Winning formula in diversified food products - QL

By THOMAS HUONG
huong@thestar.com.my

A down-to-earth business philosophy combined with laudable foresight planning as well as Malaysia's rich natural resources and stable political environment has turned a small trading company into a billion-ringgit multinational over the course of 27 years. Today, agriculturebased QL Resources Bhd whose core business includes marine products manufacturing, integrated livestock farming and crude palm oil (CPO) milling, is the largest fishmeal maker in Malaysia and the largest producer of surimi (processed fish paste) in Asia.

The group is also among the country's leading operators in animal feed raw materials and poultry farming, with a production rate of about three million eggs per day.

The diversified group made its debut on the then second board of the Kuala Lumpur Stock Exchange on March 30, 2000 with a market capitalisation of RM100mil.

In the same year, the group posted a net profit of RM12.9mil on the back of revenue of RM407.2mil.

In the 11 years after its listing, the group enjoyed phenomenal success with a 22% average ROE (return on equity) as well as profit after tax's CAGR (compounded annual growth rate) of 23% and turnover CAGR of 15%.

Today, the group's market capitalisation stands at RM2.7bil. It has more than 4,500 employees across Malaysia, Singapore, Indonesia and Vietnam.

For its financial year ended March 31, 2011, the group posted a 16.5% year-on-year jump in net profit to RM124.5mil on the back of revenue of RM1.78bil.

Income from the sea: The group has a fleet of 25 fishing boats covering Johor and Sabah.

Humble beginnings

QL Resources Bhd managing director Chia Song Kun points out that the group's rags-to-riches story was a no-nonsense, step-by-step journey.

The group's roots lie in the sleepy fishing village of Sungai Burong in northern Selangor.

“We started with very little capital. No bank would lend us money as we were small and had no track record. In those days, we collected sea or cockle shells from the fishing village and sold them as animal feed to poultry farms,” recalls the 61-year-old Chia, who founded the venture together with several of his brothers in 1984.

At that time, Chia, who is a University Malaya mathematics graduate, had left his job as a lecturer in Universiti Teknologi Mara, Shah Alam where he had served for 11 years.

“I was looking at starting a business and went back to my brothers in the fishing village. We thought it was better to do something that we knew well. At least my brothers did not need to be fishermen anymore it's a tough life,” he says.

Chia, who comes from a family with 15 children (he is the third eldest son among the nine brothers), had long-term goals for the business.

“We thought about what we could do in a fishing village. It should be a business that has good growth potential, and we decided on fish processing and poultry. These are typical and traditional activites; we just needed to do them in a big way.”

Chia also co-founded private college group Inti Universal Holdings Bhd in the mid-80s, which was taken private in late-2008 after being acquired by Laureate Education Inc.

Sniffing out opportunities

According to Chia, the formula behind the succees of the group, which was recently awarded “Company of the Year” at The Edge Billion Ringgit Club Corporate Awards, are its corporate values, namely “integrity, win-win, teamwork and innovative.”

“This is our corporate culture which has been practised as much as possible since the founding of the business,” says Chia, who cited as an example, the value of innovation in the growth of the group's marine products division which manufactures fish-meal, surimi and surimi-based products.

Surimi paste and products such as fish cakes and balls are processed from minced, small fish.

“Innovation is very important in our business strategies.”

Chia explains that there is typically a lot of post-processing waste in the manufacture of surimi products.

“In the old days, the fish cakes and balls were mostly hand made. The waste is very smelly and a nuisance. What we did was to use available technology to treat the waste in our factories and process it into fishmeal for aquaculture feed. So, there is zero wastage as the whole fish is utilised.”

In 1994, the group started to expand its revenue base by exporting surimi to Japan.

Chia points out that many Malaysian surimi manufacturers cater only to the domestic market.

“It is not easy to sell to overseas markets like Japan they are very particular about quality. But we had to attempt it in order to achieve a higher level of value creation. So we bought Japanese technology, learnt about their processes in making surimi, and manufacture according to their standards.”

Today, the group exports surimi to China, Singapore, Japan and South Korea.

A typical layer farm such as this one at QL Poultry typically contains about 1,000 chickens which can produce up to 100 tonnes of manure per day.

Value for all

Another example is the construction of a 500kW capacity biogas facility at the group's poultry farm in Pajam, Negri Sembilan, which could save up to RM100,000 per month in energy costs.

The biogas facility, fuelled by chicken manure, is due to be completed by the end of this year.

Chia says that with around RM5mil invested in the facility, the project's payback period was five years.

He points out that the project is also in line with the group's “win-win” corporate value.

“This is also part of our corporate social responsibility (CSR). By doing this, we remove the smell from the poultry farm which can be a nuisance for the nearby community, and generate power at the same time. I think a five-year payback period is acceptable to our shareholders.”

If the project proves to be successful in providing significant cost savings, Chia plans to install more biogas facilities at poultry farms in Kedah and Sarawak.

In fact, the group's very name incorporates its “win-win” value.

QL stands for “quan li (value for all)” in Mandarin.

“The business should benefit all stakeholders owners, employees, partners, customers, suppliers.”

Perhaps an interesting example of this is the group's financial assistance scheme for fishermen which started in 1987.

