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Don’t we all adore Netflix? For a small monthly fee, I get to ‘Netflix and chill’, watch episode after episode of Stranger Things until I start to grow roots. Just for that moment, I become the most resilient plant in the house, going hours on end without food, drink, or sunlight.

Once, as I emerged from my cave looking like a scruffy hobo after another Netflix binge, I thought to myself: ‘Is Netflix as alluring of an investment as their TV blockbusters?’

Well, let’s have a look at the company together.

The trailblazer

Netflix was founded in 1997. The company started as an online DVD rental service, mailing your favourite selection of movies right to your doorstep. It was a revolutionary idea, considering its competitors at that time — Blockbuster and Redbox — were renting DVDs through stores or vending machines spread around the country.

In 2007, Netflix disrupted its own industry with the introduction of OTT video streaming. An online platform for you to catch all your favourite movies and TV shows all in one place. People loved it. As a result, Netflix’s revenue soared from US$1.2 billion in 2007 to US$15.8 billion in 2018:

Source: Netflix

The number of subscribers grew exponentially, doubling every 2.37 years, from 7.5 million in 2007 to 139.3 million in 2018 – larger than the population of Mexico:

Source: Netflix

Compared to its revenue, Netflix’s pre-tax earnings are more volatile due to fluctuations in operating cost and interest expense. However, it’s still impressive nonetheless, growing at a annualised rate of 24% from US$110.9 million in 2007 to US$1.2 billion in 2018:

Source: Netflix

In turn, Netflix’s stock price skyrocketed from around US$3.00 in January 2007 to US$316.75 today (as of 17 July 2019). That’s a hundred-bagger return! Which means a US$10,000 investment in Netflix then would have turned you into an ‘instant’ millionaire:

Chart: YCharts

However, just focusing on the Netflix’s performance metrics such as profit and subscriber growth right now could get you into trouble. These numbers alone do not tell you the full story of what potentially lies ahead for the company.

It’s getting crowded in here…

While Netflix is hailed as the catalyst that singlehandedly launched the OTT industry into the mainstream, the business landscape is quickly changing.

Right now, 63% of Netflix’s video library is made up of third-party licensed content that Netflix subscribers spend almost three-quarters of their time watching. But some of this content is moving away from Netflix as Disney, Amazon, HBO, CBS, NBC, and many others have already started or are aiming to launch their own OTT services. And they plan take their content along with them. The pending licence expiry of shows like The Office and Friends — the two most popular titles on Netflix in 2018 respectively — is going to leave a hole for Netflix to fill.

The exodus of ‘anchor shows’ has spurred Netflix to spend more on original productions – Stranger Things, The Crown, Daredevil, and Narcos – which require a lot of upfront capital expenditure. This has caused Netflix’s overall content spending to accelerate over the past four years, from US$3.8 billion in 2014 to US$13.0 billion in 2018:

Source: Netflix

The average cost of production per episode has doubled to US$8 million as television studios spend heavily on exotic filming locations, special effects, and top-of-the-line cast. Inclusive of marketing, an entire season could easily cost more than US$150 million – roughly the cost of putting a box office hit like Spider-man: Far From Home in theatres. The quest to hunt for the next Game of Thrones is a costly affair.

As a result, the company’s operating cash flow has plunged into negative territory over the past four years:

Source: Netflix

More worryingly, this cash burn is funded through borrowings — Netflix’s total long-term debt has ballooned from US$885.8 million in 2014 to US$10.4 billion in 2018:

Source: Netflix

And this spending is not going to slow down anytime soon. As at 31 December 2018, Netflix has total streaming content obligations of US$19.3 billion. This includes non-cancellable obligations for the production of original content and agreements to license future third-party content:

Source: Netflix 2018 annual report

Of this amount, US$8.4 billion is currently reflected on the balance sheet as liabilities and the remaining US$10.8 billion is kept off the books. Once a show becomes available, the obligation is then moved onto the balance sheet as a content liability which is then amortised accordingly. (Notice also that although Netflix’s total debt is US$10.3 billion, its total debt obligations including interest is US$14.9 billion.)

As you can see from the table above, Netflix has over US$17.4 billion in streaming content obligations due in the next three years alone. To fund its content obligations, Netflix is once again raising another US$2 billion in debt, which would bring its total debt to over US$12 billion.

Netflix argues that, given the low interest rates, financing growth through the debt market is currently more efficient than issuing equity. But the chickens will have to come home to roost one day. The only way Netflix can afford to keep this going is to continue growing its subscriber base and raise subscriptions fees until revenue growth tips the scale, so the company can eventually pay down its debt. However, if subscriber growth starts to slow or decline drastically, then Netflix could collapse like a House of Cards.

And that future may not be that far away. The OTT space is becoming increasingly crowded with different platforms battling it out over price and content exclusivity. And we, the subscribers, will have to make a hard decision on which shows we really want to watch. Because if you want to view…

Catching all your favourite shows could mean subscribing to 4-5 different OTT providers and paying more than US$50-70 a month, about the price of cable television right now — the total opposite of why we signed up for Netflix in the first place.

Consumers would soon suffer from subscription fatigue and could decide to turn to less-than-legal sources to catch their favourite shows. Traffic on file-sharing websites is on the rise again after many years of decline as the mounting costs of keeping up with exclusive content drives consumers toward piracy.

The fifth perspective

Netflix is caught in a very difficult position. On one end, subscribers will start to question its value proposition — whether Netflix is able to produce enough quality original content to replace the loss of popular licensed third-party titles over the next few years. On the other end, Netflix is unable to raise its subscription fees when deep-pocketed competitors like Disney are charging half the price for its stellar library of content.

As much as I enjoy Netflix as a consumer, as an investor it’s probably better to watch from the sidelines and see how this story plays out. The OTT wars have just begun with no endgame in sight. Time to grab some popcorn.

The post Why Netflix scares me as an investor, even though I’m a loyal paying customer appeared first on The Fifth Person.

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Incorporated in 1996 and listed on the Main Board of Bursa Malaysia in 2007, Aeon Credit Service (M) Berhad provides consumer financing through easy payment and hire purchase schemes for consumer durables and motor vehicles as well as personal financing and credit cards in Malaysia. The company currently has a network of more than 12,000 participating merchant outlets nationwide and more than 4.6 million card members for various products.

Aeon Credit is a subsidiary of Aeon Financial Service Co., Ltd., Japan, which is in turn part of the Aeon Group of companies, a global retail and financial services group that operates in Japan, Southeast Asia, China and India.

