SKP Resources (SKPR) was one of my stock pick in my “GE13 Stock Watch”
when it was trading at 34 sen as published in i3investor about 5 years
ago in the link below,
https://klse.i3investor.com/servlets/pfs/13147.jsp
I have also written a number of articles on V.S Industries about three years ago published in i3investor, specifically mentioning about its poor cash flows for a number of years.
The share price of VS Industry has risen a whopping 553% over the last three years to date. The rise of its share price was more pronounced from beginning of April 2016 when it was trading at RM1.18 and shot up to close at RM3.07 last Friday on 27th October 2017, giving a gain of whopping 160%, in less than one and a half year. The company market capitalisation grew to RM3764 million.
SKP Resources, however, rose only 141% during the same three years period. It closed at RM1.78 last Friday, giving the company a market capitalisation of RM2187 million. In fact, the share price of SKP Resources has gone nowhere the last two years until the last couple of months when its share price started to move up from RM1.30.
Which one has a better return in investment if you have bought them 3 years ago is clear in Figure 1 below showing the return of investment over three years ago for SKPRES (lower line) and V.S (upper line).
Figure 1: Price movement of V.S vs SKPRES for the last three years
Obviously, I was wrong in the subsequent share price performance of VS.
I was right on SKPR five years ago though, when its share price went up from 34 sen to close at RM1,78, for a total gain of about 400% over 5 years.
Did the business of V.S grew at much a higher rate than that of SKPRES over the last three years which warrants the big disparity of their share price movement?
The business
VS Industry Bhd and SKP Resources Bhd are two of the largest home-grown electronics manufacturing services (EMS) providers in Malaysia. Both the Johor-based companies serve some common customers. They are the two closest peers in their industry.
Today, VS Industry is one of the top 50 EMS corporations in the world, with in-house printed circuit board (PCB) and battery-pack assembly capabilities, and hence is able to provide one-stop manufacturing solution to its clients. VS also has a more diversified customer base with three major clients, namely Keurig Green Mountain Inc (a US-based hot beverage system company), Zodiac Pool Systems Inc (a global manufacturer of pool and spa equipment) and Dyson UK. The three collectively contribute about 60% to the group’s turnover.
As for SKP Resources, it is one of the country’s fastest-growing integrated contract manufacturers, catering for the electrical and electronics, industrials, automotive and food and beverage industries. Its main customer is Dyson UK which contributes the bulk of its turnover.
SKP Resources’s in-house PCB assembly capability is coming in place now, rivalling that of VS. It also has better manufacturing capabilities.
Both companies delivered strong financial performance in the last three financial years.
But which company provides a better risk-reward ratio?
Growth
VS Industry’s revenue and net profit grew by a compounded annual growth rate (CAGR) 0f 24% and 43% to RM3281 million and RMRM156 million respectively for the last three years up to financial year ended 31st July 2017.
SKPRES’s revenue and net profit grew by much faster CAGR of 73% and 60% respectively over the last three years to RM2.148 billon and RM120 million respectively for the past 3 years as on 30th June 2017.
There are also strong visibilities in their future growth in revenue and earnings in the next few years. The high growth of Dyson especially in the China market is the common factor.
However, high growth is only beneficial to the company and its shareholders if the growth is a quality growth which enhances shareholders’ value, specifically the return of capital is higher than its cost.
Let’s first examine which, V.S or SKPR, is more efficient in their operations, and hence a better company.
Efficiency: DuPont Analysis
For efficiency, we will look at the return on assets (ROA) and return on equity (ROE), basing on their latest twelve months results ended June 2017 for SKPRES and July 2017 for V.S.
We will use Dupont Analysis to dissect their ROAs and ROEs to have a clearer picture on how their ROA and ROE were achieved.
Table 1 in the Appendix shows how the ROE of SKPRES was achieved versus that of V.S.
The table above shows that V.S has a higher turnover of RM3.28 billion, compared to the RM2.15 billion of SKPRES. SKPRES, however, has a higher net profit margin of 5.6%, compared to the 4.8% of V.S. V.S utilized three times total assets of RM2.9 billion to achieve the 53% higher revenue than SKPRES. SKPRES clearly has a much better asset turnover of 2.17, about twice that of V.S, and hence is much more efficient in assets utilization.
ROA = Net profit margin * total asset turnover
Generally, a ROA of more than 7% shows the management’s ability to manage its assets efficiently, and ROA of less than 5% is poor. Hence, we can say SKPRES which has a ROA of 12.1%, is very efficient in managing its assets, while V.S is just below average.
SKPRES has a healthier balance sheet with net cash of RM122 million compared to the net debt of RM362 millions of V.S. Consequently V.S has a higher financial leverage (FL) of 2.74 times, compared to the 1.92 times of SKPRES. Even with higher FL, ROE of V.S at 14.8%, is okay but inferior to that of 23.3% of SKPRES.