To date, the scheme has provided more than RM25mil in interest-free advances to 700 fishermen in rural villages.

Chia says the scheme, which is similar to microfinancing by the Grameen Bank in Bangladesh, allows fishermen to build and modernise their boats and at the same time, enables QL to secure its long-term supply of marine catch.

“To produce high-quality surimi, the fish needs to be fresh. So, the fishing boat must be well-equipped with a cold room and methods of keeping the fish fresh. We provide financial help to the fishermen, and they sell fish to us at market prices.”

Chia adds that QL's three marine product factories in Hutan Melintang (Perak), Endau (Johor) and Tuaran (Sabah) also provide employment opportunities for local communities.

QL's Hutan Melintang complex is the largest integrated marine processing plant in Malaysia.

“In order for a business to carry on smoothly and grow, all participants in the venture must win. However, a win-win situation is only possible if we create extra value that is the challenge.”

Surviving tough times

Meanwhile, Chia points out that QL's core value of integrity has also been crucial.

“The banks never pulled back our credit lines in the 1997-1998 Asian financial crisis, which was a challenging period for us. The US dollar was high (ringgit was pegged at RM3.80 to the US dollar) and it was tough as we import a lot of raw feed materials,” he recalls.

Chia says QL's core value of integrity stemmed from the group's humble beginnings.

“We started from scratch. So to gain trust from customers, suppliers and financial institutions, one must build a good reputation. In other words, be honest and always honour agreements even if you have to make a loss. This is easy to say but tough to practise. So you also need to have a lot of business savvy. In the long run, you still win.”

On the value of teamwork, Chia says all employees of the group need to “sing as a team”.

“Of course, one must have tolerance in any team, there are bound to be differences of opinion. One important philosophy we have is leadership by example. The management must not be involved in unethical practices.”

Chia says employee turnover is very low. “We offer attractive incentive packages.”

The future is bright

Chia is looking forward to the next two years, when oil palm trees begin to mature in QL's plantations in Indonesia.

QL's palm oil division has not impressed in its performance, contributing only 2.7% of the group's pre-tax profit although it delivered 18.5% of group revenue in the previous financial year.

Integrated livestock farming was the largest pre-tax profit contributor (56.3%), followed by marine products manufacturing (41%). However, QL's latest annual report points out that the palm oil division suffered a 45% contraction in growth in the previous financial year, due mainly to the La Nina weather phenomenon that brought unusually heavy rainfalls to Malaysia and Indonesia and reduced yields of oil palm plantations.

QL has matured oil palm trees on 1,000 ha in Sabah and in 2007, the group acquired 20,000 ha in East Kalimantan, Indonesia.

As of May this year, about 9,000 ha have been planted in Indonesia.

Chia believes the palm oil division could contribute 20%-30% of group earnings from financial year 2015 onwards as the plantations in Indonesia gradually mature.

“This will help QL to grow further in the next 10 years. We will be a more balanced group with three pillars.”

QL is also replicating its marine products manufacturing and integrated livestock farming businesses in Vietnam and Indonesia.

In Indonesia, a marine processing plant to process surimi and fishmeal in Surabaya commenced operations in May this year while new egg and breeder centres are expected to contribute to earnings by September.

In Vietnam, new poultry farms should begin to contribute to earnings by April 2012.

A Maybank Investment Bank Research note issued in May says that with its regional expansion, the group's egg production is expected to climb to 4.5 million eggs per day (growth of 50%) in the first quarter of 2013.

Growing the business

Last year was also significant in terms of synergistic acquisitions by QL.

In August, QL acquired a 23.29% stake in rival company Lay Hong Bhdfor RM11.6mil. Lay Hong is mainly involved in the production of eggs, broiler farming and feedmill activities.

“In terms of egg production, QL and Lay Hong has 11% and 5% market share respectively. Together, we can manage our egg output and distribution activities as well as feed raw material sourcing arrangements more effectively,” says Chia.

Last October, QL paid RM29mil for a 40.51% stake in Boilermech Holdings Bhd, which was subsequently listed on the ACE Market of Bursa Malaysia in May this year.

Boilermech is mainly involved in the manufacturing and distribution of biomass boilers, and QL's stake meant acquiring technology in agricultural biomass power and heat generation for its palm oil division.

“Boilermech is our vehicle towards the future. It fits into our green energy engineering projects and palm oil downstream business.”

Another significant revenue source for QL in the future could be palm pellet biofuel, which is produced from palm oil mill by-products such as empty fruit bunches.

Palm pellet biofuel can be a substitute for coal in power plants, and QL has a patent pending on this biomass technology.

QL has invested more than RM12mil in research and development on palm biomass-related renewable energy technologies since 2008.

Meanwhile, many research analysts are bullish about QL's growth prospects.

An ECM Libra Investment Research report issued in May notes that QL has a unique mix of resilient business activities and proven track record.

It points out that QL's manufacturing of both surimi and downstream products such as fish balls and crab sticks allows for product mix flexibility and more stable profit margins.

“When the price of surimi is low, QL has the option of channelling more of its surimi into value-added products.” ECM Libra Investment Research head Bernard Ching says QL's agri-food business is “more or less recession-proof”.

“Given the uncertain market environment with low growth and high unemployment in the Western economies, QL looks solid. The maturity of the palm oil trees in Indonesia in the near future will also give a boost to its earnings growth,” he says.

An analyst from OSK Research concurs, saying there was plenty of room for growth for QL's agri-food businesses regionally, based on the large populations of Vietnam (89 million) and Indonesia (238 million).

A Maybank Investment Research analyst notes that QL has seen a decade of annual double-digit growth in net profit.

“Barring unforeseen circumstances, QL should see double-digit growth in net profit for the next two financial years,” he says.

However, Chia thinks the group will grow at a slightly slower pace in the next 10 years (compared with the last decade).

“We expanded our operations regionally in order to have a bigger platform for our next phase of growth. Still, being in other countries pose new challenges such as different cultures, languages, laws and bureaucracy. The environments are not as comfortable as Malaysia.”

'Compelling regional growth' for Maybank

The acquisition of Singapore's banking franchise, Kim Eng Holdings, and the longer-term growth potential of Bank Internasional Indonesia (BII), will set the stage for a potentially compelling regional growth for Malayan Banking Bank Bhd (Maybank).

OSK Research said the bank's latest quarter net profit year-on-year (y-o-y) growth of 25.1 per cent and quarter-on-quarter growth of 11.4 per cent, respectively, far outpaced the industry's aggregate of 15.6 per cent and 8.2 per cent, respectively.

"Its earnings were propelled by an industry-beating loans growth of 17.6 per cent, y-o-y, the hefty 62.1 per cent drop in loans loss provision and maiden contribution from Kim Eng," OSK Research said in a note today.

It said BII was also aggressively expanding via new hiring and enlarging its branch network by 43 per cent over the next one-and-a-half years.

The research firm said BII's operating leverage would begin to flow through by financial year 2012 and financial year 2013 on a more stable cost base while generate new revenue from its enlarged presence.

"This would naturally help bring down the cost-to-income ratio closer to the industry average, driven largely by revenue growth from its enhanced infrastructure investments, as costs stabilises," it said.

OSK Research is maintaining a "Buy" call and fair value of RM9.60 on Maybank given the qualities provided by the bank and its alluring 7.6 per cent dividend yield which is the highest among domestic banking stocks. -- Bernama

The Edge Billion Ringgit Club - Fraser & Neave Holdings Bhd

Written by Financial Daily

Tuesday, 15 November 2011 11:31

Fraser & Neave group is a household beverages and dairies name that has been present in Malaysia since 1883.

In 1972, the Frase & Neave Ltd group ventured into glass manufacturing via acquisition of a substantial stake in Malaya Glass Bhd (MGB). In 1996, the group reorganised and realigned its Malaysian soft drinks and dairy businesses by injecting them into MGB, which later changed its name to Fraser & Neave Holdings (F&N) on March 5, 1996.

Since then, F&N has been regarded as the food and beverage (F&B) arm of its parent, Fraser & Neave, with wholly owned core businesses in Malaysia in soft drinks and dairies.

The group’s soft drink brands include 100Plus, F&N Fun Flavours, Seasons, Fruit Tree, Ice Mountain and Red Bull, while it is a franchise holder for Coca-Cola, Sprite and Aquarius. Its dairy brands include F&N, Tea Pot, Gold Coin, Farmhouse, Magnolia and Alive. It is also a franchise holder for brands such as Sunkist, Ideal, Carnation and Milkmaid.

F&N’s soft drinks factory in Shah Alam, operational since 1996, is one of the largest in Southeast Asia. The condensed milk factory in Petaling Jaya, set up in 1969, is Southeast Asia’s largest with an annual capacity of over 11 million cases. It also operates a can-making plant with a capacity of more than 420 million cans per annum.

A property division was added in 2004 and the group purchased a stake in Cocoaland Holdings Bhd in 2010 to further strengthen and accelerate the development of food products in its existing regional F&B portfolio. In 2010, the glass business was divested.

Datuk Ng Jui Sia, F&N CEO/managing director shares with The Edge Financial Daily his strategies and dreams for the company.

TEFD: What are the group’s competitive strengths and advantages?

Ng wants to see F&N establish itself as a leading regional F&B company.

Ng: Our competitive strengths lie in our people capability, established brands, a comprehensive distribution infrastructure and manufacturing excellence.

With a 128-year heritage, the F&N group in Malaysia has built a wealth of experience and established a legacy with distinctive embedded values. With intimate knowledge of the local market and consumer needs, we have managed to meet those needs for over four generations of Malaysians through product innovation. At the same time, we have built our distribution network to be second to none. F&N brands can be found in any distribution channel, ranging from hypermarket to sundry shops, from road side stalls to high-end F&B outlets.

Surveys have shown that virtually every household pantry and almost every F&B outlet in Malaysia stocks one or more of our products. Indeed, over the past 128 years our brands have become synonymous with the culture and traditions of Malaysia. Our products are affordable staples that are consumed nationally on a daily basis (and especially during Malaysia’s numerous festive seasons) and predominate in the market sectors in which we compete. For these reasons F&N is regarded as a good barometer of consumer confidence and of the national economy.