Aeon Credit has enjoyed steady growth in revenue and profit over the years. An investor who bought the stock at the IPO price of RM2.50 in 2007 would have made over a 500% gain by the end of 2018, excluding dividends, representing a compounded annual growth rate (CAGR) of 17.9%. I attended Aeon Credit’s AGM to find out more about the company.

Here are 11 things I learned from the Aeon Credit AGM:

1. Revenue grew 10.6% year-on-year to an all-time high of RM1.4 billion for the financial year ended 28 February 2019 (FY2019). This was attributed to increased contributions from the vehicle easy payment and personal financing segments.

2. Net profit grew 18.2% year-on-year to RM354.6 million in FY2019. Chairman Ng Eng Kiat attributed the growth to the higher financing receivables achieved across all segments, from personal financing (+26.8% YoY) to auto financing (+24.1% YoY).

3. Total transaction and financing volume improved 31.8% year-on-year to RM5.4 billion in FY2019, mainly driven by personal financing (+56.0% YoY), motorcycle financing (+41.1% YoY) and credit card (+27.6% YoY). Ongoing marketing campaigns together with product innovation, promotion strategies, and quality customer service helped drive the growth.

Source: Aeon Credit Service

4. Receivables collection ratios remained stable in FY2019, which management attributed to better quality receivables and its strategic collection operation. Non-performing loan ratio in 4Q 2019 was lower at 2.04% (4Q 2018: 2.33%), thanks to improvement in delinquent receivables collection. Net credit cost was lower at 2.16% in 4Q 2019 (4Q 2018: 3.27%), supported by better quality receivables and higher bad debt recovery. CFO Lee Kit Seong revealed that AEON Credit enjoys financing with lower interest rates due to support from its Japanese parent company.

Source: Aeon Credit Service

5. AEON Credit launched its e-money card AEON Member Plus Visa Card and e-wallet application AEON Wallet in November 2018 to provide AEON customers with cashless solutions (via QR code) at all AEON retail outlets. As of May 2019, its e-money card has registered over 700,000 cardholders, while its e-wallet app has over 200,000 downloads. Management targets to achieve 1.6 million cardholders and 1.0 million e-wallet users by FY2020. Lee said the move was in line with the direction set by Bank Negara Malaysia for Malaysia to go cashless. AEON Credit also plans to introduce its Corporate Card in FY2020 to capture more corporate customers by introducing its new credit settlement method.

6. Management said that as of end FY2019, AEON Credit’s customer income group ratio of B40:M40 was 70:30. The percentage of M40 customers increased in FY2019, and management targets to continue this expansion to 60:40 in FY2020, mainly to achieve better asset quality. Efforts to further penetrate this customer group include the introduction of its platinum card and risk-based pricing products, which were launched in FY2019.

7. Aeon Credit is transitioning from a business-to-business-to-consumer (B2B2C) model to a business-to-consumer-to-business (B2C2B) model in order to improve its customer touchpoints. The company is developing a new system and mobile application which could enable a more direct point of communication, as customers are able to check their financing limits before they purchase goods at Aeon’s merchants.

8. In January 2019, the Housing and Local Government Ministry granted Aeon Credit a money lending licence. Chief strategy officer Ajith Jayaram said that the approval would enable the company to market its products and services to a greater number of customers as well as expand its consumer financial products. A shareholder questioned the purpose of the licence as AEON Credit was already in the business of lending and voiced his concerned that having the licence would impose stricter requirements for future loans for its existing businesses. Ng assured that the licence would not have an impact on the company’s financials, while Lee added that Aeon Credit will also utilize the licence to expand the small and medium-sized enterprises (SME) financing business.

9. In December 2017, Aeon Credit was slapped with a RM96.8 million bill by the Inland Revenue Board for additional income taxes with penalties for alleged submission of incorrect returns for the years of assessment of 2010 to 2016. The company subsequently filed for an appeal. A shareholder asked about the progress of the issue and Ng replied that, after consultation with tax professionals, the management has reasonable grounds to believe that the company is not liable for the penalties, and have applied to the Court of Appeal to get a stay against the High Court’s decision in May 2019.

10. The Minority Shareholder Watch Group (MSWG) raised some questions about Aeon Credit’s credit card business. Management revealed its targets to maintain double-digit growth for credit cards in circulation annually. Lee explained that the credit card business complements the company’s existing business segments by offering a settlement option, and performance is currently within management’s expectations. The CFO further said that management will continue to expand the card business into the affluent T20 and M40 customer income groups, and SME segment with the newly launched platinum credit card. He revealed that Aeon Credit had issued 20,000 Platinum Cards since its launch in April 2018 and continues to see improvement in card issuance.

11. Looking forward, Aeon Credit will focus on strengthening customer loyalty and exploring new IT Infrastructure and fintech solutions. The introduction of new loyalty programs, benefits and, the e-wallet, and platinum card is expected to reach a wider group of consumers and improve customer engagement. In an answer to MSWG’s query, management revealed that part of the company’s investment budget of RM150 million for FY2018 to FY2020 are for investments in digital technology.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

The post 11 things I learned from the 2019 Aeon Credit Service AGM appeared first on The Fifth Person.

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Fortune REIT is a dual-listed REIT that trades on the Stock Exchange of Hong Kong and Singapore Exchange. The REIT currently owns a portfolio of 16 retail properties located in Hong Kong worth HK$42.0 billion. \

I received a copy of Fortune REIT’s latest annual report and I’ll be giving an update on Fortune REIT’s latest financial results, long-term performance, and valuation. Here are 12 things to know about Fortune REIT before you invest:

1. Fortune REIT’s portfolio value has grown at a compounded annual growth rate (CAGR) of 15.5% over the past 10 years. It has grown from a portfolio of 14 properties worth HK$11.5 billion in 2009 to 16 properties valued at HK$42.0 billion as at 31 December 2018. This is due to capital appreciation of its existing properties and the acquisition of new properties such as Belvedere Square, Fortune Kingswood, and Laguna Plaza during the period.

Source: Fortune REIT annual reports

The five biggest properties contributed 69.6% of Fortune REIT’s net property income (NPI) in 2018:

PropertyNPI (HK$ millions)Percentage of Total NPI
Fortune City One271.818.6%
Fortune Kingswood271.318.5%
Ma On Shan Plaza231.515.8%
Metro Town134.39.2%
Belvedere Square109.77.5%
Fortune REIT’s 11 Other Properties445.730.4%

Source: Fortune REIT annual reports

2. Fortune City One is one of three flagship malls owned by Fortune REIT. As at 31 December 2018, it is valued at HK$8.8 billion and has a 99.3% occupancy rate. The mall’s NPI has grown at a CAGR of 4.9% over the last 10 years, from HK$177.0 million in 2009 to HK$271.8 million in 2018.

