Why A Good Company Doesn't Means Its Share Price Will Move Up?

Malaysia stock market is divided into Main Market and Ace Market, which made up of more than 900 listed companies. It is a big number, how are we going to select from so many listed companies?

Personally, investing in stock market is just like shopping in supermarket. A supermarket is divided into few categories, such as food & beverages, clothes attire, electrical equipment, luxury item and so on. For example, if you want to buy alcoholic beers, there will be few brands for you to pick, such as Carlsberg, Tiger and Heineken. Each of them has different taste and quality. Of course, the price will be different too. It is all depends on your need and budget. You think that Tiger beer is better in term of taste and quality compared with other beers but it costs up to RM10 for a can. Will you still continue to buy?

The theory is the same in stock market. People tend to choose good fundamental and quality stocks with cheap price. For example, you expect property sector and construction sector will be slow down, so you prefer export-oriented stocks from industrial products sector. In this sector, you may choose companies such as FLB, Wellcall and etc.

Choose a good company is not hard, but choose a good company with its share price moving up is not easy. In this article, I would like to share about why a good company doesn’t mean its price will move up.

As an example, I will use Classic Scenic and Marco for illustration.

Classic Scenic – Sales and manufacturing of wooden picture frame

Marco – Distribution of electronic products

Marco – Distribution of electronic products

	Classic Scenic	Marco
Price, RM	1.19	0.15
NTA, RM	0.80	0.15
P/E	14.62	7.29
ROE, %	10.18	13.67
D/Y	6.72	1.38

Have a look at their financial result.

CLASSIC SCENIC			NET PROFIT RM’000
	Year/ Quarter	2011	2012	2013	2014	2015
31/3	1	3,036	2,688	2,469	2,305	2,713
30/6	2	2,002	3,813	2,448	3,201	2,491
30/9	3	2,049	3,963	1,861	2,053
31/12	4	2,220	2,808	2,356	2,557
	Total	9,307	13,272	9,134	10,116	5,204

MARCO			NET PROFIT RM'000
	Year/ Quarter	2011	2012	2013	2014	2015
31/03	1	2,989	2,814	3,485	3,958	5,177
30/06	2	3,489	4,528	3,824	3,384	5,062
30/09	3	3,607	2,902	4,961	5,978
31/12	4	3,910	4,181	2,512	4,724
	Total	13,995	14,425	14,782	18,044	10,239

These two companies had same similarities. They are rich in cash and making good stable profit every year. Fundamentally they are good, isn’t it? However, their price seems like not doing well. The price range for Classic Scenic over the three years is RM1.05 to RM1.38 (30%), while Marco is in the range of RM0.14 to RM0.25.

Well, the element that this two companies lack of is EXPANSION. Without expansion or acquisition, they will always remain at the same place while other good companies keep improving. By looking at their cash, obviously they do not make use of their cash wisely.

CLASSIC SCENIC	2011	2012	2013	2014
Net borrowing, RM	-	-	-	-
Free cash flow, RM	19,127,459	21,723,975	16,205,843	16,523,884

MARCO	2011	2012	2013	2014
Net borrowing, RM	7,494,001	4,106,108	6,037,017	1,132,207
Free cash flow, RM	39,001,210	41,037,848	41,703,573	41,502,475
Net cash, RM	31,507,209	36,931,740	35,666,556	40,370,268

Marco doesn’t have dividend policy and it only gave out 0.2 cent on FY14. Dividend yield is only 1.38%! The company unwilling to pay out a little bit more for its shareholder even though they had RM40m cash on hand. They rather keep the cash from not doing anything.

Classic Scenic had a dividend policy of 50% and it gave out 8 cent on the previous financial year. Its current dividend yield is 6.72% which is pretty attractive. Besides that, 92% of its revenue is from oversea countries. Classic Scenic is one of the beneficiaries of weakening of MYR.

As a conclusion, a company without expansion is not attractive to invest even though the company is making good profit constantly every quarter and cash rich. In order to compete with other good companies, this type of company needs to have at least one or two advantages/strength as catalyst to move its share price. Classic Scenic has two but Marco doesn’t has any, that’s the reason why Classic Scenic price movement is moving up but at a very slow pace while Marco always remains the same.

Just for sharing.