What have been the achievements of the group in the past four years?
The most significant achievement was Nestle’s canned milk acquisition in 2007. The acquisition propelled F&N into the largest canned milk producer in Southeast Asia. This was a very strategic investment as it enabled F&N to set a foothold in Thailand and a launch pad for expansion into the largely untapped Indochina and Myanmar markets with a population base of over 200 million. Its presence in the Thai market has helped F&N transform almost overnight into a top five non-alcoholic F&B company in Thailand, contributing to over RM1 billion revenue, next to the dairy business.

In 2009, a RM250 million Greenfield liquid milk plant was established in Rojana, 70km north of Bangkok with a total capacity of 3.5 million cans per day or annual production of 24 million cases of products. The plant is fully integrated with outsourced in-situ can manufacturing facility and on-site logistics operations.

The Thai plant became a blueprint for F&N Dairies Malaysia’s new RM350 million plant at the Pulau Indah halal hub in Selangor which is scheduled for completion in the second half of this year. This plant will showcase cutting-edge green technology which minimises carbon footprint via the incorporation of water, energy and environmental conservation technology.

Over the past five years since January 2006, the market capitalisation of F&N has seen a nearly threefold increase from RM2.21 billion to RM6.27 billion as at mid-October 2011.

What are the major challenges your company faced over the years and how did it overcome them? Is there anything else you would have done differently?
Our raw materials purchases are in US dollars. Thus, volatility in the USD/MYR exchange rate will have an impact. We will monitor our currency movements closely.

How is the company positioning itself within your industry? What are your strategies to grow or gain market share?
We are the market leaders in the ready-to-drink (RTD) beverages and canned milk (sweetened condensed milk and evaporated milk) in Malaysia. Our aim is to reinforce this leading position, while expanding our product portfolio towards becoming a total F&B company.

We are making fast and positive inroads into Thailand markets, and establishing a strong brand visibility in Indochina and Myanmar.

We have a two-pronged strategy for expansion. The first is to grow the business organically in the domestic markets that we operate in and seek new ones through exports, while the second is to seek out acquisition opportunities and/or strategic alliances with F&B entities, which will complement and synergise with our existing business model.

The F&N group is also able to leverage on the trained expertise from Nestle in terms of technical capability and R&D resources which have resulted in the introduction of innovative products to the market.

We will continue to launch more products and variants in addition to strengthening the distribution infrastructure of our remaining core products in the country. Our sound balance sheet coupled with strong liquidity will stand us in good stead as we pursue our vision of becoming a regional F&B company.

What are the group’s plans for the future, both short-term and long-term? What are your group plans to compete in the increasingly globalised environment?
With Coca-Cola’s impending entry, we expect the local beverage landscape to change and competition to intensify, both of which will pose challenges as well as provide new opportunities to the group. Noise levels (in terms of advertisement, promotions, merchandising, new product launches) will increase significantly with the entry of such a formidable player. Arising from this, we expect the RTD market to expand.

Presently F&N has a leading advantage in terms of width and depth of distribution and our brands like 100Plus, F&N, Seasons are household names. F&N will vigorously contest to reinforce our position in the market. After all, Malaysia is our home ground and we are homegrown. We expect F&N volume to continue to grow by double digits in the foreseeable future.

As for dairies, we have started the ball rolling by entering the Thai dairy market in 2007. The immediate focus is to grow share in the Thai market and build brand franchise and presence in Myanmar and the Indochina region.

Once there is a critical mass, it offers an opportunity to set up dairy plants in Indochina and Myanmar to cater to the growing demand as the Rojana plant in Thailand will not be able to fulfil demand of a 220-million population base.

How would you like to see the group in 10 years’ time?
We would like to see F&N establishing itself as a leading regional F&B company, with dairy and soft drink plants in the Asean region, particularly in Myanmar and Indochina.

QSR’s Tom Yum Crunch spices up a busy 4Q

Written by Financial Daily

Tuesday, 08 November 2011 10:29

QSR Brands Bhd
(Nov 4, RM5.65)
Maintain outperform with revised target price of RM8.30 from RM7.22: Crowd favourite Tom Yum Crunch returns after seven years to a hot and spicy response, feeding into KFC’s mouth-watering same-store sales growth (SSSG) 0f 12% in October. Pizza Hut is playing catch-up in the delivery segment and the group is making further headway in India.

We raise our target price as we roll it forward, still pegged to 17.8 times forward price earnings ratio (PER), the average valuation of bigger peers. A further rise in average ticket prices, success in new markets and accelerated share buyback underpin our “outperform” call.

We are confident that Tom Yum Crunch will enable QSR to meet our FY11 SSSG target of 5% for both Pizza Hut and KFC. This will be the group’s best SSSG performance since FY09. We wasted no time in joining the queue at a KFC restaurant to welcome the return of Tom Yum Crunch.

During its debut in 2Q04, the wonder product helped KFC’s quarterly SSSG hit an unprecedented 44%. Just like the first round, the product did not disappoint and has generated a lot of buzz, contributing to KFC’s 12% SSSG in October. We applaud QSR’s latest initiative to drive Pizza Hut’s transactions across the delivery segment where it is lagging behind Domino’s. QSR has rolled out a new type of dough and a new distribution channel called Pizza Hut Delivery (PHD). PHD guarantees delivery within 30 minutes for 5km-radius catchment areas and offers free delivery and net prices to compete more effectively with Domino’s. We are encouraged by KFC India’s progress so far.