Source: Fortune REIT annual reports

3. Fortune Kingswood is another flagship mall owned by Fortune REIT. As at 31 December 2018, it is worth HK$8.3 billion and has an 88.4% occupancy rate, a fall from 95.8% in 2017. This was mainly due to asset enhancement initiatives (AEI) which commenced in June 2018. The mall’s NPI of HK$271.3 million 2018 was its first dip in five years.

Source: Fortune REIT annual reports

4. Ma On Shan Plaza is valued at HK$6.1 billion and has a 92.2% occupancy rate as at 31 December 2018. The mall’s NPI has grown at a CAGR of 7.9% over the last 10 years, from HK$117.1 million in 2009 to HK$231.5 million in 2018.

Source: Fortune REIT annual reports

5. Metro Town is worth HK$3.9 billion and has a 99.2% occupancy rate as at 31 December 2018. The mall’s NPI has grown at a CAGR of 7.8% over the last 10 years, from HK$73.4 million in 2010 to HK$134.3 million in 2018.

Source: Fortune REIT annual reports

6. Belvedere Square is valued at HK$2.7 billion and has an occupancy rate of 99.8% as at 31 December 2018. Its NPI has grown at a CAGR of 13.7% over the last six years, from HK$50.8 million in 2012 to HK$109.7 million in 2018.

Source: Fortune REIT annual reports

7. Overall, Fortune REIT’s revenue and distributable income have at a CAGR of 12.0% and 12.6% respectively over the last 10 years. This was achieved by positive rental reversions and the acquisition of new properties during the period. As at 31 December 2018, Fortune REIT has an overall portfolio occupancy rate of 93.1%. The REIT has close to 1,300 leases and its top 10 tenants account for 27.7% of gross rental income.

Source: Fortune REIT annual reports Source: Fortune REIT annual reports

8. Net asset value (NAV) per unit has increased from HK$5.32 in 2009 to HK$16.61 in 2018 – a CAGR of 13.5%. Gearing ratio lowered from 27.4% in 2017 to 20.9% in 2018 and Fortune REIT has no refinancing needs until 2020. Fifty-seven percent of its debt has been hedged at fixed interest rates and average cost of debt is 2.89% per annum. Fortune REIT has a debt headroom of HK$18.7 billion which it can use to invest in new properties or AEIs to raise the value of a property.

9. In June 2018, Fortune REIT commenced AEI at the West Block of Fortune Kingswood. Costing a total of HK$150 million, the mall aims to introduce more F&B and retail offerings upon its completion at end-2019. A revitalisation plan to add new lifestyle & entertainment elements at the East Block is also being planned and will come next.

10. Fortune REIT’s entire property portfolio is centred in Hong Kong where land tenures are set to expire on 30 June 2047. The exceptions are Metro Town and Hampton Loft where their land tenures will expire on 10 February 2053 and 12 December 2049 respectively instead. It remains to be seen whether the Chinese government will extend the land leases in Hong Kong.

11. PB ratio: As at 31 December 2018, Fortune REIT has a NAV per unit of HK$16.61. Based on its unit price of HK$10.78 (as at 16 July 2019), its current P/B ratio is 0.65, which is marginally above its 10-year average of 0.62.

12. Distribution yield: Fortune REIT has paid a growing distribution per unit over the last 10 years, from 30.2 Hong Kong cents in 2009 to 51.3 Hong Kong cents in 2018.

Source: Fortune REIT annual reports

If the REIT maintains its distribution, its current yield is 4.75% per year, the lowest in 10 years.

The fifth perspective

Fortune REIT has delivered steady growth in revenue, NPI, and distributions over the last 10 years. Looking at its current P/B, it may seem that the REIT is undervalued as it is trading at only 0.66 times its book value. However, looking at Fortune REIT’s historical P/B will tell you that it persistently trades below book and a P/B below 1.0 should not be construed as a discount.

It may be more useful to compare Fortune’s current yield with its historical averages. At a 4.75% yield currently, which is a 10-year low, the REIT looks expensive right now.

The post 12 things to know about Fortune REIT before you invest (updated 2019) appeared first on The Fifth Person.

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Listed in 2007, Aeon Credit Service (M) Berhad offers a diverse range of financing services for the purchase of motor vehicles and consumer durables in Malaysia. Presently, it operates out of six regional offices and has a network of 71 branches and service centres in shopping malls across Malaysia. As at 15 July 2019, Aeon Credit is worth RM4.2 billion in market capitalisation.

In this article, I’ll bring an update on the company’s latest financial results, long-term performance, and valuation. So here are 12 things to know about Aeon Credit before you invest:

1. For the financial year ended 28 Feb 2019, Aeon Credit had gross financial receivables of RM8.7 billion. This comprised mainly of automobile financing, motorcycle financing, and personal financing:

SegmentAmount (RM millions)Percentage of Total
Motorcycle Financing 2,56829.5%
Automobile Financing2,50928.9%
Personal Financing2,44928.2%
Credit Card7628.8%
Objective Financing3393.9%
SME Financing650.7%
Total8,692100.0%

Source: Aeon Credit Q4 2019 results

Inclusive of impairment losses, Aeon Credit’s total financing receivables amounts to RM8.1 billion. This amount has grown at a compound annual growth rate (CAGR) of 25.0% from RM873 million in FY2009. This is mainly attributable to growth from its key segments: automobile, motorcycle, and personal financing over the last 10 years.

Source: Aeon Credit annual reports

2. Aeon Credit’s non-performing loans rose sharply from 1.73% in 2013 to 2.64% in 2015. This was due to the company relaxing its lending policies to capture more market share during the period. Since then, Aeon Credit has tightened its policies and its NPL ratio has steadily dropped to 2.04% in 2019.

Source: Aeon Credit annual reports

3. Aeon Credit had a stable collection ratio of 97.97% in 2019. For receivables past due 1 month and past due 2-3 months, the collection ratio was 82.58%, and 71.24% respectively. The collection ratios are fairly consistent compared to the levels recorded over the past three years.

Source: Aeon Credit Q4 2019 results

4. Over the last 10 years, Aeon Credit has achieved a 22.0% CAGR in both revenue and shareholders’ earnings. This was mainly due to steady growth in interest income and fees received from provision of automobile, motorcycle, and personal financing during the period.

Source: Aeon Credit annual reports

5. From 2012 to 2017, Aeon Credit had a six-year return on equity (ROE) average of 30.0%. In 2018, the company substantially enlarged its equity base due to a rights issue of 432 million irredeemable convertible unsecured loan stocks, which caused its ROE to fall to 19.0%. In 2019, Aeon Credit’s ROE rebounded to 23.7% as the company continued to grow its profits.