Generally, a company with ROE of more than 15%, has a good business, or more efficient.
ROE = ROA * financial leverage = Net profit margin * total asset turnover * financial leverage
The excellent ROE of SKPRES at 23.3%, or about twice its cost of equity was achieved both with a higher net profit margin and asset turnover, the more desirable ways to achieve a higher ROE, without undesirable high financial leverage.
With higher ROA and ROE for SKPRES, one would expect SKPRES would have been trading at higher valuation multiples than V.S.
But is it?
“Investment success doesn't come from “buying good things,” but rather from “buying things well.” Howard Marks.
Market valuations
On 17th October 2017, SKPRES and V.S closed at RM1.78 and RM3.07 respectively.
At those prices, SKPRES is trading at market valuations of PE of 18.3 and Enterprise 14.3 times Ebit, substantially lower than the 24.3 and 16.4 respectively of V.S, as shown in Table 2 in the Appendix.
This defies the logic that a better company in SKPRES should be traded at a higher market valuation. However, we know in investment, logic doesn’t apply all the time anywhere, especially in the short term.
“In the short term, market is a voting machine; but in the long-term, it is a weighting machine”
Conclusions
The DuPont Analysis of dissecting the ROE of SKPRES and V.S shows that SKPRES has a higher ROA and ROE of 12.1% and 23.3% respectively, which are much higher than that of V.S. Furthermore, the higher ROE of SKPRES was achieved with the more desirable mean, i.e. the high profit margin and asset turnover, coupled with low financial leverage.
It is a surprise that SKPRES is trading at a much lower market valuation than V.S.
Perhaps, for those who are interested in investing in EMS providers, this provides a good opportunity to accumulate some shares in a high growth company in SKPRES which are selling at cheaper price.
As Usual, for those who are keen to learn about fundamental value investing (FVI), or getting some stocks folowing FVI to invest in for building long-term wealth safely but surely, may contact me in the email address below.
KC Chong (ckc14invest@gmail.com)
Disclaimers:
All stocks mentioned here are for sharing about fundamental value investing. They are not recommendations to buy or sell.
There is no guarantee of the accuracy or validity of all information shared here, nor anybody is responsible for any errors or omissions which may have occurred.
http://klse.i3investor.com/servlets/cube/kcchongnz.jsp
Appendix
https://klse.i3investor.com/servlets/pfs/13147.jsp
I have also written a number of articles on V.S Industries about three years ago published in i3investor, specifically mentioning about its poor cash flows for a number of years.
The share price of VS Industry has risen a whopping 553% over the last three years to date. The rise of its share price was more pronounced from beginning of April 2016 when it was trading at RM1.18 and shot up to close at RM3.07 last Friday on 27th October 2017, giving a gain of whopping 160%, in less than one and a half year. The company market capitalisation grew to RM3764 million.
SKP Resources, however, rose only 141% during the same three years period. It closed at RM1.78 last Friday, giving the company a market capitalisation of RM2187 million. In fact, the share price of SKP Resources has gone nowhere the last two years until the last couple of months when its share price started to move up from RM1.30.
Which one has a better return in investment if you have bought them 3 years ago is clear in Figure 1 below showing the return of investment over three years ago for SKPRES (lower line) and V.S (upper line).
Figure 1: Price movement of V.S vs SKPRES for the last three years
Obviously, I was wrong in the subsequent share price performance of VS.
I was right on SKPR five years ago though, when its share price went up from 34 sen to close at RM1,78, for a total gain of about 400% over 5 years.
Did the business of V.S grew at much a higher rate than that of SKPRES over the last three years which warrants the big disparity of their share price movement?
The business
VS Industry Bhd and SKP Resources Bhd are two of the largest home-grown electronics manufacturing services (EMS) providers in Malaysia. Both the Johor-based companies serve some common customers. They are the two closest peers in their industry.
Today, VS Industry is one of the top 50 EMS corporations in the world, with in-house printed circuit board (PCB) and battery-pack assembly capabilities, and hence is able to provide one-stop manufacturing solution to its clients. VS also has a more diversified customer base with three major clients, namely Keurig Green Mountain Inc (a US-based hot beverage system company), Zodiac Pool Systems Inc (a global manufacturer of pool and spa equipment) and Dyson UK. The three collectively contribute about 60% to the group’s turnover.
As for SKP Resources, it is one of the country’s fastest-growing integrated contract manufacturers, catering for the electrical and electronics, industrials, automotive and food and beverage industries. Its main customer is Dyson UK which contributes the bulk of its turnover.
SKP Resources’s in-house PCB assembly capability is coming in place now, rivalling that of VS. It also has better manufacturing capabilities.
