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A Walk in the Park with Cypark Resources Berhad (5184)

Lately, I have been searching for a company which has good profit margins, a business model which is non-conventional (i.e., not manufacturing, banking, plantation, and trading in nature), and resilient to external market shocks. I hope I have found the right company! This week I will be looking at Cypark Resources Berhad (5184). Cypark is a company that is involved with the provision of environmental solutions. It has 4 main business segments which are: 1. Environmental engineering: Provision of nature conservation and environmental improvement services. 2. Landscaping and infrastructure: Provision of landscape services, project management services, and infrastructure development. 3. Maintenance: Provision of specialist maintenance works on leachate treatment plants, landscape services for parks, and maintenance of public amenities. 4. Green technology & renewable energy: Solar panel, biogas, biomass, waste-to-energy, and other renewable energy project

Home with Homeritz

Homeritz is a company that designs, manufactures and sells its own upholstery furniture. Based on its latest 2016 annual report, it does business in every continent (Americas, Europe, Africa, Middle East, and Asia Pacific) except the North and South Pole. 

Chart 1: Revenue Breakdown Based on Geographical Location

(Source: 2016 Annual Report)

The annual report, however, does not specifically state the major countries that it sells its furniture to. I’d love to get my hands on these information. But alas, I’m not a privileged investor.

Financial Analysis

Chart 2: Income Statement Breakdown

All per share figures are computed using Chart 2 undiluted number of shares. As of the end of June 2017, Homertiz has 514,000 outstanding warrants.
(Source: Annual Reports and Quarterly Reports)

Chart 2 is an extract of the income statement of Homeritz. In 2015, Embrace Industries Sdn Bhd, a subsidiary of Homeritz was fully acquired. Hence, all profits from the subsidiary now fully accrue to the shareholders of Homertiz.

In terms of profit margins, Homeritz really is quite efficient. PBT margin and PAT margin averaged 21.2% and 17.6% respectively in the 4 years under review. Revenue, PBT and PAT recorded a growth of 40%, 76%, and 56% respectively from 2013 to 2016.

But due to the large number of shares (approximately 200 – 300 million), profits were diluted. Also, as of Q3 2017 of Homeritz interim financial statements, there were 514,000 warrants outstanding. In the writer’s opinion, the outstanding warrants really are quite negligible to Homertiz’s profit.

Chart 3: Financial Health of Homertitz

Homeritz throughout the 4 years was never in a net debt position. The share price of Homeritz averaged RM0.95 for the whole month of August till early September 2017. It should be noted that 20% of Homertiz’s share price consist of cash.

This leaves us with this question, what is the remaining RM0.56 worth?

In order to determine what Homertiz’s operations are worth, lets delve into its cash flow.

Chart 4: Cash Flow Analysis of Homertiz

The best way to tell a healthy business is to look at its cash flow. I’ve listed the 4 most relevant years 2016 – 2013. In this 4 years, Free Cash Flow has been above RM16 million per annum.

Now, if we were to account for the purchase of freehold land of about RM8 million as one-off in nature, and were to add back to free cash flow, Free Cash Flow/ Revenue for 2016 was approximately 17%. So Free Cash Flow/ Revenue averaged 17% for the past 4 years under review. Hence, for every dollar sold, 17 cents was received as cash, which would equate to roughly 9 cents per share. Not too shabby for a furniture company.

Say if we were to project and try to value this company at a conservative constant growth rate for 5 years until 2021, what is the potential value of this stock? 39 cents for saleable asset value plus 43 cents [9 cents per year till 2021 with a constant growth rate of 6% per annum discounted at 7.5% (an investment should best 4% of annual inflation and 3.35% of FD rate per annum, otherwise it’s not worth the money)], this brings us to 82 cents. Decent but not outstanding.

Chart 5: Attempting a 5-year forecast

Prospects for this company
We know that this company exports 99% of its furniture overseas, of which 54% to Asia Pacific and 41% to the Americas. 100% of its trade receivables and payables are denominated in USD as of the end of 2016. Based on my understanding, a significant portion of sales are in USD and probably 40% (read this somewhere in an article or annual report) of costs are denominated in USD as well. Cost drivers are most probably imported leather (USD denominated), manpower (RM denominated and consist of approximately 12% of revenue), and wood. Homertiz spends around RM1.5 million on research and development annually. At least it’s still committed to improvement.

Map of which Homeritz Products are Sold To

Highlighted in Yellow are the areas in US where it was severely affected by hurricane Harvey and Irma. So, if management is smart, they should try to market to these poor folks. Consequently, we should see revenue increasing. Logically, we should see some demand in Homeritz’s furniture in the near future.

In terms of the potential appreciation of the MYR against the USD, I’m not too sure about that. But if nothing changes, based on our valuation above, this is still a decent investment. Whether the appreciation or the depreciation of the MYR against the USD persists, Homertiz’s profit margins are still sound and has some buffer for a rough ride.

Furniture business isn’t a fancy industry nor is it an industry that will be going out of business soon. My view is that everybody needs furniture, despite the low rate of furniture replacement, there are still many more people out there who needs a new furniture set – those who are getting richer and those that need to replace their damaged/old furniture. As an Original Equipment and Design manufacturer, this company enjoys decent profit margins. Also, it has been steadily growing for the past 5 years. However, this is no guarantee that future performance is guaranteed, but based on its latest Q3 2017 quarterly report, management is looking forward to a profitable 2017.

For a technical analysis review of this stock, readers are encouraged to refer to read my article >>> HERE.

If you like my posts and this blog please SUBSCRIBE in the link above or follow me on Google+ !!!    THANKS

Note: This is not a recommendation to buy or sell this stock by the writer. The writer owns shares in this company. The writer intends to share his view point on this stock’s potential investment value, any decision to invest or sell shares in this company is entirely at the reader's own risk.


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