6. As of 28 February 2019, Aeon Credit had a debt-to-equity ratio of 3.38, an increase from 2018 but substantially lower compared to levels recorded from 2013 to 2017. The ratio fell significantly in 2018 due to the aforementioned rights issue.

Aeon Credit also has a healthy total capital ratio (TCR) of 22.4%. In comparison, Malaysian banks have an average TCR of 17.46%.

Source: Aeon Credit annual reports

7. Aeon Credit aims to increase its pool of borrowers in the Middle-40 (M40) income group. The M40 group refers to a target group where median household incomes range from RM3,860 to RM8,319 a month, and are considered higher-quality borrowers than the B40 group of customers. The company’s focus on the M40 group has allowed it to bring down its NPL ratio since 2015. Moving on, Aeon Credit plans to offer customised products such as platinum cards, risk-based pricing products, and the AEON E-wallet to this group of customers.

Source: Aeon Credit Q4 2019 results

8. In November 2018, Aeon Credit successfully launched AEON E-wallet. It can be used by all Aeon members to perform cashless transactions at all Aeon retail outlets across Malaysia. As of 28 February 2019, Aeon Credit has over 150,000 e-wallet users and aims to reach one million users in FY2020.

Source: Aeon Credit Q4 2019 results

9. Aeon Credit was granted a money-lending license by the Malaysian Government which is valid for two years starting 15 January 2019. Money-lending complements Aeon Credit’s existing financing business and will open up a new revenue stream as it allows the company to market its services to wider pool of customers.

10. P/E ratio: Aeon Credit reported earnings per share of RM1.336 in FY2019. Based on its share price of RM16.70 (as at 15 July 2019), Aeon Credit’s P/E ratio is 12.5, above its 10-year average of 10.97.

While its P/E ratio may look to be on the high side, the company has been growing its earnings at 22.0% on average over the last 10 years. This means Aeon Credit’s PEG ratio is currently 0.57 which is considered unvalued when you take into account the company’s growth rate. However, it may be more conservative to use Aeon Credit’s more recent growth rates as a company’s growth usually slows as it becomes larger. From 2016 to 2019, Aeon Credit’s earnings CAGR was 15.9% — which gives us a more conservative PEG ratio of 0.78.

11. P/B ratio: As of 28 February 2019, Aeon Credit has net assets per share of RM5.87. Hence, it has a current P/B ratio of 2.84, which is below its 10-year average of 2.95.

12. Dividend yield: Aeon Credit has a track record of paying increasing dividends over the last 10 years. Its adjusted dividend per share has increased from 8.20 sen in 2010 to 44.60 sen in 2019 (adjusted for the rights issue in FY2018).

Source: Aeon Credit annual reports

If Aeon Credit maintains its dividend, its current yield is 2.67% which is below its 10-year average of 3.20%.

The fifth perspective

Aeon Credit has delivered consistent growth in revenues, earnings and dividends over the past 10 years. As such, its share price has risen substantially and its market capitalisation has grown from RM350 million in 2009 to RM4.2 billion today.

The stock currently looks expensive based on historical averages, but if the company is able to sustain its growth rate for a number of years, the stock may be worth its premium today. Whether you believe this growth will pan out or not depends on your independent views and research as an investor.

The post 12 things to know about Aeon Credit Service before you invest appeared first on The Fifth Person.

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Temasek Holdings, an investment fund wholly-owned by the government of Singapore, released its financial results for the year ended 31 March 2019 during Temasek Review 2019. Temasek Review is an annual event in which Temasek executives examine the fund’s performance over the past year and share their thoughts on a host of topics from portfolio allocation to market outlook.

After attending the Temasek Review 2019 media conference, I came away with a much better understanding of Temasek’s portfolio, its investment principles and its outlook for global markets going forward. While Temasek is not a listed company that investors like us can buy into, the company’s future developments are definitely worth following. After all, it manages a significant amount of the Singapore government’s investments, and its success is intertwined closely with that of Singapore’s.

In light of that, here are eight things I learned from Temasek Review 2019:

1. Temasek’s portfolio value grew by 1.49% from S$308 billion in 2018 to S$313 billion in 2019. Over the past ten years, Temasek’s portfolio has grown at a compounded annual growth rate (CAGR) of 9%, adding a total of S$183 billion in value.  

Source: Temasek Review 2019 Presentation Slides

While Temasek’s one-year return of 1.49% was below the MSCI World Index’s return of 8%, it outperformed the MSCI All Asia ex-Japan index’s negative 2% return, and MSCI Singapore Index’s negative 3% return. This reflects Temasek’s increased exposure to the Asian markets, as we will explore in greater detail in the third point.  

2. Temasek maintains a healthy balance sheet, with total debt of S$15.1 billion against S$44.2 billion in cash and short-term investments. Its debt represents only 4.8% of its portfolio value, but more importantly, the firm’s recurring income sufficiently covers its interest payments. Its dividends alone are enough to cover its interest expenses 22 times over, and recurring income from divestments, dividends, interest income and investment income are 96 times of its interest expenses.

3. Asian stocks account for the bulk of Temasek’s portfolio- making up two-thirds of total portfolio value. It has most exposure to companies based in Singapore and China, with the two countries each accounting for 26% of total portfolio value. According to Temasek COO Chia Song Hwee, Temasek has increased its allocation to China over the past few years, in part due to attractive investment opportunities in companies that have access to the large and growing Chinese market. As seen in the table below, Temasek also increased its exposure to the North American and European markets to 25% this year. While Temasek CEO Dilhan Pillay acknowledged that they are ‘relatively underweight in Europe and US’ holdings, exposure to Asia is expected to remain significant going forward since Asia continues to drive global growth.

Source: Temasek Review 2019 Overview

4. Temasek has identified six structural trends that will underpin all future investments. The six trends are: longer lifespans, rising affluence, sustainable living, more connected world, sharing economy, and smarter systems. In his prepared remarks, John Vaske, head of Temasek’s Americas segment, divided the six trends into two main categories — social progress and technology enablers.

Source: Temasek Review 2019 Presentation Slides

Vaske continued by identifying a number of investments that capitalise on these trends. For instance, Temasek’s investment in Pivot Bio, an American biotech developing an alternative to environmentally harmful fertilisers, capitalises on the ‘sustainable living’ theme.