Both companies delivered strong financial performance in the last three financial years.
But which company provides a better risk-reward ratio?
Growth
VS Industry’s revenue and net profit grew by a compounded annual growth rate (CAGR) 0f 24% and 43% to RM3281 million and RMRM156 million respectively for the last three years up to financial year ended 31st July 2017.
SKPRES’s revenue and net profit grew by much faster CAGR of 73% and 60% respectively over the last three years to RM2.148 billon and RM120 million respectively for the past 3 years as on 30th June 2017.
There are also strong visibilities in their future growth in revenue and earnings in the next few years. The high growth of Dyson especially in the China market is the common factor.
However, high growth is only beneficial to the company and its shareholders if the growth is a quality growth which enhances shareholders’ value, specifically the return of capital is higher than its cost.
Let’s first examine which, V.S or SKPR, is more efficient in their operations, and hence a better company.
Efficiency: DuPont Analysis
For efficiency, we will look at the return on assets (ROA) and return on equity (ROE), basing on their latest twelve months results ended June 2017 for SKPRES and July 2017 for V.S.
We will use Dupont Analysis to dissect their ROAs and ROEs to have a clearer picture on how their ROA and ROE were achieved.
Table 1 in the Appendix shows how the ROE of SKPRES was achieved versus that of V.S.
The table above shows that V.S has a higher turnover of RM3.28 billion, compared to the RM2.15 billion of SKPRES. SKPRES, however, has a higher net profit margin of 5.6%, compared to the 4.8% of V.S. V.S utilized three times total assets of RM2.9 billion to achieve the 53% higher revenue than SKPRES. SKPRES clearly has a much better asset turnover of 2.17, about twice that of V.S, and hence is much more efficient in assets utilization.
ROA = Net profit margin * total asset turnover
Generally, a ROA of more than 7% shows the management’s ability to manage its assets efficiently, and ROA of less than 5% is poor. Hence, we can say SKPRES which has a ROA of 12.1%, is very efficient in managing its assets, while V.S is just below average.
SKPRES has a healthier balance sheet with net cash of RM122 million compared to the net debt of RM362 millions of V.S. Consequently V.S has a higher financial leverage (FL) of 2.74 times, compared to the 1.92 times of SKPRES. Even with higher FL, ROE of V.S at 14.8%, is okay but inferior to that of 23.3% of SKPRES.
Generally, a company with ROE of more than 15%, has a good business, or more efficient.
ROE = ROA * financial leverage = Net profit margin * total asset turnover * financial leverage
The excellent ROE of SKPRES at 23.3%, or about twice its cost of equity was achieved both with a higher net profit margin and asset turnover, the more desirable ways to achieve a higher ROE, without undesirable high financial leverage.
With higher ROA and ROE for SKPRES, one would expect SKPRES would have been trading at higher valuation multiples than V.S.
But is it?
“Investment success doesn't come from “buying good things,” but rather from “buying things well.” Howard Marks.
Market valuations
On 17th October 2017, SKPRES and V.S closed at RM1.78 and RM3.07 respectively.
At those prices, SKPRES is trading at market valuations of PE of 18.3 and Enterprise 14.3 times Ebit, substantially lower than the 24.3 and 16.4 respectively of V.S, as shown in Table 2 in the Appendix.
This defies the logic that a better company in SKPRES should be traded at a higher market valuation. However, we know in investment, logic doesn’t apply all the time anywhere, especially in the short term.
“In the short term, market is a voting machine; but in the long-term, it is a weighting machine”
Conclusions
The DuPont Analysis of dissecting the ROE of SKPRES and V.S shows that SKPRES has a higher ROA and ROE of 12.1% and 23.3% respectively, which are much higher than that of V.S. Furthermore, the higher ROE of SKPRES was achieved with the more desirable mean, i.e. the high profit margin and asset turnover, coupled with low financial leverage.
It is a surprise that SKPRES is trading at a much lower market valuation than V.S.
Perhaps, for those who are interested in investing in EMS providers, this provides a good opportunity to accumulate some shares in a high growth company in SKPRES which are selling at cheaper price.
As Usual, for those who are keen to learn about fundamental value investing (FVI), or getting some stocks folowing FVI to invest in for building long-term wealth safely but surely, may contact me in the email address below.
KC Chong (ckc14invest@gmail.com)
Disclaimers:
All stocks mentioned here are for sharing about fundamental value investing. They are not recommendations to buy or sell.
There is no guarantee of the accuracy or validity of all information shared here, nor anybody is responsible for any errors or omissions which may have occurred.
http://klse.i3investor.com/servlets/cube/kcchongnz.jsp
Appendix
Table 1: DuPont analysis of SKPRES Vs V.S
Table 2: Market valuations of SKPRES and V.S
