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Thursday, 10 December 2020

(Tradeview 2020)- Long Term Value Pick 6 : Peterlabs Holdings Berhad, My Gratitude Stock

   





Dear all, thank you for the support as Tradeview Public Channel has broken 6000 followers today. Maybe to some it is an ordinary feat but to me, I am very thankful for the interest in my writings. To be honest, as a writer with a fundamentalist investment philosophy, this journey was hard as it is extremely tough to build up readership interest or following because of the society's general tendency towards instant gratification, quick returns and "get rich now" mindset. Most would know I never write or advocate loss making penny stocks or companies with bad fundamentals however "beautiful the chart / headline news". This is because I believe strongly that investing in the stock market is a long term endeavor to built wealth over time, not a one hit wonder which disappears after the hype. This mindset have served me well through the years. 

Whether it is the 1920s or today, the stock market has captured retail investors imagination. This is particularly apt in 2020 as Bursa records historical highs due to retail investors participation which filled in the void of close to RM 23 billion of foreign funds net selling for the year. When most said the end of loan moratorium means the significant reduction of retail participation, it would appear experts undermine the retail investors' enthusiasm & appetite for the market. The market continues to rally with local funds playing mere supporting role, foreign funds selling, and retail investors buying. However, to err on the side of caution, please remember to be very careful in your stock investments especially in a heated market. Avoid loss making penny stocks and news driven stock plays. The outcome is highly dangerous & risky. One wrong pick can wipe a year's effort.

To thank everyone for the continuous support especially those who have been with me since I started writing publicly 6 years ago, I would like to share publicly a small cap fundamental stock which meets the criteria a strong balance sheet, earnings track record and good growth catalyst. Whether there is big cap, mid cap or small cap stocks, there are good companies in Bursa worth considering over speculative plays. The stock I am referring to is Peterlabs Holdings Berhad (Peterlabs). Peterlabs is in the business of manufacturing animal health products, animal nutritional feed additive and veterinary pharmaceutical to serve the livestock industry.  It is one of the rare small cap stock with continuous growth in revenue, earnings track record, consistent dividend payout, healthy yield, professional management and net cash position. Recently, they have moved to acquire 60% stake Thye On Thong Trading SB (TOT), which is an established distributor of notable consumer goods / daily essential brands with more than 30 years history. The terms of the M&A is fair and synergistic (including for distribution of Peterlabs products). I like it because of the profit guarantee and commitment by existing owner of TOT to continue to be a part of the business with a 40% stake. 





Apart from the general considerations, I like the stock despite the small outfit is because of how well it is managed. The CEO of Peterlabs, Mr. Lim Tong Seng has accumulated over 33 years of experience in the livestock industry, mainly in the animal health and nutrition sector. Mr Lim’s career in the livestock industry began when he joined the feedmill division of Industrial Farm Pte Ltd in 1978 as a Feedmill Executive. In 1984, he assumed the position of Production Executive at Agrinuser (M) Sdn Bhd, a feed additive premix manufacturing company. In 1989, he founded Benuser and spearheaded the company’s operations in manufacturing various feed additives and premixes for the livestock industry. In 2002, Mr Lim left Benuser and co-founded PeterLabs, Osmosis Nutrition and PLON Synergy together with two (2) directors from Chern Tek, namely Teo Chin Heng and Dr. Teo Kooi Cheng. 


When a management is technically strong, that is an added bonus. Having knowledge in the industry means the company is not a fly-by-night operations run by cowboys. To begin with, most loss making penny stocks in Bursa have this problem hence my apprehension in looking at micro cap stocks.  However, after an in-depth study of the company, it gives me comfort to invest in Peterlabs. Buying into a company is equivalent to buying into a management. If you do not trust the management, do not buy the company. 



The operating cashflow is healthy with RM12 million (42% increase YoY) likely due to improvement in receivables collection as well. The earlier private placement exercise (share price issued at 20.6 sens has also contributed to a strong balance sheet with cash amounting to RM27 million (net cash RM22 million) which stands at 0.49x of the total market capital. With a strong balance sheet and generous management, the dividend payout has always been rather consistent for the past 7 years except FY 2019. However, management did compensate with a higher dividend payout for FY 2020 which comes up to 4.16% yield at current market price of 24 sens.

To be honest, Peterlabs has always been a consistent feature in my portfolio. I have held it through the years and revisiting now is because of the new growth catalyst which will provide immediate term earning visibility at least for the next 2 years. This is the acquisition of 60% stake in TOT for a sum of RM 3 million in cash and issuance of  39 million new shares to TOT owner at 20 sens making the full payment consideration to be RM 10.8 million. This is good method of acquisition as it ties the interest of TOT owner with Peterlabs. Furthermore, the owner of TOT would not be silly to accept purchase consideration in shares if he is not confident with the prospects of the deal. A good indication for shareholders is the price tag of issued shares of 20 sens forms the base as well for the stock. This takes care of the downside for investors.

All companies have some risk factor and for Peterlabs, it would be the cost of materials which is imported to be used for manufacturing the end product. It means a weak Ringgit will cause margin compression due to higher forex impact (importation cost). On the contrary, a strong Ringgit will help lower cost of raw materials and enhance margin. MYR has been strengthening for the past few months and if this trend continues, Peterlabs margin would improve.  

At current share price of 24 sens, I am of the view the share price is still undervalued and there is more upside because of the past track record combined with the future potential. Although I am of the view that near term impact on the core business would still exist due to MCO / pandemic aftermath but based on my calculation, the valuation should be in the range of 30 sens taking into account of at least RM 4.5 million of guaranteed profit in the next 2 years as per the acquisition deal. 


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