Monthly sales average RM350,000 to RM400,000 per outlet, substantially higher than the average of RM270,000 per outlet recorded by KFC Malaysia’s operations. A wide array of products that cater for vegetarians and non-vegetarians is bringing in the traffic and a staggering SSSG of 20%. Similar to the Malaysian operations, the average ticket price has been on the uptrend, hitting RM14 in 2Q11 compared with RM13.50 in 1Q11 and RM12 in 4Q10. — CIMB IB Research, Nov 4

NTPM hit by rising costs

KUALA LUMPUR: A market leader in tissue products, NTPM Holdings Bhd is concerned about the rising costs of its main raw materials, recycled paper and pulp, but has decided not to pass down the cost increases to consumers.

In an email interview with The Edge Financial Daily, NTPM’s managing director Lee See Jin explained: “NTPM has to be socially responsible not to pass on the cost increase to the consumers each time there is a hike in the material and operational costs. The consumer is already burdened by the increase in daily living costs such as petrol and electricity.”

Pulp and recycled paper constitute 30% of NTPM’s cost of sales, he said.

The prices of recycled paper and pulp have been increasing by an average of 45% and 33% respectively over the last two years and this had an impact on NTPM’s profitability in its previous financial year ended April (FY11).

For its first quarter (1Q) ended July 31, NTPM posted a 13.2% year-on-year rise in revenue to RM106.95 million from RM94.5 million a year ago.

But due to the increase in raw materials cost and production overheads, its net profit fell by 25.6% to RM9.23 million from RM12.41 million previously.

Asked if NTPM is compromising its shareholder value by not passing down the cost increases to consumers, Lee said: “It all depends on the situation, that is, market forces and the competitors’ market position. Increasing our selling price will improve our profitability in the short term.

Lee said NTPM will continue to find ways to mitigate the impact of higher costs by continuing to improve its business operations and looking for avenues to bring down energy costs.

“However, using this strategy may result in some cost conscious customers seeking cheaper alternatives. Hence, we may lose some market share in the future.”

He said there should not be any price increment in NTPM’s products for now.

On the strategies against rising raw material prices, Lee said NTPM will continue to find ways to mitigate the impact of higher costs by continuing to improve its business operations and looking for avenues to bring down energy costs.

Electricity accounts for about 8.5% of NTPM’s cost of sales.

For 1QFY12, NTPM derived 80% of its revenue from tissue products such as facial tissue (19%), toilet rolls (33%), kitchen towels (6%), serviettes (5%) and jumbo rolls (8%).

The balance 20% came from personal care products such as facial cotton (3%), sanitary napkins (7%), baby diapers (9%) and adult diapers (1%).

NTPM’s Premier and Royal Gold brands are the top two market leaders in the facial tissue segment with a market share of 38.3% and 9% respectively.

Its Cutie brand is also the market leader in the toilet tissue segment with 48.5% market share.

Its Diapex brand in the baby diaper segment and Intimate brand in the sanitary napkins segment have a market share of 4% and 6.1% respectively.

Lee said the information for its products’ market share was extracted from ACNielsen’s market report for 2010. But the current market share for these products should not differ much, he said.

According to Lee, NTPM’s major competitors are Kimberly-Clark, Uni-Charm, SCA and DSG (Thailand).

Sales of NTPM’s baby diaper products have been growing rapidly with a 78% increase in FY11.

Lee said NTPM targets to achieve a market share of 10% to 20% for baby diapers in the future, which translates into sales of RM100,000 to RM200,000 per annum.

“We expect the contribution from baby diapers to be 5% to 10% of our total revenue,” he said.

On the introduction of new products, Lee said the company is interested in wet wipes and its inclusion will provide a comprehensive answer to the range of personal care products NTPM currently owns.

To increase market share and stay ahead of competitors, NTPM will focus on growth by expanding its product portfolio and introducing new innovative products, he said.

“NTPM will continue to enhance its distribution network in the country, which is one of the group’s core competencies, and strengthen its foothold on its higher value-added products range,” he added.

He said NTPM will also beef up its presence in established markets such as Malaysia and Singapore, and seek opportunities in Southeast Asia and the Oceania region.

For 1QFY12, most of its revenue came from Malaysia (67%). Other revenue contributors include Singapore (15%), Australia (5%), Thailand (3%), South Africa (3%), USA (2.1%), New Zealand (1.5%) and Brunei (1%).

In July, NTPM, through a wholly owned subsidiary, NTPM Paper Mill (Bentong) Sdn Bhd, had proposed to acquire land and machinery from Union Paper Industries Sdn Bhd for RM20 million.

Lee said Union Paper has two paper-making machines with a capacity of 30 tonnes per day. The machines are meant to produce “high runner” toilet rolls and facial tissue products.

The acquisition is expected to be completed by April 2012 and NTPM Paper Mill is expected to contribute to NTPM’s earnings from FY13 onwards, said Lee.

