Saturday, September 22, 2007

Review Of Uchi Again.

Back in 2005, I wrote some notes on Uchi. I used the investing from a business perspective on Uchi.

  • From a business perspective, that is, if i were to be approached by someone and offered a stake or a partnership in a business, one of the very first thing, I would like to know is how profitable this company is.

The following table highlights what Uchi has done since listing.

Back then in 2005, I wrote the following notes.

  • Over the years, profit margin was increased despite the increase in sales. Look at 1999. Uchi had a net profit margin of 38.7% with a sales turnover of 51.5 million. Fast forward to fy 2004. Uchi sales is now 115.352 million. Sales have doubled since 1999. And the net profit for fy 2004 is now 54.4%. So despite doubling its sales, i would dare say that Uchi had not compromised on its profit margins. Uchi had not taken any shortcut to success. They did not do any sales pumping to achieve these good results. (Yes ... no artificial engineering of sales/profit growth!)

    What kind of business product/services can achieve such result? Doesn't it show that Uchi has a strong competitive product to achieve such result (we are talking about a 6 years track record!)?

    And if Uchi's product was a fly-by-night product... there was no way it could last so long, rite?

    Considering the issue where bees are so attracted where ever there is honey, in business, with Uchi enjoying such grand profitability, one would surely imagine that some competitor would come and challenge Uchi for the honey, rite?

    Again by comparing with the end financial results, we can see that it would appear that with Uchi's profitability remaining so strong, it would suggest that no competitor has managed to break Uchi's stranglehold. Am i wrong to make such assumption?

So was I wrong to make such an assumption? The table above has shown that Uchi performance since fy 2005 has still been as impressive. Uchi earned some 83 million for its fy 2006, which works out to an extremely impressive annual compounded earnings growth (CAGR) of over 23% since its fy 2000, where it only earned some 23 million.

However, I would not get too overly engrossed with numbers. Numbers can be represented in many different ways. Take the simple CAGR issue. If the initial comparison point used was 2003, the CAGR would have been different. Back in fy 2003, Uchi earned some 58 million. Uchi's earnings in fy 2006 was some 83 million. This would work to a CAGR of only some 12.6%!

See the different interpretation?

And yes, some numbers lovers would proclaimed that perhaps Uchi's earnings growth is showing some clear signs of slowing down the recent years.

Is there a right or wrong here?

Not really. For me it's mere interpretation of numbers.

And I still recall this fantastic set of comments made to me from a friend on this growth issue which was mentioned in this blog posting: ROI on Uchi: Part II

  • Altho' earnings growth has peaked and no more returning 12% per annum BUT financials and margins are still great, is there a problem? Wouldnt it come a time when every biz would have to go thru a consolidation cycle? The fact that growth has slowed but if amply compensated by higher revenue translating into better financials, isnt it a stock worth holding?An analogy from a trader's perspective, after a spike in price, a stock usually consolidates at a certain range - this is a price range where an equilibrium of buyers and sellers can agree to trade. Now, the next phase of movement will then be dictated by whether the buying or selling is greater than the other and u then take appropriate action. Do i sell into a consolidation? No, I dont. Any similarities here?

How? Is Uchi going through a consolidation cycle?

Take these comments from CIMB research published on Aug 2007 on Uchi's quarterly earnings.

  • Below expectations. Uchi’s annualised 1H07 earnings missed our forecast by 8% and were 12% short of consensus. 2Q net profit edged up just 2.1% yoy and 2.5% qoq because of revenue growth of only 4% yoy and 3.1% qoq. While we acknowledge that 3Q is the peak earnings period due to higher billings for coffee makers ahead of the 4Q festive season, we believe that full-year earnings will fall short of our estimate. As expected, the company did not declare any dividends.

See? The yoy and qoq growth is still there BUT according to the folks at CIMB, the recent earnings simply isn't impressive!

