What a week! 1Q2011 has come to a close with the developed markets registering healthy gain and overall a good quarter for equity market investors who have good exposure to the US and Europe.
So what should we play for 2Q2011? Lets see. Why don't we start off with a nice stock pick to whet our appetites? For Singapore, I would like to say we have seen quite a good rally on the smaller caps. I really wonder why Singaporeans love to stick to our own stocks when our less illustrious neighbor have many more stocks that are trading at super low valuations.
I have to be honest, I have stopped buying Singapore stocks because as a value investor, it is really getting a lot harder to buy stocks in here. The valuations are sucky and if we are arguing on a corporate governance standpoint, it is just ironic that we have 3 companies that have suspended trading in their shares over the past 3 weeks in Singapore. So lets not give poor excuses and be honest with ourselves. We are cowards....Why? Everyone recalls the Clob share days but that was during a time when the markets were under substantial duress. Now the chances of such happenings are just not fathomable.
Ok I have to say, Malaysian stocks are just more exciting than Singapore. Why? What was the most exciting stock over the past 3 weeks? Ramba energy? Dyna-mac? Yeah both were up more than 20% over the past 2 weeks. How about in Malaysia? Seal Inc? Up 41% in 1 day. I rest my case. Fundamentals? Dyna-mac is trading close to 20 times p/e with no contract wins. Ramba? Loss making company with lots of promises about oil production. Seal? Timber company trading at 16 times p/e and trading 10 cents below its book value.
Expect more Malaysian stock picks to come because I really want to share with you all the cheap stocks I can find and am personally buying.
Lets start off with one of my favourites. QSR Brands.
QSR Brands operates over 980 outlets in Malaysia, Singapore, Brunei, Cambodia and India. In addition, via its associated company, KFC Holdings (Malaysia) Bhd, it operates over 620 KFC restaurants in Malaysia, Singapore, Brunei, Cambodia and India. KFC Holdings also manages over 35 RasaMas restaurants in Malaysia and Brunei as well as 52 Kedai Ayamas in Malaysia.
Ayamas Food Corporation Sdn Bhd, an associate of QSR Brands, is the first company in Malaysia to sell chicken and chicken-based products in an air-conditioned environment, and the first to offer an array of chicken roasters and light, chicken-based snacks.
Its first convenience store was opened at Seapark in 1988. Today it has some 52 stores under the name Kedai Ayamas. The store markets top quality halal branded chicken that has been hygienically processed and packed in the company's own processing plants.
Through its stake in KFC Holdings (Malaysia) Bhd, QSR Brands has invested in a variety of related activities that support the Group's core restaurant business.
Poultry integration is crucial to the Group's operations, providing consistent support services; a stable source of quality chicken at very competitive prices; better cost control; and the ability to supply the fast-expanding open poultry market, locally and abroad.
The Group's modern, computer-controlled feedmill began operations in 1990 with an installed capacity of 120,000 metric tons per annum. Since then, the demand for its high quality poultry feed has prompted the Group to increase the feedmill's capacity to 160,000 metric tons per annum. One of the largest single feedmills in Malaysia, it supplies to The Group's breeder farms, broiler farms as well as contract broiler farms take up more than 90% of the production while the balance is sold in the open market.
Located in Port Klang, Malaysia's premier port, the feedmill imports the best quality feed grains and raw materials from Asia, Australia, Europe, the USA and South America. It conducts regular quality control checks at every stage of production. The feedmill also applies stringent quality controls to ensure that the best quality feeds are produced for are met for the optimal growth and liveability of the chickens.
In 1988, KFC Holdings (Malaysia) Bhd, an associate of QSR Brands, started a broiler breeder farm using the Ross Breeds of Scotland. A premier breed, the fast-growing Ross broilers are noted for their good body conformation, liveability, efficient feed conversion and high meat yield.
Each year, some 320,000 parent stocks are imported and housed in the Group's five breeder farms. The farms and hatcheries produce 36 million day-old chicks per annum, catering to the Group's own requirements.
The Group keeps abreast of new breeding technology to ensure the highest quality day-old-chicks are produced. The breeders are reared in temperature-controlled chicken houses and fed with nutritionally formulated-feeds to optimize production.
Strict sanitation and bio-security controls are practiced in the farms at all times. Each chicken house is well spaced out from the others so as to minimize disease outbreak and contamination. A diagnostic laboratory monitors the health of the breeders and the quality of the chicks produced.
In order to meet its broiler requirements, Ayamas Food Corporation, an associate of QSR Brands, operates a highly efficient contract broiler farming system. Day-old-chicks and feed are supplied to over 100 contract farmers throughout Malaysia. The Company's qualified field extension specialists pay regular visits to these farms to check that the husbandry practices and feeding programmes established by the Group are strictly followed.
To further motivate the contract farmers, fees are based on their performance and the quality of the chickens reared. Upon reaching the desired weight, the chickens are sent to the Ayamas processing plants in Port Klang, Penang and Johor.
Ayamas has recently taken further steps to expand its poultry production to meet increasing consumer demand. Its target is to raise monthly fresh bird production from three million to four million.