Currently, NTPM has 18 paper-making machines with a total capacity of 255 tonnes per day. NTPM is currently operating at 80% capacity.

For its personal care products, NTPM has two production lines for baby diapers and six machines for sanitary napkins. Both operations are currently operating at 50% capacity.

On the industry’s outlook, Lee foresees the market growth for NTPM’s products over the next year or two possibly moderating due to inflationary pressures on consumer spending power and waning consumer confidence.

“At the same time, we are feeling the pinch of intense competition from other market players.

“However, we are optimistic that we shall continue to do well and thrive in the years ahead mainly due to Asia’s robust growth led by its strong domestic demand,” he said.

Since its listing in 2003 until FY11, NTPM has chalked up compound annual growth rates for revenue and net profit of about 11% and 8% respectively.

For FY11, it registered revenue of RM420.23 million, an increase of 9.7% from RM383.12 million for FY10.

Despite the higher revenue, its net profit declined 12.2% to RM52.06 million from RM59.32 million previously, due to the increase in raw material prices.

NTPM has a market capitalisation of RM555.98 million at its closing price of 49.5 sen last Friday. Its stock has fallen 11.61% year-to-date and has traded between a 52-week high of 58 sen and a low of 46 sen.

As at July 31, NTPM had cash reserves of RM20.75 million and total borrowings of RM75.8 million.

For FY11, it paid a total net dividend per share of 2.9 sen which represented a payout ratio of 62.56%. Its dividend yield was 5.86% based on its last traded price.

In a Sept 26 report, OSK Research downgraded NTPM to a “sell” with a fair value of 46 sen from 53 sen previously.

OSK Research said NTPM posted poorer than expected results in 1QFY12 as margins were impacted from gas and electricity price hikes, higher raw material prices, and higher indirect raw material such as chemical and packaging prices.

However, it stated that if the global economic conditions worsen, the potential decline in pulp prices would augur well for NTPM.

BFood on expansion spree

I really like this counter, looking for the right time to buy in. Injection 50% of Berjaya Starbuck asset under Berjaya Foods definitely will offer a better growth opportunity rather than just relying on KRR. Its a good brand but i dont really feel like KRR has a ummph factor to drive customer to their restaurant frequently like KFC or McD.

Now, with Starbucks under BJFood umbrella, will give us opportunity to participate Starbucks' growth potential. Clean balance sheet, good business model and future growth through restaurant expansion and potential of enjection of other Berjaya asset such as Krispy Kreme and Wendy's

==============================================

KUALA LUMPUR: Berjaya Food Bhd (BFood) is showing promising growth prospects with the injection of Berjaya Starbucks Coffee Co Sdn Bhd into its business and the plan to expand its chain of Kenny Rogers Roasters (KRR) restaurants in Malaysia and Indonesia.

BGroup, which holds the global KRR franchise via wholly-owned Roasters Asia Pacific (HK) Ltd, is venturing into China.

BFood, on the other hand, is principally involved in the development and operations of KRR in Malaysia through wholly-owned Berjaya Roasters (M) Sdn Bhd, the franchise holder of KRR restaurants in Malaysia.

Listed on Bursa Malaysia in March, BFood’s FY11 net profit was up by 17% to RM10.2 million from RM8.68 million in FY10. Revenue grew by 19% to RM71.9 million from RM60.42 in FY10.

In a recent interview with The Edge Financial Daily, BFood CEO Datuk Francis Lee expected the company’s revenue and net profit for FY12 ending April 30 to grow at the same pace as in the previous year.

BFood’s earnings for FY13 onwards will get a boost from the ongoing acquisition of Berjaya Starbucks, which will be concluded in the first quarter of 2012, said Lee, a former director of Berjaya Starbucks.

Last month, BFood proposed to buy a 50% stake in Berjaya Starbucks from BGroup for RM71.69 million cash or at a price-to-earnings ratio (PER) of 13.5 times.

The acquisition will be financed by a proposed cash call to raise over RM70 million. The proposed rights issue is on the basis of four rights shares together with four free warrants for every five existing shares held at an issue price of 65 sen per share.

Kenny Rogers Roasters at Aeon Bandaraya Melaka shopping centre.

Berjaya Starbucks, for its FY11 ended April 30, recorded a net profit and revenue of RM10.62 million and RM145 million respectively.

When asked if the acquisition of Berjaya Starbucks at a PER of 13.5 is expensive, Lee’s response was: “At 13.5 times, I think it’s a fair value because of the visibility of Starbucks in the whole of Malaysia. It will propel BFood to a different level.”

“If you look at Starbucks Corporation (listed on Nasdaq) itself, it has a PER of 26 times,” he added.

However, Lee declined to give details of Berjaya Starbucks’s expected future earnings. He only revealed that Berjaya Starbucks same-store sales growth has been about 15%.

According to Lee, BFood is targeting to open 12 to 15 Starbucks outlets every year.

“With 120 outlets currently, Berjaya Starbucks’ store growth would be about 12%,” he said, adding that BFood plans to have 200 outlets over the next five years.

Lee said a master development agreement with Starbucks Corporation was in the process of being re-signed and should be concluded within two months.