As it is, for me, from a business perspective, the main question I will ask is, "Does it pass or fail to meet your assessment that Uchi remains a good business investment?". Yes, growth appears to be slowing down. And perhaps the issue is it going thru the consolidation cycle? Would this be a concern? For me, I would prefer to look at the bigger picture and my view would remain. Uchi earnings track record indicates that Uchi business does have a strong competitive advantage of others. What it has achieved over the years does indicate that it has a strong product and that the management has done extremely well to achieve these results.

Now if you look at the table again, currently Uchi number of shares in the market is some 375 million.

However, my main concern remains with its ESOS issue mentioned here: ROI on Uchi: Part III - the ESOS issue

As mentioned by the great, late Philip Fisher:

  • The management of a company is always for closer to its assets than its shareholders. And without even breaking any laws, there are number of ways that the management can benefit themselves and their families at the expense of the minority shareholders, for example employing their relatives, buy-and-selling of properties between relatives at above market rates or the issuing common stock options.

Make no mistake, I view this stock option as a massive issue. I simply do not like what I see!

This issue can be seen here: ESOS

The Enlarged issued and paid-up share capital after the Proposed New ESOS would ultimately see Uchi's share base enlarge to 455.213 million shares.

Look at the above table in this posting. TTM earnings shows a share base of 375 million shares. Uchi's current earnings is some 86 million or an EPS of 23 sen. Uchi last traded at 3.02 or an PEx of 13x.

But when all these ESOS is granted listing, Uchi's share base will enlarge to 455 million. Which means an earnings of 86 million would only equate to an EPS of just 19 sen. And using a same PE multiple of 13x, then Uchi could be trading as low as 2.47!!

See the extreme dilutive effect caused by Uchi's massive ESOS?

If I own this stock, I would be deeply concerned.

And what about perspective investors? Surely they would be worried too. No?

Why would they want to invest in a business knowing very well that the future earnings will be diluted by so much?

Here is an interesting note. That ROI on Uchi: Part III - the ESOS issue was blogged on Feb 28th 2006. Look at the very last sentence.

  • just for the record... Uchi is now trading at 3.30.

Uchi today's trade at 3.02.

So despite Uchi's extremely impressive set of earnings, Uchi's stock price has under performed the market greatly.

Yes, recent quarterly earnings indicated that its earnings growth is no longer as impressive but I, for one, reckon that the share overhang caused by the potential ESOS listing as the main factor for the stock under performance.


What say you?


shomer said...

Hi Moola,
Your insights to the Uchi potential enlarged shareholding and it's effect on the EPS and hence the pricing valuation are most appropriate. Investors ( including me ) do not pay sufficient attention to the dilution effect and hence have a distorted value to the EPS. I think the critical factor propping up it's share price is the solid dividends. If this is reduced then the possibility of a downside to it's price increases.
have a good weekendibdtaar

bullbear said...

The dilutive effect of ESOS on EPS should always be taken into consideration in one's investment. One should be cautious, perhaps even avoid, investing in companies where the dilution of shareholdings from ESOS exceeds 1 or 2% per year on a regular basis. Perhaps, others have better opinion on this.

Moola said...

My dearest bullbear,

Quote: The dilutive effect of ESOS on EPS should always be taken into consideration in one's investment. One should be cautious, perhaps even avoid, investing in companies where the dilution of shareholdings from ESOS exceeds 1 or 2% per year on a regular basis.

I would agree.

Before one invests, issues like this should have been taken into consideration.

However, what if you own a stock and the company decides to embark on such a corporate exercise. What would you have done?


ywt06 said...

hi moola .. mind to do some analysis about petra perdana? thank you.

the greatest investor, warren buffett said esos is not good for the shareholders as it has dilution effect.

in the other hands, esos is a way to motivate the employees to work hard for the company?

share buy back is essential if a company continues to issue new shares under esos ....

Moola said...

My Dearest ywt06,


This issue got me wondering at times. Why do employees of plc needs so much monetary motivation for them to perform?

Uchi ESOS. Isn't the size of the ESOS simply too excessive?


ywt06 said...

well, we need to face the fact. salary and benefits are always the most important factor you work for a company. how many people are working for job satisfaction without considering compensation?
it is another way to retain the employees as well ...
however, from a shareholder stand point, i disagree ESOS ...