5. Global growth remains weak, and Temasek remains cautious in the face of elevated recession risk. In her prepared remarks, Senior Managing Director Png Chin Yee shared that Temasek expects global growth to remain weak going forward due to trade tensions and disruptive technologies. As a result, global interest rates will likely remain low as policymakers attempt to spur investment and economic growth. For instance, the U.S. Federal Reserve recently signaled its willingness to cut rates if economic uncertainties persist. While low interest rates generally stimulate economic growth, global interest rates are already low as they are, limiting the effectiveness of future rate cuts. This elevates recession risk in the medium term, giving Temasek reason for caution. However, Png noted that the firm remains ‘open and alert to investment opportunities in strong, resilient companies’.

6. Temasek is relatively insulated from the negative impacts of U.S.-China trade tensions despite its exposure to both markets. Most of Temasek’s current investments in the U.S. and China are centered on domestic themes. For instance, its largest Chinese investments, which include the likes of Alibaba Group Holdings, Ping An Insurance and China Construction Bank, are in the consumer and financial industries. These industries are not as reliant on trade and capitalise on structural trends such as increasing domestic consumer spending. Such structural forces will continue to drive growth even in the face of increased uncertainty. Despite this, the firm is actively evaluating the impact of trade tensions on its existing holdings.

7. The weight of private companies in Temasek’s portfolio has increased substantially over the past ten years. In 2009, private companies and unlisted assets accounted for 28% of Temasek’s portfolio. By 2019, that figure has increased to 42%. The company is largely agnostic to the listing status of potential investments, given that it allocates funds in accordance to its investment principles and the six structural trends it’s identified. The increase in weight was driven by capital market trends and Temasek’s increased allocation to early-stage companies. In general, companies are staying private for longer periods of time due to factors such as market volatility and stringent disclosure requirements. Additionally, Temasek made some investments in early-stage companies to better understand a number of nascent yet potentially disruptive trends. Among other advantages, an understanding of these trends provides clarity on their possible impacts on current portfolio holdings.

8. While Temasek’s investment in Bayer AG is underperforming, management is confident about its future prospects. Shares in pharmaceutical giant Bayer has been battered over the past year amid allegations that its herbicide Roundup causes cancer. Having purchased a 3.6% stake in April 2018 at a price of €96.77 per share, Temasek is now sitting on a paper loss of 39%. Head of Americas John Vaske replied saying that their investment in Bayer was underwritten by a long-term thesis that still remains intact today. It plays to two of the six structural trends that Temasek has identified, namely sustainable living and longer lifespans. In addition, Bayer has largely met the team’s initial assumptions and projections, which gives them confidence. Vaske added that the decline in Bayer’s share prices is a function of the uncertainty surrounding the litigation case. As an investor focused on the long term without immediate capital needs, Temasek is able to look past the uncertainty surrounding the litigation issue and focus on the company’s long-term potential.

Read more: 5 reasons why you shouldn’t buy a stock just because a big-name investor owns it

The post 8 things I learned from Temasek Review 2019 appeared first on The Fifth Person.

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Telekom Malaysia (TM) is a telecommunications company that began as the national telco of Malaysia. 2018 was a challenging year for the company as it faced regulatory pressure to provide broadband services at ‘double the speed, half the price‘.

Amidst declining market capitalisation, it was removed from the FTSE Bursa Malaysia KLCI in December 2018. Will TM continue to be paying a steady dividend to shareholders? I attended its recent annual general meeting to find out.

Here are nine things I learned from the 2019 TM AGM:

1. Revenue lowered by 2.2% year-on-year to RM11.8 billion in 2018. TM was particularly hit by the implementation of Mandatory Standard of Access Pricing (MSAP) in June 2018 that required telecommunications companies to double their broadband speed at half the price. Acting group CEO Imri Mokhtar does not foresee any further price reductions in 2019 which was reinforced by the Minister of Communications and Multimedia in February this year. Over the past five years, revenue has grown at a compound annual growth rate of just 1.3%. The management is expecting a low-to-mid-single-digit decline in its revenue in 2019.

Source: Telekom Malaysia 2018 annual report

2. Net profit nosedived 83.5% year-on-year to RM153.2 million in 2018, a five-year low.If we dig deeper, net profit excluding one-off extraordinary items which comprised impairments and other operating income and expenses will tell a different story. There was a RM982.5 million impairment on TM’s fixed and wireless network assets in 2018 because of challenging business and economic conditions, while RM169 million ringgit was also impaired to incorporate the impact of MSAP. Therefore, net profit excluding one-off items actually increased 0.7% from RM827.7 million in 2017 to RM833.8 million in 2018.

Source: Telekom Malaysia 2018 annual report

3. Dividend payout policy was revised in 2018 and TM will now pay 40-60% of net profit as dividends. Previously, TM would distribute at least RM700 million or up to 90.0% of its net profit as annual dividendto shareholders. As a result, dividend per share dropped to 2.0 sen in 2018 from 21.5 sen the previous year.

4. TM comprises three business segments: unifi, TM ONE, and TM GLOBAL. While TM has primarily been a fixed line business and has not been successful in the mobile business, Imri said he sees an opportunity in the mobile business under unifi and eperienced candidates would be brought in to lead the mobile business. Under the other two segments, TM One provides services to corporate and government agencies, and TM Global provides services to domestic and international telecommunications companies. Chairman Rosli Bin Man also mentioned that TM would address some of the cost factors that made them lose contracts and to participate in tenders more aggressively.

5. The number of unifi customers grew by 15.3% in 2018 while the number of Streamyx customers dropped by 22.5%. More than 266,000 Streamyx customers in unifi areas were upgraded to unifi. Minority Shareholder Watch Group (MSWG) highlighted that the unifi segment recorded a loss of RM618.3 million for the year which the management attributed to the decline in Streamyx customers which outpaced unifi home broadband growth, higher operating costs, and an impairment on network assets in 3Q 2018. TM is looking to improve its customer satisfaction while a number of shareholders also shared about their unpleasant customer experiences with the company at the AGM.

Source: 2019 Telekom Malaysia AGM presentation slides

6. A number of shareholders along with MSWG and Institutional Investors Council Malaysia were concerned about the potential conflict of interest for independent director Gee Siew Yoong who serves on the board of both TM and Tenaga Nasional Berhad which recently embarked on a National Fiberisation and Connectivity Plan. Given the direct competition between the two companies in the broadband space, TM recommended shareholders not to re-elect Gee as a director who would therefore retire at the end of the AGM. Consequently, 90.7% of shares were voted against the re-election of Gee.