In 2009, Ayamas embarked on an Intrapreneur Broiler Farming Scheme whereby company staff are encouraged to become Intrapreneur broiler farmers, with qualifyinf staff each being given a farm to manage with a capacity of 100,000 broilers per cycle. The Intrapreneur will hold a 25% stake while Ayamas will hold a 75% stake. This scheme will help to increase the broiler production to meet the Group’s growing demand for chicken.
Through its associate KFC Holdings (Malaysia) Bhd, the QSR Group engages in poultry processing and secondary processing.
Primary processing involves the halal slaughtering and production of chicken and chicken parts to the required specifications. Secondary processing involves the processing of poultry products into convenience foods like burgers, nuggets, kiev, bologna, smoked chicken, satay, sausages, chicken balls etc. to be marketed under the Ayamas brand name.
Each day, the Group's two plants process 110,000 birds. The Ayamas plant in Port Klang, Malaysia, is the largest poultry processing plant in the country and one of the largest in the Asia Pacific region. It has modern equipment and processes more then 80,000 birds per day and 1,500 metric tones of secondary processed poultry products per month.
Distribution is handled internally by a large fleet of refrigerated trucks. This direct delivery from plant to customer ensures the freshness of products as well as consistency of supply.
The Group's emphasis on processing quality has won international recognition, including awards from Yum! Brands International. Yum! Brands International is the world's largest restaurant system with over 37,000 KFC, Pizza Hut, Taco Bell, Long John Silver A&W and WingStreet.
Currently, secondary processed products are exported to Singapore and Brunei. The company is exploring opportunities to export to Indonesia, the Middle East and elsewhere.
In 1994, QSR Brands acquired a controlling interest in Region Food Industries Sdn Bhd (RFI). Under the group's strong leadership, RFI is now one of the country's leading sauce manufacturers, producing 12 million bottles per annum.
Using state of the art machinery, RFI processes premium quality natural ingredients into superior quality sauces. It has its own comprehensive R&D Department which develops new products for an increasingly sophisticated market.
The RFI plant conforms to international manufacturing standards. This was further augmented with the ISO 9002 certification awarded to RFI since 1999. The certification of its standards enabled stronger penetration into the export market. Currently, RFI products are exported to UK, USA, France, Australia, New Zealand, Japan, Hong Kong, Mauritius, Maldives, the Middle East, Brunei and Singapore.
Locally, RFI supplies Life tomato ketchup and Life chili sauce to KFC, Pizza Hut, RasaMas and other fast-food operators. Its products are also found in most major supermarkets, hypermarkets and provision stores.
The Group's commissary is Malaysia's largest vegetable commissary. The ultra-modern facility was set up in order to meet the increasing demand from the restaurant chains and to tap the potentials of the open market.
Currently, it supplies the Group's KFC and Pizza Hut restaurants chains with coleslaw, salad, vegetables and other types of fresh products.
Bakery – The bakery initially started out as a supporting business to the KFC restaurant chain manufacturing buns for KFC meals. Its operations have since expanded beyond a mere supporting role to the KFC chain.
The bakery now produces a wide range of cakes and pastries and supplies Pizza Hut with bakery goods. With its upgraded state-of-the-art equipment, it is able to provide versatility and higher production output to further take advantage of the growing local market.
The bakery division continues to record higher sales with the commissioning of an automatic bun-line and nationwide supply of buns to KFC restaurants. Business expanded even further with the supply of garlic bread to Pizza Hut Singapore from the middle of 2003 and the increase in open market sales of bakery products. A new automatic seasoning flour blending and packing plant for Original Recipe and Hot & Spicy blends for KFC restaurants has also begun operations and is set to contribute substantially to the overall performance of the Group.
After my extensive cut and paste of the company's operations from its website, you can see the point I am trying to put across to you. I like the extensively integrated business units of the company, all of which complements one another and plays an integral part in the smooth operation of all its core businesses. Personally, I am willing to give this company a premium over its valuation. In terms of p/e, the company is trading at a trailing 12 month p/e of 13.25 times. To me its considered cheap because of the strength of the business franchise. Also, Carlyle group put a buy out offer for the company in Nov 2010 for $6.70 while its price right now is $5.33. I believe Carlyle offering a price in excess of 20 times p/e is reflective of sharing the same sentiment as me. Did I say that the company also owns quite a lot of the shop spaces they occupy in Malaysia? I like that because the thing I really dislike most about retail businesses is the burden of rent. QSR will face some of this but they are smart enough to buy the spaces which are available.
The company has a book value of $2.90 but I do not think that this is truly reflective of the actual value of its brands. I have to admit that I have a strong affinity to KFC because it is my favourite fast food chain and that is one of the key reasons to why I have so much faith in this company. One other thing, did I mention that the company generates RM300 million per year in operating cashflow? The company has only 270 million shares. What does that mean? More than $1 per share in operating cashflow. I really think this is one for the future and I challenge you to find me a company in Singapore that has such a strong business and consistent cashflow?
So here I am, calling for a strong buy for QSR brands.
Have a great trading week ahead!
Best,
SVI
Subscribe to:
Post Comments (Atom)
Posts
No comments:
Post a Comment