The new agreement will allow Berjaya Starbucks to run its franchises for 20 years compared with 10 years previously.

Going forward, Lee said Starbucks would always be the preferred brand in Malaysia.

“Starbucks will be the first port of call when it comes to any mall or premises that is ready to be occupied because of its unique position and strength, US backing, product development and marketing tools,” he said.

On BFood’s expansion into Indonesia, Lee said in about two weeks, it would complete a deal allowing BFood to develop and operate the KRR franchise in Indonesia.

In late July, BFood entered into a joint venture with PT Mitra Samaya, PT Harapan Swasti Sentosa and PT Boga Lestari Sentosa to develop and operate the KRR franchise in Indonesia under PT Boga.

Under the deal, BFood will pay RM1.91 million for a 51% equity stake in PT Boga. On top of that, BFood will extend a RM6.09 million loan to the Indonesia-based company and will subscribe to the rights issue of PT Boga that will cost about RM1.99 million. BFood is granted an option to raise its shareholding to 70% within seven years.

PT Boga has four KRR restaurants in major shopping malls in Jakarta.

In addition to the four restaurants in Indonesia, Lee said PT Boga will open another five by the end of this year, and another three more by end-June 2012. In total, there will be 12 stores by end-June 2012.

Lee expects the KRR restaurants in Indonesia to break even by April 2012 and contribute to BFood’s earnings in FY13.

“The following financial year-end should have some positive growth in terms of bottom-line numbers,” he said.

Lee emphasised the potential of BFood’s business in Jakarta, the most populous city in Southeast Asia, with a population of over 20 million.

After opening 20 to 25 KRR restaurants in Jakarta, BFood will also look at other places in Indonesia, Lee said.

Within the next five years, he expects a total of 60 to 70 KRR restaurants to be in Indonesia.

Lee said Indonesia will be the company’s focus for the moment but other potential countries will include India, Taiwan, Vietnam and Thailand.

In Malaysia, there are currently 68 KRR restaurants — 55 BFood-owned and 13 franchised restaurants. BFood plans to open another 15 KRR restaurants in FY12, Lee said.

While BFood’s focus will be mostly in Southeast Asia for the moment, BCorp will be the vehicle for the KRR franchise venture in China.

In April, Lee had set up a team in Shenzhen, China, and said BCorp would open its first KRR restaurant there in the first week of November.

The restaurant will be located in Shenzhen Link City Underground Shopping Mall in Futian district. The unique underground mall is linked to an underground mass rapid transit, he said.

“It’s on the border of Kowloon and China, so there is a lot of traffic and people passing through,” he said.

Lee said BCorp has set up five stores in China and is under negotiation to open another 20.

BFood may inject other food and beverage (F&B) brands held under BGroup such as Papa John’s Pizza, Wendy’s Restaurants and Krispy Kreme Doughnuts.

“When the other franchises [under BGroup] are ready [in terms of earnings] there may be a possibility of injecting them into BFood,” he said.

“The idea is to hold BFood as the preferred route to hold all of our group’s F&B businesses,” he added.

Lee said BFood will look to buy other F&B businesses at low PERs to add value to the company. “BFood’s growth can be organic and also through external acquisitions,” he said.

To ensure a high success rate for its KRR operations, Lee said BCorp consults focus groups.

Based on the focus groups’ findings, Lee said they will tweak the KRR menu to better suit the food taste of different countries. For instance, people in China prefer a slightly sweeter sauce, whereas in Indonesia, a slightly saltier or spicier sauce is preferred.

However, KRR restaurants worldwide will maintain their signature products and sauces, he said.

KRR has redesigned its restaurants to create a modern and contemporary ambience, Lee said.

The KRR logo has been changed, too. The face of Kenny Rogers, country musician and co-founder of KRR, has been replaced with a flame and the new overall logo has more aggressive colours, Lee said.

“The younger generation does not know who Kenny Rogers is,” he explained.

Lee said BFood has streamlined the KRR menu to increased gross profit margins. He added that the average spending in Malaysian KRR restaurants is about RM45.

KRR’s competitors are table service restaurants in the mid-casual segment such as Pizza Hut, which has a similar ambience to KRR restaurants, he said. He clarified that KRR is not a fast food business.

To ensure KRR’s quality is maintained while the business is expanding, Lee said an important criteria is to keep recruiting and training employees.

Not known to many, Lee said KRR and Berjaya Starbucks have a mobile restaurant capable of serving up to 200 guests.

“If you can have the Starbucks and KRR van together at an event, it will be a unique experience,” said Lee, who holds such an event at his home once a year.

Financially, BFood has a sound balance sheet with cash reserves of RM31.29 million with no borrowings as at end-July.

Lee said the cash reserves will be used to open more stores and pay dividends.

BFood paid its first interim dividend of three sen in FY11 amounting to RM4.26 million, which translates into a payout ratio of 41.8%.

Based on its closing price last Friday at 84 sen, BFood has a dividend yield of 3.6%.

Since its maiden trading day on March 8, BFood’s share price has climbed 65% to 84 sen from its issue price of 51 sen.