7. TM was without a permanent CEO from June 2018. The Ministry of Finance is a special shareholder of TM and indirectly owns a 26.2% stake via Khazanah Nasional Berhad. The chairman said that the ministry agreed to appoint Imri as the permanent group CEO in February 2019, but the Prime Minister’s Office (PMO) subsequently instructed the company to hold back the appointment. A few days after the AGM, TM issued a statement publicly stating: ‘It is good corporate governance to engage key stakeholders including the PMO’. However, the prime minister also serves as the chairman of Khazanah and the conflicting statements raised concerns over political interference. As of 13 June 2019, former Axiata senior executive Datuk Noor Kamarul Anuar Nuruddin was appointed as TM’s new CEO and Imri would resume his position as COO.

8. A shareholder pointed out that TM’s profit before tax was significantly lower in 2018 at RM17.4 million compared to RM1.0 billion in 2017, yet total tax paid in 2018 was only 10% lower at RM271.4 million. The CFO explained that the total tax paid is aggregated at the group level. Subsidiaries that are individual entities still pay taxes. In 2018, no tax credit was offset from the losses incurred from the investment in Webe Digital Sdn Bhd. The subsidiary was acquired in 2014 and rebranded as unifi Mobile that provides mobile telecommunications services.  

9. TM will spend about 18% of its revenue as capital expenditure in 2019, the same proportion as the year before. The capex will be spent on investments for broadband access and data, mobile services, and digital solutions and services for customers. A shareholder wondered if the company would sell off some of its properties to obtain better cash flow. Imri replied that they would only sell assets that are no longer strategic to the business.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

The post 9 things I learned from the 2019 Telekom Malaysia AGM appeared first on The Fifth Person.

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Listed in 2011, Sheng Siong Group Limited is the owner and operator of one of the largest supermarket chains in Singapore. As of 7 July 2019, Sheng Siong is worth S$1.65 billion in market capitalisation. In this article, I’ll give a review of its latest results, long-term financial performance, and valuation ratios.

Here are 12 things to know about Sheng Siong before you invest.

1. Group revenue has grown at a compound annual growth rate (CAGR) of 6.4% over the last eight years, from S$578.4 million in 2011 to S$890.9 million in 2018.

Source: Sheng Siong Group annual reports

Sales growth has come mainly from the opening of new stores, while same-store sales growth has remained positive every year since 2012, except for 2013. As at 31 December 2018, Sheng Siong has 54 stores in Singapore — an addition of ten brand-new stores from a store count of 44 in 2017. Total retail area increased to 496,200 square feet in 2018 from 404,000 square feet in 2017.

Source: Sheng Siong Group Q4 2018 results Source: Sheng Siong Group Q4 2018 results

2. Shareholders’ earnings has grown at a CAGR of 14.6% over the last eight years, from S$27.3 million in 2011 to S$70.8 million in 2018. Earnings growth outpaced revenue growth as Sheng Siong incurred lower cost of goods sold as a result of better buying prices, higher rebates given by suppliers for special promotions and volume discounts, and improvements in its product mix.

Source: Sheng Siong Group annual reports

3. Sheng Siong has an eight-year return on equity average of 23.78%. Since 2012, Sheng Siong has maintained an ROE of above 20.0%. As at 31 December 2018, Sheng Siong has no borrowings and S$290.2 million in shareholders’ equity. It has a total of S$170.1 million in current assets and S$141.1 million in current liabilities, which gives it a current ratio of 1.21.

Source: Sheng Siong Group annual reports

4. From 2011 to 2018, Sheng Siong generated S$497.8 million in cash flows from operations and raised S$157.1 million in equity from its IPO in 2011 and a private placement in 2014. Out of which, it has spent:

  • S$293.4 million in net capital expenditures
  • S$22.3 million in net repayment of long-term borrowings
  • S$326.2 million in dividend payments to shareholders
Source: Sheng Siong Group annual reports

Sheng Siong is a cash-producing business and doesn’t need to continually raise equity or debt to expand its operations and reward shareholders with dividend payments.

5. As of 15 March 2019, Sheng Siong’s major shareholders and their direct shareholdings are as follows:

ShareholderDirect Shareholding (%)
Sheng Siong Holdings Pte Ltd29.85%
Lim Hock Eng9.14%
Lim Hock Chee9.14%
Lim Hock Leng9.14%

The Lim family remains influential as they hold stakes in Sheng Siong directly and indirectly through Sheng Siong Holdings Pte Ltd. They also occupy four out of 10 seats at the board of directors and hold the following key leadership positions:

  • Lim Hock Eng, executive chairman
  • Lim Hock Chee, CEO
  • Lim Hock Leng, managing director
  • Lin RuiWen (daughter of Lim Hock Eng), executive director

6. In 2015, Sheng Siong rolled out its ‘Hybrid Self-Checkout System. The system which allows customers to can scan, pack and pay for their own items is now in 47 stores and the company is aiming for full implementation by 1H 2019. The system has reduced customer checkout waiting time by more than 30 seconds on average and allowed cashiers to take on roles that enlarge the scope of their responsibilities and skill sets. Sheng Siong is also planning to launch Nets QR code by 1H 2019 which would provide an additional cashless payment option for customers.

7. In 2016, Sheng Siong leased a piece of land measuring 1,800 square metres at 6 Mandai Link located adjacent to its existing warehouse. The following year, it commenced the construction of a new extension to the existing warehouse. Upon completion, it would add another 97,000 square feet of warehouse space for Sheng Siong. The completion was initially scheduled for Q1 2019 but has been delayed to Q4 2019.

8. In November 2017, Sheng Siong opened its first supermarket in China in the city of Kunming. The store incurred a loss of S$0.7 million in 2018, of which Sheng Siong’s fair share of loss was S$0.4 million. The amount is relatively small compared to Sheng Siong’s total earnings of S$70.8 million for the year. Sheng Siong still plans to continue expanding in China and has signed a new lease for a second store in Kunming. The management expects to open the store in Q3 2019.

9. In 2018, Sheng Siong launched its first ‘$tm machines‘ in Singapore at its ITE College Central and Block 417 Fernvale Link stores. The machines allow customers to withdraw cash from their bank accounts. The cash in the $tm machines is topped up from supermarket sales and reduces the amount of cash that Sheng Siong needs to physically deposit at the bank daily. Thus, this helps the company to save on some cash handling charges and improves productivity as the cash will be recycled at its outlets. Sheng Siong plans to install these $tm in all of its stores by 1H 2019.

10. P/E ratio: Sheng Siong made 4.71 cents in earnings per share in 2018. Based on its share price of $1.10 (as at 7 July 2019), Sheng Siong’s current P/E ratio is 23.35, which is which is a higher than its average of 21.61 from 2011 to 2018.

11. P/B ratio: As at 31 December 2018, Sheng Siong reported 19.3 cents in net assets per share. Therefore, its current P/B ratio is 5.70 which is higher than its average of 5.23 from 2011 to 2018.

