Kumpulan Fima Berhad (KFIMA) operates
a diversified business in 4 major divisions; (i) manufacturing
(ii) plantation (iii) food (iv) bulking (v) [other] investment holding. A
large proportion of its business are derived from its 60.02% partially
owned subsidiary Fima Corporation Berhad (FIMACOR), which is also publicly listed in KLSE.
- Manufacturing – operates via FIMACOR’s subsidiary which produces security and confidential documents such as passports, stamps, identity cards, licenses, etc. FIMACOR also owns a 20% joint venture with Giesecke & Devrient Malaysia Sdn Bhd (G&D), the sole printing company of Malaysia’s banknotes. In fact, the G&D group is recognised as the world’s largest one-stop provider of banknotes.
- Plantation – oil palm and pineapple cultivation and processing. Most of its oil palm plantation are operated via investment holding in FIMACOR.
- Food – manufactures, packages and distributes canned fish. KFIMA’s involvement is via its 77.85% owned subsidiary, International Food Corporation Limited (IFC) which is located in Papua New Guinea. IFC produces for the locals and exports to the European Union.
- Bulking – bulk handling and storing various types of liquid and semi-liquid products, providing logistics services for these items as well. Operates primarily within Malaysia.
- Others – investment holding and property investments.
Substantial shareholders as at 24 July 2015:
- BHR Enterprise Sdn Bhd (53.24%) – Indirect interest by multiple directors
- Subur Rahmat Sdn Bhd (6.56%)
- Teo Tin Lun (1.97%)
| Valuation | UNDERVALUED |
|---|---|
| Current price | RM 1.83 |
| Shares outstanding (approx.) | 278,222,000 |
| Market cap | RM 509.1 million |
| Fair value | RM 2.03 |
| Margin of safety | 9.9% |
HIGHLIGHTS
- Ownership in Malaysia’s sole banknote printing company
- Resilient manufacturing business model
- Growing oil palm plantations
ANALYSIS
Financial Ratios @ Reuters: KFIM.KL
Please note that I have computed all
ratios reported below from original sources unless stated otherwise. For
other various ratios, please refer to Reuters.
Resilient manufacturing business via FIMACOR
This segment contributes an average of 45.9% of KFIMA’s total revenue since FY2008. Operating one of the largest domestic security printers in Malaysia,
the Group is in a well established position with good competitive
advantage against its peers. With that, the division managed to
achieve a revenue CAGR of 8.6% over the past 7 years. Meanwhile,
operating profits grew 5.6% CAGR over the same time frame. However,
cumulative YTD operating margins have deteriorated to 18.8% compared to
an average of 26.0% from FY2008 – FY2015. This is due to less favorable
sales mix and higher operating cost. FIMACOR’s minority interest in G&D contributes an average of 4.1% of PAT over the past 4 years.
Moving ahead, this steady business model
is supported by the constant need for security documents regardless of
any economic conditions. With revenue growth drivers in tact, the
management should emphasize efforts to minimize operational cost to
maximize returns from this division.
Plantation sector, the bullish sector
KFIMA derives 22.5% of its revenue from
plantation in FY2015, in which 56% was oil palm plantation and 44% from
pineapple cultivation. Using annualized data for FY2016, revenue achieved a 8 year CAGR of 16.6%.
General Information: Oil
palm trees begin to yield fruits at commercial levels after 3 years. As
the trees continue to mature until 18 years, the yield rates continue
to increase. Yield gradually decreases after 18 years, with a total
commercial lifespan of 25 years.
The age profile of FIMACOR’s oil
plantation in 2015 was 3.5% aged above 19 years, 50.2% aged between 10
to 18 years, 8.4% aged 4 to 9 years and 37.9% immature. This means that
at present, approximately 62.1% of its plants are still producing
yields, with 58.6% producing yields at its peak. The Group achieved a
respectable oil extraction rate (OER) of 23.4% over the last 5 years.
With CPO prices expected to rebound this year based on analysts’
opinions, FIMACOR is a good counter with exposure in the palm oil
sector.
While
not much data was explicitly provided for the pineapple cultivation and
distribution business, I differenced KFIMA’s plantation data with
60.02% of FIMACOR’s plantation data to obtain the residual which I
assume to be fully contributed by the pineapple business. The pineapple
business achieved a 4 year revenue CAGR of 2.5%, however operating
profit suffered a 4 year CAGR of -14.2%. The pineapple business was
profitable throughout the 4 years.
Revenue contributions from food division has fallen from a high of 26.2% in FY2008 to a mere 14.8% cumulative YTD.
Subsidiaries Marushin and IFC have been
performing poorly, although KFIMA has reported that IFC operations have
improved from a loss-making FY2014 into a slightly profitable FY2015. In
FY2014, IFC operations were struggling with PRG minimum wage policies,
greater regulatory scrutiny and weak consumer sentiment.
Bulking services roughly stagnated since
FY2009, after adjusting for inflation. The Group reported revenue growth
of 4.8% yoy in FY2015 due to higher contributions from oil and chemical
fluids. Occupancy and throughput volumes improved as well.
There is not much expectations on these
segments in the near future, except that the bulking division could be a
beneficiary of crude oil supply glut, albeit rather minimally. The
profit contributions from the food and bulking divisions combined have
fallen from 50.0% in FY2008 to 32.4% in FY2015.
Frequent ownership dilution from ESOS and RSGS
Continuous ownership dilution from
Employee’s Share Option Scheme (ESOS) and Restricted Share Grant Scheme
(RSGS) due to lenient eligibility criterias; (i) full time employment
for more than 1 year with the Group (ii) Malaysia citizenship, permanent
resident in Malaysia or non-PR with a valid working permit with rank
Manager or above (iii) term of fixed-term contract workers must exceed 2
years, with renewal of contract 6 months before expiry. Since 18
November 2011, KFIMA has granted a total of 25,130,900 ESO, an
approximate 9% ownership dilution based on the weighted
average current shares outstanding of 278,222,000. As at 31 March 2015,
7,210,200 share options were exercisable at weighted average exercise
price of RM 1.62.
VALUATION
Fair value of RM 2.57 based on a 10-Y DCF
valuation justified by; (i) -2.0% supernormal growth (ii) 8% required
return (iii) 0.2% terminal growth.
Fair value of RM 1.48 based on a
sum-of-parts model with the following assumptions; (i) KFIMA
liquidation value (ii) all other subsidiaries and asset at book values
offset with other liabilities. Note that other assets exceed other
liabilities and subsidiaries are profit making, however they are assumed
to be negligible after discounting asset values.
Average fair value for KFIMA is RM 2.03.
Thank you.
Shaun Loong
Disclosure: At time
of publication, I do not own stocks in KFIMA or FIMACOR due to lack of
catalyst. This article has been edited on 24 March 2016.
