Consistently Profit Making Company Not Necessary Is Good

I would like to share about London Biscuit Berhad. Its principal activity is manufacturing and trading of confectionery and other related foodstuffs. 

It is a profit making company whereby its revenue and net profit are improving from year to year.

However, one of the reasons why I am not interested in this company is because it keeps asking money from third party and raise fund.

• 2011 – Private placement, 10% of paid up share capital, raised RM10.25m
• 2013 – Private placement, 24.35% of paid up share capital, raised RM21.60m
• 2014 - Private placement, 9.9% of paid up share capital, raised RM16.35m

London Biscuit had been raised fund thrice in the past 4 years through private placement.

Let’s have a look with its borrowing.

Year	2011	2012	2013	2014
Net borrowing, RM	133,022,425	145,709,767	179,882,116	195,939,083
Free cash flow, RM	23,648,053	19,135,454	27,210,353	14,702,322
Net cash, RM	(109,374,372)	(126,574,313)	(152,671,763)	(181,236,761)

Its borrowing included bankers’ acceptances, term loan, revolving credits and bank overdrafts. Even though London Biscuit had raised fund few times previously from private placement, but its borrowing is still keep increasing! FYI, in annual report 2014, London Biscuit’s borrowing is roughly RM196m. However in June 2015 quarter report, its borrowing had increased up to RM275m! Even though London Biscuit is a profit making company, but compare to its huge borrowing, its net profit of RM14m on FY15 is just too insignificant. Don’t forget that the fund raised from private placement doesn’t categorize into borrowing. So, where is all the money flow?

Year	2011	2012	2013	2014
Current ratio	0.94	0.58	0.62	0.61
Acid test ratio	0.80	0.45	0.50	0.50
Net current asset value, RM	(0.49)	(0.91)	(0.95)	(0.92)

*Current ratio = Current assets / Current liabilities

London Biscuit is facing a very illiquid situation, which its current ratio less than one! It is very risky as it might not be able to reach its short term financial obligation. FYI, as at 1^st of Sept, London Biscuit is only worth RM0.75 in the market while its net current asset value is (RM0.92)!

Year	2011	2012	2013	2014
Trade receivables	45,438,856	58,687,439	78,174,079	100,549,335

London Biscuit have very huge receivables which I believe it’s not able to collect from its customers! This is one of its major problems. It is not able to turn its receivables into cash. Besides that, its expenses and raw materials cost are very high and it increased from year to year.

Year	2011	2012	2013	2014
Administrative expenses	(21,613,633)	(25,318,354)	(23,792,000)	(29,468,032)
Selling and distribution expenses	(11,347,750)	(10,808,804)	(17,656,329)	(22,592,383)
Total expenses	(32,961,383)	(36,127,158)	(41,448,329)	(52,060,415)

FYI, London Biscuit is managed and controlled by Liew family since year 1994. Surprisingly, the whole Liew family had Dato-ship except the eldest daughter, Liew Yet Lee.

• Father – Liew Kuek Hin 
• Mother – Lim Yook Lan
• Son – Liew Yew Chung, Liew Yew Cheng
• Daughter – Liew Yet Mei, Liew Yet Lee

However, Liew family only owned 23.91% of London Biscuit. Even though they are still substantial shareholders, but scrolled back to 5 to 10 years ago, you will found that actually Liew family had slowly disposed off its shares interest portion by portion. On 2005, they still owned 57.73% but on 2010, they reduced it to 40.78% and now they only left 23.91%!

I believe it’s one of their strategies to exit the business whenever the worst scenario happens. London Biscuit currently had a serious financial problem. Once they unable to reach their short-term obligation, they will face a very serious issue.

Besides that, London Biscuit had just declared bonus issue of 1:5 on Jan 2015. The company may take part of retained earnings to clear part of its borrowing but why they choose to declare bonus issue? I believe the management wants to increase the liquidity of the stocks and to boost up the share price, so that they can dispose it more easily at a higher price.

In addition, London Biscuit had also declared ESOS for a period of five years from 2nd January, 2014 expiring on 1st January, 2019. It shall not exceed 15% of the issued and paid-up share capital. FYI, the paid up share capital of London Biscuit for year 2010 and 2015 is as below:

As at Feb 2010 – 87,250,000

As at Jul 2015 – 181,232,699

Is the management trying to dilute the company shares? I will leave it to you to think.

For all the reason above, as for me, London Biscuit is a very risky company even though it is making good profit every year. Everyone will have their own perspective and I might be wrong too. But, I will definitely avoid this type of company.

Just for sharing.

High Dividend Yield Stocks - Attractive?

Share investment had two types of incomes:

·         Capital appreciation

·         Dividend income

Every investor has their own method of investing that suits them the most. For youngsters, normally they are more to risk seeker while for elder person they are more to risk adverse. High dividend yields are attractive to investors who desire current income and stability with lower risk. This yield is then reinvested. This process of reinvesting repeats itself for as long as you own the stocks. As the interest on your investment is compounded, it will greatly increase your return over the time.

Dividends are money in your pocket, and after they’re paid they can’t be taken from you. The share price movement of a company is mainly affected by market sentiment and the company earnings. However, dividends are mainly affected by company earnings itself only. No matter how bad the market condition is, as long as the company is still making good profit, they will still declare good dividend regardless how low is their share price! Unless the management is not generous or they want to retain for expansion, then that’s different story.

Last day of July = 1,699.92

Last day of August = 1,612.74

KLCI index had dropped 87.18 points, which is equivalent to 5.13% in August. Many shares had dropped below their support line and some had broken a new low. I not sure whether the market will still going down but investors may start to collect some good undervalue stocks. There are many good fundamental companies with cheap price in the market. Heavy drop in August made those high dividend stocks more attractive. So, for some investors, it is a good opportunity to collect, isn’t it?

High dividend yield is one of the powerful tools which can help us to achieve financial freedom.  For example, if you invest RM1million in REITs by retirement age, with average D/Y of 6% after tax, you will get RM60k annually, which equivalent to RM5k passive income a month! By that time, you do not need to do anything, to get RM5k a month. This is what we called financial freedom.

Before I stop here, I would like to share some good consistent earning company and REITs with D/Y more than 6% (as at 28^th August 2015).

No.	Stocks	Price	D/Y
1	Tasek	15.000	11.33%
2	Media Prima	1.050	10.48%
3	SEGi	1.400	9.29%
4	Rexit	0.400	8.75%
5	Perstim	4.210	8.31%
6	Magnum	2.600	7.69%
7	Atlan	4.560	7.68%
8	CCM Duopharma	2.450	7.55%
9	YTL E-Solutions	0.535	7.48%
10	Padini	1.370	7.30%
11	BJToto	2.950	7.29%
12	CYL	0.700	7.14%
13	Star	2.540	7.09%
14	JCY	0.640	7.03%
15	Classic Scenic	1.150	6.96%
16	Uchi Tech.	1.450	6.90%
17	Deleum	1.080	6.48%
18	Yi-Lai	0.805	6.21%

REITs

No.	REITs	Price	D/Y
1	Atrium	1.04	8.94%
2	Quill Capita	1.04	8.06%
3	YTL	1.04	7.67%
4	AmanahRaya	0.83	7.52%
5	Amanah Harta Tanah	0.97	7.42%
6	UOA	1.50	7.37%
7	Amfirst	0.78	7.14%
8	Hektar	1.51	6.95%
9	IGB	1.31	6.39%
10	Axis	3.27	6.04%
11	Sunway	1.49	5.86%
12	Tower	1.10	5.82%
13	Alaqar	1.34	5.71%
14	Pavilion	1.51	5.44%
15	Capitamalls	1.33	3.47%

Note: Atrium had just disposed one of its properties and it is giving out higher dividend from its gain on disposal. On the next quarter and onwards, its earnings income expects to b drop and will not be able to pay high dividend. YTL had proposed private placement which expect to be done on beginning of next year. By the time, the company earnings will be dilute and investors will get lesser dividend for each share.

Feel free to comment.

Just for sharing.