Dividend yield: Sheng Siong has a track record of paying a growing dividend per share (DPS) since its IPO. DPS has increased from 1.77 cents in 2011 to 3.4 cents in 2018.

Source: Sheng Siong Group annual reports

If Sheng Siong maintains its DPS, then its current dividend yield is 3.1% — which is below its long-term average of 3.93%.

The fifth perspective

Overall, Sheng Siong has delivered consistent growth in revenues, earnings, and dividends for shareholders. The company is conservatively run with no debt and S$87.2 million in cash reserves. In terms of valuation, however, the stock is currently trading above its long-term valuation averages, while its yield has fallen to a historical low. An investor may want to wait for a better price before considering Sheng Siong.

The post 12 things to know about Sheng Siong before you invest (updated 2019) appeared first on The Fifth Person.

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Founded in 1669 during the Qing Dynasty in China, Beijing Tong Ren Tang was the exclusive royal  pharmacy for 188 years since 1723, ‘spanning the reign of eight emperors’. With 350 years of history, it is a well-known household name in China.

Beijing Tong Ren Tang Chinese Medicine Company Limited manufactures, wholesales, and retails traditional Chinese medicine (TCM) and healthcare products. It also provides Chinese medical consultation and treatments. It first established operations in Hong Kong in 2004, listed on the Growth Enterprise Market in 2013 before moving to the Main Board of the Stock Exchange of Hong Kong in 2018. The company is present in 21 countries and regions outside Mainland China and owns 81 retail outlets.

Often named as the world’s biggest TCM producer, I am glad to have attended its recent annual general meeting in Hong Kong. Here are eight things I learned from the 2019 Beijing Tong Ren Tang Chinese Medicine Company AGM:

1. Revenue increased 19.6% year-on-year to HK$1.5 billion in 2018, and has grown at a compound annual growth rate (CAGR) of 19.8% over the last six years. Hong Kong, Mainland China, and Macau collectively accounted for 88.4% of 2018 revenue with the rest contributed by overseas regions. The surge in revenue was due to rising demand for the company’s Angong Niuhuang Wan (安宮牛黃丸) and Sporoderm-broken Ganoderma Lucidum Spores Powder Capsules (GLSPC) (破壁灵芝孢子粉胶囊). In line with increased health consciousness among the public and improved marketing initiatives, Chairman Ding Yong Ling acknowledged that the company has been growing steadily and could reach out to more consumers via new marketing initiatives.


Source: Beijing Tong Ren Tang Chinese Medicine Company 2018 annual report

2. Executive Director Lin Man does not foresee any share buybacks in the near future as 71.7% of the company’s shares are already indirectly state-owned and the company would like to maintain/increase the liquidity of its shares. The shares are also available for trade for international and Mainland Chinese investors through Shenzhen-Hong Kong Stock Connect, which would help raise liquidity for the shares. A shareholder pointed out that the company is not covered by many analysts and research brokers. Ding acknowledged that they could reach out to institutional investors more.

3. Ding said that the company would jump on the bandwagon of the Belt and Road Initiative to raise awareness of the benefits of TCM and promote Chinese culture through TCM globally. Beijing Tong Ren Tang has a reasonable global business presence and participated in the recently held Belt and Road Forum for International Cooperation in Beijing in May 2019.

4. Executive Director Zhang Huan Ping shared that the company will focus on the following three areas as part of their growth plans:

  • Accelerate foreign registration of branded products
  • Train more medical practitioners overseas and promote TCM to westerners instead of just overseas Chinese as the awareness of the benefits of TCM is still rather low among westerners.
  • Expand overseas as well as re-evaluate both domestic and foreign resources for future development

In addition, he reassured shareholders that the company will not change because of shuffles in directorships especially in the holding company over the scandal of reusing expired honey.

5. Ding shared that the company is in the midst of developing an enhanced premium Angong Niuhuang Wan with three natural ingredients (三天然). The new product, which is used for stroke, is an upgrade from the existing one that consists of two natural ingredients (双天然), namely natural calculus bovis and musk. The new product that has been approved by the Ministry of Health will be solely distributed by the company. According to Ding, the number of patients who suffer from stroke could hit 30 million in China. Stroke is also one of the leading causes of death in Hong Kong. The directors were careful not to disclose too many product details to shareholders prior to its release.

6. As usual, there were shareholders who requested for a higher dividend at the AGM. Dividend per share increased 21.1% to HK$0.23 in 2018. At the same time, dividend yield stood at 1.9%. The company prefers to keep some money to maintain its cashflow but will aim to pay a higher dividend in the future.

7. A shareholder was concerned about the slowdown in registrations of the company’s products overseas particularly Angong Niuhuang Wan. Ding shared that overseas registrations are tough and time-consuming — the EU took eight years to register one its products — because of non-conventional ingredients. For instance, Angong Niuhuang Wan contains various ingredients of plant and animal origins such as powdered buffalo horn extract. (It doesn’t use rhinoceros horn extract which is strictly prohibited by law.) Revenue is expected to grow once registrations are completed. The company will continue to develop new products based on traditional recipes and protect their intellectual property.

8. Ding alluded that the slowdown in business development was due to bureaucracy. As long as investment in foreign countries is involved, approval needs to be sought from the top. Also, she agreed with one of the shareholders that the company could do more in terms of online-to-offline commerce particularly in mainland China. GLSPC is well-received among cancer patients because of its potential anti-tumour properties. Besides hospitals, she believes the health benefits of GLSPC can be communicated to the public via other channels more innovatively.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

The post 8 things I learned from the 2019 Beijing Tong Ren Tang AGM appeared first on The Fifth Person.

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Most investors in Singapore should be familiar with Jardine Cycle & Carriage and the other Jardine-related companies. When I chat with investors about the Jardine group of companies, many of them will say they are well-managed and shareholder friendly.

The last Jardine C&C annual general meeting I attended was in 2017. At the last AGM, I left with a good impression of the management team and at how well-mannered the meeting was conducted. This year, I decided to attend the Jardine C&C AGM again to learn new updates and insights about the company.

Here are six things I learned from the 2019 Jardine Cycle & Carriage AGM:

1. A shareholder asked about the company’s automotive business in Myanmar which made an underlying loss of US$4.9 million in 2018. Managing director Alexander Newbigging explained that Myanmar only started opening up to the outside world in 2011/12. Before that, the new car market in Myanmar was literally non-existent as no new cars were directly sold in the country. Cars were either secondhand or imported, and the automotive market was largely unstructured. As the country opened up, more structures were set in place to recognise official dealers and original equipment manufacturers. Jardine C&C has managed to secure the distributor rights for Mercedes-Benz and Mazda for Myanmar. The volume is still small in the country, but the business is close to being cash flow positive. The management views Myanmar as a good long-term prospect and the market needs time to grow.

