· F&B companies’ potential for strong double-digit earnings growth, in addition to decent dividend yields has made them attractive investments. The positive prospects for the F&B producers highlighted stems from improvements in operating efficiency, market dominance with high barrier of entry, regional market reach as well as moderation in raw material prices corresponding to crude oil price/ economic downturn.
· Halal Industry Development Corporation (HDC) Senior Manager Encik Wan Salman gave participants an overview of the Halal industry and elaborated on the areas of processed food, ingredients, cosmetics and livestock. The size of the worldwide halal food market in 2005 was estimated at US$582.3b (RM2.04 trillion) in 2005. Malaysia is well-positioned to take a sizable bite of the market as a global Halal food hub because of the country’s reputation as a modern, moderate Islamic country, strategic geographic location (proximity to Middle East) and well-received Halal certification standard.
· Borneo Aqua Harvest (BAH) Mr Desmond Yong (Special Assistant to Managing Director) delivered a highly informative presentation on the company’s grouper aquaculture business, followed by live product display. BAH’s competitive advantages are its competency in marine biotechnologies (enables in-house production of fries and controlled timing of production), good geographical location off Lahad Datu, Sabah (clear waters, protected from strong current, ideal climate, logistical advantage with proximity to biggest markets- Hong Kong and China), control of the entire value chain from brood stock management to rearing (thus reducing mortality rate) and own distribution (with two live fish carrier ships and marketing centre in Hong Kong).
· BAH experienced declining profit in FY07-FY08 due to shortage of fish stock following sale of fries in response to pressure from promoters to meet profit forecast. However, the company anticipates a steep pick-up with double-digit earnings growth from 2HFY09 onwards as it raises production capacity to keep up with seemingly inexhaustible demand from Hong Kong and China.
· QL Resources’ (QL) Mr Freddie Yap (Group Accountant and Investor Relations), briefed us on the company’s agro-based businesses of marine products manufacturing, palm oil activities and integrated livestock farming. The company has demonstrated a solid track record of earnings growth for the past 23 years and looks to regional expansion to propel it further.
· Plan for a new surimi plant in Surabaya, Indonesia is awaiting local government approval and is likely to be operational by FY11 at the earliest. The plant will cost US$8m. As for the Tarakan, Indonesia oil palm plantation, 12,000 acres of the total 30,000 acres has been planted up, and is likely to deliver meaningful contribution in FY12 when the trees mature. The company is delaying its integrated layer farming project in Tay Ninh, Vietnam due to unfavourable economic conditions in the country. The company has also decided to proceed on a smaller scale, with RM25m cost of investment spread over 2 years.
· Hup Seng Industries’ (HSI) Dato’ Seri Kerk Choo Ting (Executive Director of several HSI subsidiaries) spoke on the Batu Pahat-based biscuit manufacturer’s restructuring exercise that is designed to spur the stolid family-run concern into its next phase of growth. HSI is one of Malaysia’s largest biscuit manufacturers and makes the iconic ‘Ping Pong’ brand of cream crackers.
· HSI embarked on a cost recovery program in end-2007 by implementing a Mobile Sales System in its trading division. This measure coupled with lower raw material prices, was largely responsible for the 10% YoY increase in 1QFY09 operating profit margin. Anticipate further improvement in profitability as the cost recovery exercise is extended to the manufacturing division in the form of an ERP system.
· We understand that the company is likely to introduce a formal dividend policy of 40% net profit by end-FY09 that would translate into a potential FY09 dividend yield of 7%.
· Daibochi Plastic & Packaging Industry’s (DPP) Mr Thomas Lim (Managing Director) introduced conference participants to the company’s flexible packaging business that caters largely to the F&B industry. DPP is one of only two players that make up approximately 60% domestic market share. The company’s competitive strengths are its ability to provide the end-to-end packaging process (with in-house cylinder-making, metalizing and sealing capabilities) and its well-established relationships with MNC clients (DPP is the sole supplier to Nestle’s Chembong Confectionery factory and Kraft/ Danone biscuits in Malaysia).
· Sizable leap in earnings recently with 1HFY09 net profit of RM10.8m already surpassing the full year’s net profit of RM8.2m in 2008. This was caused by lower input costs with the price moderation of plastic resin and films (42% of total operating expenses), as well as improved product mix. Given the company’s increasing exports to MNCs (now 40% of group revenue) as well as the introduction of innovative new products such as printed plastic film for cigarettes (now being supplied to BAT) and anti-static packaging for electronic products, we expect the 12% pretax profit margin of 1HFY09 (more than double YoY) to be sustainable, if not show further improvement, moving forward.
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