Saturday, September 04, 2010

Reply From K C: Can One See The Big Problem With London Biscuits?

From the posting Regarding London Biscuits Again

  • Allow me to present LB's performance in a different perspective. The important metric for performance is return of equity, ROE.

    Dissecting ROE of LB by Dupont analysis into: ROE=NI/E=NI/S*S/TA*TA/E NI is net income, S is sales, E is total equity, TA is total asset.

    For the last financial year, profit margin, NI/S=8%, Asset turnover S/TA=0.44, and leverage TA/E=2.0, giving ROE=8%*0.44*2=7.1%.

    ROE is very low despite the high leverage (hence risk). This is because asset turnover is very low (poor usage of assets) and profit margin is low.

    Profit margin has deteriorated steadily from 14% in 2005 to the present 8%, a huge drop.

    How well does LB utilizes its invested capital? The return of capital (ROIC) is pathetic at only 5.4%, which I believe it is even lower than the after cost of debt.

    LB appears to be a good buy for many people because of its seemingly low PER. In what form is the E in the P/E ratio? In the past 6 years, I do not see any positive free cash flow at all in any single year! Dividends have been slashed year after year to 1.5 sen per share. In fact I doubt there is any cash for this dividend payment, if not from more borrowing. Can one see the big problem with LB now? Can anyone still want to argue that LB at 1.07 is a good buy?

Firstly to ck5354: London Biscuit - Kanasai.

ck5354, How are you? It's been a long time since Fusion. I saw your link to my posting. Thanks! :P However, I am sure that you realised that I wrote that posting based on the Property, Plant and Equipment issue because someone had asked, so I replied. It's like my initial posting, Regarding London Biscuits Again, it was also a request. And I am sure you realise that my postings are just postings. Is it really bad news, meh? And you do know that I have no motivation to argue with anyone if any stock is worth a buy or a sell. I seriously lack the motivation to make such talk. And I do realise I had failed to post my disclaimer. :P

1. I am a nobody.
2. I am not responsible for anyone's investments.
3. I am not a sotong. :D
4. I am certainly not an independent investment advisor.
5. Since I am not an in dependant investment advisor, I cannot guarantee that you should lose money.
6. Most important, I find no motivation to talk about stock price movements. Yeah, I do not indulge in guessing what a stock price will or will not do. So please spare me all the chats that you think this stock will go down by so much or this stock will soar by so much.


K C: Many thanks for sharing your views on London Biscuits.

As you are aware I do try to avoid talking investing yardsticks. Not that investing yardsticks are not good but somehow, it take the life out of the company. The company is just turned into a stock made of numbers and more numbers.

Regarding PER.


Sensitive issue. Some just don't like me talking about this extremely sensitive issue. :P

Posted before: Can Investing Based On Low PER Fail? ( do see this also: Some Opinions )

Anyway for me, what's needed to remember is the P and E in that simplistic investment yardstick is never a constant. And the P is possible to change in value every time the stock is traded. And the E? Which E does one want to use? Past fiscal year? Current trailing earnings? Next fiscal year? Next, next fiscal year?

And to compound things worse, number of shares could always change. Which means the E could also change.

And what does low PER means?

Meaning is simple for me. In my flawed opinion, all it says is that THE stock is trading at low valuation based on the 'E'.

That's all.

It says absolutely nothing about the quality of the company.

Take LB. All it says it is trading at a low PER, that's all. It does not say if LB is good or no. Many I believe fail to realise this and they buy the stock based on the yardstick.

On the other hand, what's the flip side of it? What's the other sensible question that needs to be asked?

Think about it....

The market is extremely bull yes?

So why is the stock being avoided by the market?

Is there SOMETHING amiss? Is there something that they don't like that is causing them NOT to like the stock? And assuming if this is the case, then the LOW PER becomes redundant yes?

Regarding the lower dividend, I would put the enlarged share base into consideration too. Thanks to the wonder of nice ESOS, shares ballooned from 78.045 million to 96.104 million. Yes the wonderful world of ESOS created an incredible 17.969 new shares. Yeah, who does it benefit? With share base enlarged, and London Biscuit's cash balances really stretched, it's no wonder that dividends is less.

And regarding LB, I really said what I had wanted to say in last month's posting: Review Of London Biscuit

Regarding the stock? Remember I am not a sotong. I have no idea what the stock would or would not do.


panaceaasia said...

Do you need to own a hatchery to get a steady supply of eggs at a special price ? What will the minority shareholders of TPC have to say about special prices to shareholders ?

Moolah said...

panaceaasia: That TPC GO was incredible.

It made the GO announcement on 8th April 2010.

The GO would have cost LB 16.32 million cash.

How much cash did LB when it reported its piggy bank when it made its earnings announcement on Feb 2010?

See: LB earninngs report on Bursa website

Answer? 13.793 million.

I guess more borrowings needed!

Incredible yes?