2. In December 2018, subsidiary Cycle & Carriage Bintang announced that it would sell its 49% stake in Mercedes-Benz Malaysia back to Daimler AG for RM66 million. Newbigging said that the call option exercised by Daimler AG has been there for many years. Despite its stake, C&C Bintang did not have any voting rights or management influence in Mercedes-Benz Malaysia; it was just entitled to a fixed annual dividend of RM11.2 million. Newbigging assured shareholders that at the dealership level, there would be no changes in leadership and business is as usual.

3. Jardine C&C subsidiary Astra’s automotive market share in Indonesia declined from 54% to 51% due to the entry of a new competitor. The competitor launched new products in 2018, particularly in the SUV segment, while Astra did not. The management explained that this was due to product life cycles common across the automotive industry, and Astra’s new product life cycle was launched in January 2019. The management feels that a 51% market share is still a very healthy level for the company.

4. A shareholder asked about the rationale behind the company investing a 25.5% stake in Siam City Cement Public Company (SCCC). The management said that cement and building materials is a relevant industry as Thailand develops and becomes more urbanised. SCCC has a 28% market share in Thailand and will benefit as more infrastructure is built in the country. The management also sees that SCCC as a well-managed company and Jardine C&C can help to regionalise SCCC’s business. Although SCCC’s profit has been depressed the past few years due to a weak Thai cement industry, the management is starting to see some green shoots of recovery.

5. Another shareholder asked about the oversupply issue in the cement industry in Thailand. The management explained that Thailand has always had more cement supply than demand over the last 20 years and the excess supply is exported to foreign markets.

6. Jardine C&C currently holds a 10.6% stake in Vinamilk and intends to acquire more. The management said that they normally target to acquire a minimum 20% interest in companies which are strategic investments for Jardine C&C.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

The post 6 things I learned from the 2019 Jardine Cycle & Carriage AGM appeared first on The Fifth Person.

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Brahim’s Holdings Berhad (BHB) provides halal inflight catering to 35 international commercial airlines at Kuala Lumpur International Airport (KLIA), KLIA2, and Penang International Airport. It also operates restaurants and cafes in KLIA and KLIA2 and provides cabin-handling services. On average, it serves 50,000 meals to 200 flights daily.

BHB used to solely be in the warehouse and logistics business until it acquired a 51% stake in LSG Sky Chefs — an in-flight caterer and service operator — in 2008, before acquiring the remaining 49% stake in 2012.

However, in March this year, BHB triggered Practice Note 17 (PN17) status after its shareholders’ equity fell below the 25% threshold, which caused its share price to crash 43.9% in one trading day.

Chart: Google

I was curious to find out how the management planned to turn the company’s situation around. Here are seven things I learned from the 2019 Brahim’s Holdings AGM:

1. Revenue decreased 5.9% year-on-year to RM274.3 million in 2018. Although revenue has grown at a compound annual growth rate (CAGR) of 9.8% from 2008 to 2018, it has fallen by 30.5% since 2013.

Source: BHB annual reports

The deterioration of revenue is largely due to its dependency on its largest customer, Malaysia Airlines Berhad, that has suffered losses since 2011 and was further hit by two air disasters in 2014. The airline underwent a number of reorganisation plans, which led to the suspension of routes and reduction of flight frequency. In the end, fewer passengers for Malaysia Airlines means fewer orders for BHB. The Malaysian government is also in the midst of considering whether to shut, sell, or refinance the airline. In the worst-case scenario, BHB could lose half of its total revenue that’s contributed by Malaysia Airlines alone. According to Chairman Ibrahim bin Haji Ahmad, another 34 airlines contributed to the other half of BHB’s revenue. BHB has a high customer concentration risk although contribution of total revenue from Malaysia Airlines has dropped from 80% previously.

2. BHB would record a net profit of RM8.1 million in 2018 if impairment losses amounting to RM113.9 million in the same year are excluded. Net profit has fluctuated over the past 10 years. Besides falling revenue, operating expenses was one issue brought up by a shareholder at the AGM. On average, 93.6% of total revenue has gone to operating expenses since 2008, which leaves very little room for profit. Operating expenses increased from RM103.2 million in 2008 to RM277.8 million in 2018 — a CAGR of 10.4% which is higher than its 9.8% revenue CAGR growth over the same period. During the AGM, the directors shared that they had no plans to lay off workers. The chairman also attributed the increase in SGA expenses in 2018 to internal restructuring where SATS Limited assigned their staff to assist BHB workers on improving their daily operational efficiencies.

Source: BHB annual reports

3. In the past 11 years, BHB has only distributed a dividend once to shareholders — in 2013 at RM0.25 per share. Since 1999, the amount of capital raised from shareholders is greater than the amount of capital returned to shareholders.

4. PricewaterhouseCoopers, the external auditor of BHB, raised its concern over BHB’s ability to pay its debt. BHB managed to negotiate with financial institutions including OCBC Bank to defer its instalment payable. As of 31 December 2018, BHB’s debt servicing ratio stood at 221.7% and its debt-to-equity ratio stood at 10.2.

5. Since February 2019, BHB has been classified as a Practice Note 17 (PN17) company after its shareholder equity fell below the 25% threshold. The directors do not seem to have a concrete plan to resolve the issue and are possibly looking for a white knight to rescue the company. At the AGM, they mentioned they were open to a reverse takeover even if it might cause a change in business directions. However, the company subsequently announced that it would not significantly change its business direction and is the midst of formulating a self-regularisation plan instead. BHB until February 2020 to do submit its plan to the authorities for approval. The company may also consider hiving off its logistics business that isn’t performing very well.

6. Revenue is not recurring as BHB needs to regularly participate in tenders to secure contracts with customers. BHB’s revenue also largely depends on the tourism sector. In 2018, Malaysia missed its tourist arrivals target for eight consecutive years and the number of tourist arrivals dropped 0.4% year-on-year to 25.8 million.

7. BHB wants to be less dependent on the airline catering business by doubling revenue contribution from its non-airline catering services in the next three to five years. Currently, the non-airline catering services only accounts for 1-2% of total revenue. BHB also wants to maximise its kitchen capacity from 50,000 meals currently to 60,000 meals per day. In January 2018, BHB secured itself as the main catering operator for Keretapi Tanah Melayu Berhad, a rail operator in Peninsular Malaysia, and Universiti Kebangsaan Malaysia, a public university.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

The post 7 things I learned from the 2019 Brahim’s Holdings AGM appeared first on The Fifth Person.

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