According to Bloomberg data, BFood has a PER of 11.65 and market capitalisation of RM119 million. As a comparison, KFC Holdings (M) Bhd has a PER of 16.43 and market capitalisation of RM2.62 billion, while QSR Brands Bhd has a PER of 13.36 and market capitalisation of RM1.62 billion.

The other F&B stock listed this year, Oldtown Bhd, has a PER of 7.74 and market capitalisation of RM303.6 million.

Lee said BFood’s market capitalisation of RM119 million gives it much potential to grow compared with KFCH and QSR.

Affin Holdings Bhd

Affin Holdings looks very attractive to me at current valuation.

Price = RM2.46

PE = 7.6

NTA = RM3.48

Not so crazy about their ROE and customer loan breakdown. Though we are expecting a slower growth of loan in next few quarter due to gloomy outlook in global and domestic market but i think their share has been over punished to a unreasonable valuation. Trading buy?

MBSB transformation yields stronger results

Malaysian Building Society Bhd
(Sept 19, RM1.38)
Initiating coverage at RM1.43 with buy call and target price of RM1.84: MBSB’s change in business direction has resulted in a turnaround in performance. Compound annual growth
rate (CAGR) for net net profit from FY08 to FY10 was 61.4%. The strong growth in personal loan financing extended to government servants as opposed to its past focus on property development financing made the difference.

MBSB’s loan portfolio comprises a mix of personal, mortgage and corporate loans representing 40%, 34% and 25% as at 2QFY11. Loans grew strongly at a CAGR of 16.3% over
FY08 to FY10. Key driver was personal loan financing for government servants. Growth of mortgage loans is expected to be flat for FY11 as the group is in the process of
restructuring its mortgage loan portfolio.

Loan to deposit (LD) ratio as at 2QFY11 stood at 109%. It improved compared with 254.35% in 1999. Since the Ministry of Finance’s approval in 2004, fixed deposits of government and statutory bodies are allowed be placed with MBSB. Year-to-date, customer deposits have grown 150%. MBSB has been securitising receivables (selling mortgage loans to Cagamas Bhd) to raise funds. It is in the progress of issuing sukuk securities to support the growth of its loan book.

Both impaired loan ratios (gross and net) gradually declined. For 2QFY11, gross impaired and net impaired loan ratio stood at 12.2% and 26.3% against FY08 of 48.3% and 23.2%.

With stronger risk management in place and a focus on growing personal loan financing which has a low impairment risk, we expect asset quality to improve further and are projecting a gross impaired loan ratio of 25% for FY11.

Cost-to-income came off a high of 46.3% in 2008 to 18.3% in 2QFY11, lower than the average CTI of 47% in 2QCY11 for banking stocks under our coverage. The improvement was mainly due to stronger growth in Islamic banking income over the past two years.

We believe CTI will not rise substantially as overheads, in particular personnel cost, will be kept low. Expansion of its retail and corporate loans will be done through strategic tie-ups with agents instead of recruitment of additional personnel with its limited branches. We project a CTI of 20% and 22% for FY11 and FY12.

We initiate coverage with a “buy” at a target price of RM1.84. Valuation is undemanding with price-earnings ratio of 8 times (one standard deviation below five-year historical
average PER) on a forecast earnings per share of 23 sen for FY12. Our fair value for the stock at RM1.84 equates to 1.8 times our forecast book value for FY12. — MIDF Research,
Sept 19

Sime to benefit from Caterpillar-Bucyrus deal - Agree

AGREE!

The gain will come from better sales of equipment and parts, lower production cost and improved service

Kuala Lumpur: Sime Darby Bhd, the exclusive distributor for Caterpillar Inc is expected to benefit from Caterpillar's US$8.8 billion (RM27.28 billion) purchase of Bucyrus International Inc.

The gain will come from better sales of equipment and parts, lower production cost and improved service.

Sime Darby executive vice president industrial division Scott William Cameron said there will be a good spillover effect on Sime Darby, especially for its Hasting Deerings operations in Australia.

"With the acquisition of Bucyrus, it will give a positive impact towards Sime Darby especially in Australia and China.

The benefits include higher sales of new equipment and aftermarket parts and support, lower product cost and greater reliability, driven by the use of Caterpillar engines and components in Bucyrus products," Cameron said in an e-mail interview.

He said Sime will benefit from an improved service and lower owning and operating costs, propelled by Caterpillar's global manufacturing, supply chain and purchasing capabilities.

US-based Caterpillar, which is one of the world's leading makers of heavy equipment, completed its Bucyrus purchase last July. Bucyrus produces huge machines and equipment for the mining sector.

New York Stock Exchange-listed Caterpillar said with the deal, it has created a mining equipment group with unmatched product range.

Caterpillar is one of the world's leading manufacturers of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.

Sime Darby, which is one of Malaysia's largest conglomerates, has six business divisions, namely plantations, property, energy and utilities, industrial, healthcare and automotive.

Sime Darby Industrial Division is the world's fifth largest Caterpillar dealer. It has been distributing Caterpillar products for the past 80 years.

Sime's industrial division registered its highest ever operating profit of RM1.1 billion for the financial year ended June 2011.

The 41 per cent increase over the previous financial year was due to strong sales in Australia/Pacific Islands, China and Malaysia, as well as better price realisations across all regions.