Speculation gone wrong?
Of course Speculation could go wrong! Even the most conservative investment could go wrong! What did you expect?!
Referring to our first post on AJIYA: Redefining Speculation, we stated an opportunity to speculate on AJIYA. Two financial quarters have passed, AJIYA share price dropped from RM 0.78 to RM 0.625 at time of writing, equivalent to a drop close to 20%. Not only we didn’t see expected improvement in core revenue & earnings, the profitability of the Group has actually worsened (P/S: serve you right for speculating).
Before you throw stones at us, let us share our analysis on latest 3QFY17 financial results. To recap, AJIYA came on our radar as a speculation pick because we noticed there could be a re-rating in its earnings capability. We were impressed with AJIYA cash flow and balance sheet, an improvement in earnings capability could be a game changer to AJIYA (check above link Redefining Speculation for more details).
From 3QFY17 Financial Report, we can see there is actually improvement in AJIYA balance sheet. While there is little change in Inventories, Receivables and Payables, the Borrowings of the Group has dropped -24.45% and Net Cash has increased by +48.23%! NCAV per share, a valuation created by Benjamin Graham [(Current Assets – Total Liabilities)/ Total Outstanding Number of Shares], for AJIYA is RM 0.63, which is lower than its market price!
I think we can agree on that balance sheet of AJIYA is actually much stronger today than the day we covered. However, in today’s market, balance sheet tends to serve more as a guidance to potential downside, as opposed to potential upside.
From TTM Q3FY17, we see that AJIYA’s Cash Flow From Operation (CFFO) strengthened 21.67% (from RM 41.94 mil to RM 34,47 mil) and Free Cash Flow (FCF) strengthened 34.31% (from RM 35.23 mil to RM RM 26.23 mil).
The strong cash flow and cash conversion cycle of AJIYA told us one thing, despite the stiff competition in the building sector material, AJIYA didn’t compromise its credit policy to its clients in order to secure more orders. That also explains why its earnings ability remains weak, “In the building material sector, u can’t get a good profit margin if you always demand people to pay cash.”
There is nothing wrong for demanding for cash in business. We like that actually. But if there is no product differentiation in what you do, you don’t get a good margin, and need to compromise your credit policy. That explains why AJIYA’s (who doesn’t compromise its credit policy) TTM3QFY17 Normalized Net Profit Margin is 3.5%, and with ROE of 4%. Not only AJIYA failed to increase its revenue, its profit margin deteriorated further. So, where was “higher-profit-margin business” AGIBS as promised by the management? We don’t know. The contribution from IBS is not seen for recent financial quarters, and without much explanation from the management in financial report. However at footnote of 3QFY17 Financial Report, the management is still confident about the take off of IBS. The management is also trying “calm” its shareholders by reassuring them that most of the MOU still intact.
Well, if you have got enough shit from the management, you can sell it. But we opine that downside is pretty much limited at this price. Or you can give them another chance until the publish of Annual Report FY17, where we can get more details.
Boring…………. but not necessarily bad
BORINGGGGGGGGGG!!!! For a company like HOMERIZ, there is no sexy story to tell about. In our previous write-ups on HOMERIZ, we mentioned there are 3 Usual Suspects that would affect the profitability of company like HOMERIZ. Check the links below to find out what are the 3 factors:
Other than the 3 Usual Suspects, for better or worse, there is really not much left that would cause a drastic change in its performance (HOMERIZ is kinda immune to 2nd Usual Suspects, check above links for more details). And this will probably stay the same for coming years as the management vows to remain focused in their main business.
Excerpt: Page 9 of HOMERIZ 4QFY17
Should we shun away from this kind of investment? The answer is No. Boring is not necessarily bad. On the contrary, more often than not, they come at great value because no much attention is on them.
HOMERIZ latest quarter report 4QFY17 summarized it whole year performance and it is not particularly impressive. The whole year revenue improved 7.2% but 4% of which was due to strengthening of USD and only 3% increase in sales volume. We can also assume the same to its Profit Before Tax (PBT), which only improved 8.2%, and probably only half of it was accountable to sales volume. Thus, coupled with recent strengthening of RM against USD, you can’t blame HOMERIZ for losing its popularity. Don’t you know, you are a shooting star. And all the world will love you just as long, as long as you are a shooting star. – Bad Company
In the Financial Period FY17 for HOMERIZ (September 2016 to August 2017), the average exchange rate was RM 4.33/USD. However, 1QFY17 of HOMERIZ (from Sept 2017 to November 2017), the exchange rate is hovering around RM 4.20/USD.
Excerpt: Page 8 of HOMERIZ 4QFY17
Illustration 1: Average USD/MYR Exchange Rate from Sept 2016 to Aug 2017 Source: https://www.oanda.com
Just before we move on to present HOMERIZ fundamentals over the past 5 years in bar chart below. Looks impressive, yes? think long term.
Illustration 2: HOMERIZ's profitability over the 6 Financial Years
Now, let me present HOMERIZ financial scores in a lazy way using Illustration 3 & 4.
Illustration 3: Fundamental Summary of HOMERIZ over 6 Financial Years Illustration 4: Cash Flow Score of HOMERIZ over 6 Financial Years
Red frame of Illustration 3 shows HOMERIZ return on capital over the 6 Financial Years. Yes, next Financial Year might be lower (or higher) due to exchange rates, but HOMERIZ has historically proven its ability to generate higher than average return on capital. If you are thinking long term, don’t dwell on the Exchange Rates. After all, who can predict them? Blue frame and green frame present the cash position and liquidity ratio of HOMERIZ respectively over the years. HOMERIZ has been net cash since FY12, and its liquidity ratios have been exceptionally strong over the years. The cash scores of HOMERIZ has been impressive, but take note of on the relatively weaker CFFO in FY17 and higher CAPEX over the past two financial years (FY16 & FY17) as shown in brown frame (the reason of recent higher CAPEX is worth finding out).
And a side note of management, over the past 6 years, the management of HOMERIZ has never taken an annual pay of more than 10% of its Net Profit. The founders, Chua Fen Fatt & Twee Hwee Ing (Husband & Wife) are together holding 57% of total outstanding shares of HOMERIZ. Despite the lower dividend in FY17 compared to FY16 (4.2 cent per share vs 5 cent per share), we opine that HOMERIZ is one of the Dividend Stock given its strong free cash flow and Directors’ interest in the company (What is the easiet way to get paid when you are holding 57% of a company?)
At time of writing, HOMERIZ is trading at RM 0.90, EV/EBIT of 5.98x. Assuming an EV/EBIT of 8x, HOMERIZ target would be RM 1.15, potential upside of 27.78%.
AJIYA 3QFY1 Financial Report
HOMERIZ 4QFY17 Financial Report