Stock Pick Year 2014 - kcchongnz - CENBOND

Packaging companies in Malaysia
Investment success doesn’t come from “buying good things”, but rather from “buying things well”.
People need packaging for the organization and containment, protection, handling, delivery, advertising and presentation of goods. Examples of packaging include everything from cardboard boxes to food wrappers commonly made of plastic and paper. Packaging is used every day and everywhere in the world all the time. Hence it is viable to include a packaging stock in a diversified investment portfolio.
In Malaysia, there are a number of packaging companies listed in Bursa. Which packaging company should one invest in? Normally when an expert is asked, he would encourage you to invest in the market leader. A market leader is generally one with the highest market share in the industry and with the biggest market capitalization. Let us see Table 1which company below is the market leader.
Table 1: Some packaging companies in Malaysia

Company	Cenbond	Tomypak	Daibochi	BoxPak	PPHB	Muda	Orna
Sales (000)	186841	216724	278752	264334	139568	1088370	229336
Share price	1.56	1.40	4.03	2.36	0.650	0.920	0.795
No. of shares	120000	109264	113853	60023	109898	303686	75251
Market Cap	187200	152970	458828	141654	71434	279391	59825

Sales and market capitalizations
From the table above, Daibochi, a flexible plastic packaging company is clearly a market leader with 279 million Ringgit  in annual sales and a market capitalization of 459m Ringgit. Its competitor in flexible plastic packaging, Tomypak, with 30% less in sales, has its market cap only a third of Daibochi. Muda Holding though has a much higher sales of 1.09 billion, it’s major business is paper manufacturing and its market cap is only 279m. Box-Pack is the leader in corrugated cartons with 264m in annual sales and a market cap of 142m. Public Packaging Holding Berhad, Box-Pak’s competitor in corrugated cartoon, has only half the sales and market cap. Century Bond dominates in paper packaging with a sales of 187m and a market cap of 187m. It has about only 10% in plastic packaging business. All pure packaging companies are considered as small (mostly) to mid cap companies. So should you invest in Daibochi, the market leader in the packaging industry?

I usually look at the performance of the company first before deciding. Let me start me the return of equity of the companies and see which one is the most efficient in utilising the equity of the company. I am particular interested in dissecting the ROE to have a clearer picture how the ROE comes about.

Du Pont analysis
DuPont equation provides a broader picture of the return on  equity of a company. It tells where a company's strength lies and where there is room for improvement. It is the epic of financial statement analysis of a company. Investopedia has a very good explanation on why is it important to carry our DuPont analysis on a company’s business as shown in the link below:
http://www.investopedia.com/articles/fundamental-analysis/08/dupont-analysis.asp
Table 2 below shows the plastic packaging firm Tomypak has the highest ROE of 17%.

Table 2: Dissection of ROE

Company	Cenbond	Tomypak	Daibochi	BoxPak	PPHB	Muda	Orna
Net profit margin,	10.3%	8.0%	8.8%	7.2%	10.2%	1.5%	3.2%
Asset turnover, AT	0.95	1.32	1.19	1.26	0.68	0.87	1.10
Financial leverage,	1.30	1.58	1.56	1.61	1.55	2.13	1.82
ROE	13%	17%	16%	14%	11%	3%	6%

Tomypak achieves the marginal higher ROE than its competitor Daibochi due to its higher asset turnover of 1.32, though its net profit margin is lower at 8.0%. Similarly, Box-Pak achieves substantial higher ROE (14%) than its competitor PPHB (11%) with twice higher sales related to its assets compared to PPHB. Cenbond has a slightly lower ROE of 13% and this number is still acceptable as it is higher than the cost of capital. However Cenbond is the least risky because it has the lowest leverage of them all at 1.3. Its net profit margin at 10.3% is the highest among the packaging companies. Muda is the worst among the lot with meagre net profit margin (1.5%) and very low ROE of 3%, way below the cost of capital.
However, it is not really fair to compare ROE among the companies. Firstly net profit can be skewed by one-off and non-operating items dramatically. Secondly companies have different capital structures and they are not reflected in ROE. ROE can also be artificially enhanced with the use of excessive debt, which can be dangerous if there is a severe economic downturn and liquidity problem in the market. Some companies like Cenbond has a lot of excess cash (64 sen per share) not needed for the operations, while Muda Holding has huge debt. Hence a better efficiency metric would be the return of invested capital which earnings and all capitals are accounted for. Appended is a link in i3 describing what ROIC is and its usefulness in comparison with ROE:
http://klse.i3investor.com/blogs/kianweiaritcles/36668.jsp
Table 3 below clearly shows that Cenbond has the best operating efficiency by a wide margin with a ROIC of 22%.
Table 3: Comparisons of ROE and ROIC

Company	Cenbond	Tomypak	Daibochi	BoxPak	PPHB	Muda	Orna
ROE	13%	17%	16%	14%	11%	3%	6%
ROIC	22%	15%	16%	13%	12%	4%	6%

Taking the efficiency into consideration, the first 5 companies with ROE and ROIC of more than 10% are considered investible with the order of the following ranking; Cenbond, Daibochi, Tomypak, Box-Pak, and PPHB.

Value value and value
I have mentioned many times before, a good company is not necessary a better investment as in investment, the return of investment is what we are looking for, and the price you pay determines your return. So which company is the best value buy?

Table 4 below shows the corrugated carton maker, PPHB at 65 sen now is the cheapest buy with a PE ratio of 5.0 and an Enterprise value just 3.4 times its earnings before interest and tax.

Table 4: Market Valuations

Company	Cenbond	Tomypak	Daibochi	BoxPak	PPHB	Muda	Orna
Price	1.54	1.41	4.12	2.25	0.65	0.92	0.79
PE	9.6	8.9	19.0	7.1	5.0	17.4	8.2
EV/Ebit	4.6	6.7	13.6	6.3	3.4	13.2	8.8

Cenbond at 1.54 is the next value for money buy with a PE ratio of 9.6 and a EV/Ebit of 4.6. As Cenbond has a much better operating efficiency of 22%, and a high earnings yield (ebit/EV) also of 22%, it has a higher ranking using the Magic Formula of Joel Greenblatt as shown in figure 1 below.

I have added Cenbond as a packaging stock in my investment portfolio for 2014. Why not? I am buying the best thing in this industry and buying it well.

Figure 1: