However, there are other factors too once the conflict ends.

Reading quickly the Annual report (30/6/2023, before Israel-Hamas conflict), some keywords come into mind:  

- Number of outlets (Starbucks 393, Kenny Rogers 80, Jollibean 28 ...)

Challenges:  

- Rising inflation (impact to household, BFOOD revenue somewhat discretionary)

- Rising interest rates (expensive to borrow monies)

- Economic growth rate (e.g. slow down previously from Russian-Ukraine conflict, Covid, disruptive, trade-supply chains, impact to higher energy prices, costs, etc.)

- Domestic economy buying power in the population, etc.  

Generally, not too difficult to understand this business.

Future prospects:  Starbucks originally planned to add 40-45 new stores in 2024, but Israel Hamas conflict probably put a pause / huge dent to that growth plan.  The threat now is - will they have to close stalls instead?  Not closing stalls is probably a huge win already, but that depends on the coming quarterly reports. 

Financials

Looks like FYE June 2023 is peak revenue and peak DPS.

Dividends - 2023 3.50 sen was a massive one-time spike, not expected to repeat.   It will come down for sure in FYE2024.   More normal is 0.40 sen to 1.10 sen range.  The question is will 2024 DPS be higher than 2020 40 sen Covid or worse than Covid?  My guess it may be similar but nobody knows - Covid during lockdown is much worse than today from customer traffic perspective, but then, the lock down was not 365 days/year where boycott is very persistent daily.  If so, we may not have seen the worse yet.

  

Net Asset 28 sen vs current price of 54 sen, i.e. still trading at a premium (normal).

Last Quarterly report 15 Nov 2023, for period ending 30/9/23.

Next Quarterly report likely mid Feb 2024, for period ending 31/12/23.

Q3 showed minimal drop in Revenue because date is prior the Israel-Hamas conflict and boycotts.

Notwithstanding, EPS dropped massively already from 1.96 sen down to 1.08 sen for YoY (3 months).  It appears, the business was already in some difficulty prior to the conflict.

Out of the past 10 years, if we ignore top 3 year earnings in 2015, 2022, 2023, the historical EPS ranges from loss (2020 Covid, -0.97sen) to around 2 sen, averaging perhaps 0.5 to 1.5 sen say.

Market eager awaits BFOOD quarterly results due mid Feb.

Quick glance - liquidity and leverage within acceptable parameters / no cause for unusual concerns.

Is current 54 sen price cheap to enter?

Price has already fallen 53%.  Can it fall more?

So much uncertainties:

- Impact to earnings and dividend yield.

- When Israel-Hamas conflict will end (demands from both sides are so high, hard to see when the conflict will end).

- How many bad news will be announced?  Will it just be one when next quarterly earnings is announced?  Or more than just one bad news?

- There's already signs, even before the Israel-Hamas conflict of financials deteriorating.  Will they flush it all out in this quarter, or try to spread the adverse results over the coming quarters?

What could be the catalysts to cause price to stop falling and do a U-turn?

No position yet.

Trading or Investing?

My personal interest for this stock is looking to invest for the long term to provide diversification to my current 40+ stock portfolio.   Not looking to trade this stock short term, mainly due to personal reasons (my commitments only allows me to check prices after trading hours and weekends/holidays).

So, is this stock worth to invest?  

Question 1:  Does it meet my criteria of quality business?  Pure glance at last 10 year EPS and DPS and looking at what's happening now suggest that the quality is just average.   A couple of the brands may be above average - Starbucks, Kenny Rogers, the rest not too convincing over next 10 year period.  The boycott may be just bad luck, but may also last for quite a while.  However, 13 year price action from 8 sen to over RM1 after a decade is extremely convincing. 

Question 2:  Does it provide a high enough sustainable dividends over the next 10 years?  

- Prudently, 1 sen p.a. average over 50 sen entry price is only 2%

- 2 sen p.a. is 4% dividend yield (less prudent scenario).

Hard to know, but to be prudent, should not assume more than 2% p.a. dividend yield i.e. likely dividend yield over the next 5-10 years may be lower/on par with FD.  

Question 3:  Management quality?

- Nothing negative that stands out.

Question 4:  Is the price attractive enough?

Is the Price Attractive Enough to Invest?

Due to low long term sustainable dividend yield, the investor will need to buy low, rely on price gains, in order to beat the MAYBANK benchmark return of 9% total returns per annum.   

If long term dividend yield is say 2% p.a., then, to beat 9% requires 7% p.a. price gains to match MAYBANK.  

Doubling price at 7% p.a. would require 10 years.

The question is - is 50 sen attractive enough?

How CERTAIN are we (not how possible, but how CERTAIN) that BFOOD will eventually get back to RM1 in less than 10 years from entry?  

The safe answer is not 100% certain.  Why?  

1. How bad will Q4 revenues and financials be?

2. How long will the conflict and boycott last?

3. How large will the size of the loss of revenue and financials?  Market will look at this with great interest, because it will tell us with greater certainty how "sticky" the brands are.   If substantial loss, then,  brand is not that "sticky"i.e. recovery will take longer, and vice versa.

4. Also looking to see if Management will use this window to further flush out all other cockroaches, or will they try to defend to show a small impact to stop the price from falling further? (then the drop will be more prolonged).

Analysts views

https://theedgemalaysia.com/node/693123 (7 December 2023)

From Sep 2023 to Nov 2023, IB were still calling for Buys and Holds when Prices were trading much higher than today, when prices have already peaked and is falling.   Here, it doesn't pay to follow them.

In November, MAYBANK called for a Sell targeting 60 sen.  The first sell caller still get the TP too high, as today is 54 sen already.   Nobody can be precise, don't judge MAYBANK too harshly.  But they are better to get the direction right calling for a SELL than a Buy.

In December, RHB changed their minds, calling to BUY with a TP of 1.29 and then flipping to a SELL with a TP of 46 sen.   Anyone who followed RHB will LOSE monies.   But again, don't judge too harshly, as nobody really knows the markets.

 

The litmus test is this coming quarterly report.   How many analysts will change their minds from BUY/HOLD to SELL?

Do we have time to invest at a better more attractive price?

My gut says yes.

"V" recovery is less likely (when measure over 1 year period) given:

- Past 10 years financial history

- P/NTA still a large premiums

- Low long term sustainable dividend yield (the 2023 one time high is in the past).

- Past 10 years price history

- What we know about the Israel-Hamas conflict

- Unlikely for Tun M or politicians to come out to reverse their boycotting calls previously (?)

- Questions about how sticky are the brands.

- Not enough Analysts coming out to call for a SELL given how likely / how catastropic the financials will turn out this coming mid Feb. 

Disclosure:  No position (yet).