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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

Apollo Food Holdings Bhd (6432)

Is investing in Apollo Food Holdings Berhad (6432) a secure and risk-free investment? If you are not sure what Apollo Food Holdings does, you would at least have come across its products in your childhood. Do these snacks below ring a bell?

Who would have thought that this company is listed on the Malaysian Stock Exchange? Based on the BCG growth share matrix, Apollo Food is categorized as a “cash cow.” Milking cash from its day-to-day operations. There has not been much excitement in its share price; it has been in a trading range of RM4.50 – RM6.00 for over 2 years.

This stock will ultimately disappoint investors who are seeking growth companies with quick capital appreciation. However, those who are seeking a safe haven for their capital, or intend to protect their capital may consider this stock in their portfolio.

To invest in Apollo, an investor ought to look at a longer time horizon. Hence, I will be looking at a time frame of 5 years.

Chart 1: Key Financial and Investment Statistics for Apollo Food


There has not been much growth in terms of sales for this company. Based on its quarter on quarter (Q-o-Q) financial results, revenue has been trending sideways (Refer Chart 2 below). Apollo Food products are timeless as taste buds for chocolates and sweets seldom change. However, there is a possibility that taste buds will get more sophisticated and will gravitate away from traditional chocolate products. This is likely the case as South East Asia, Apollo Food’s main area of business, continues to develop economically.

Chart 2: Quarterly Revenue Trend for Apollo Food

Based on its Q-o-Q results, it seems like revenue has been consistent. Only dipping in July 2017 (Q1 2018). However, if we scrutinise its full 12 months revenue, a clearer declining trend is evident. Refer Chart 3: Annual Sales by Region below. Well, it can be said that its products are gradually getting less popular and consumers’ (mainly children) taste buds are getting more sophisticated.

Chart 3: Annual Sales by Region

Other than a declining sales trend, there are 2 main issues afflicting this company. Firstly, its raw material costs have been escalating. In financial year 2017, its gross profit margin was 20% and recently in July 2017, its gross profit margin decreased to 18%. Prior to financial years 2017, its gross profit margins were above 25%; refer Chart 1 above. Secondly, employee salaries have been trending upwards (Chart 1). Employee salaries have grown at a compounded annual growth rate (CAGR) of 7.3% over the last 5 years, outpacing revenue growth.

In terms of its financial position, Apollo Food has a solid balance sheet. As of July 2017, it had approximately RM120 million worth of cash and liquid assets. Gearing is practically zero as Apollo is a debt free company.

30 cents dividend per share forever?
Is this possible? 30 cents dividend per share amounts to a pay out of RM24 million per year. With a cash pile of RM120 million as of July 2017, assuming net cash flow is zero, this can go on for another 5 years. Hence, I think dividends of 30 cents per share may not be sustainable. Possibly, the high dividend per share was declared to discourage shareholders from disposing Apollo Food’s shares to stabilise its share price from declining further. I think Apollo Food would revert to a more sustainable dividend pay-out per share, closer to 20 to 25 cents per share. Chart 1 above would give you a better understanding of the cash flow of Apollo Food.

So is RM4.50 per share expensive?
I’m no expert on discount rates and perpetual growth rates. 


But below is just an assumption:
If we were to simply value Apollo using the Gordon growth model, assuming constant dividends of RM0.25 per share until perpetuity, what would be the value of this stock? Note that this is just a hypothetical value and is not meant to be the true value of this stock. Say, it pays out annually RM0.25 in perpetuity, at a constant growth rate of 2%, and discount rate of 8.00%, we would arrive at an approximate value of RM4.20 per share.

Apollo Food’s net assets per share is RM3.20. Its rolling past 4 quarters earnings per share (EPS) was around 20 cents. So price earnings ratio (PE) is 16 times at RM3.20 (net asset value per share). At RM5.00, its PE is 25; the difference between the former and latter PE is a PE of 9 times. Considering that growth in terms of revenue, profits and cash flow are quite limited, I think its current valuation is rather high.

Chart 4 below shows the different dividend yields of Apollo Food based on a price range.

Chart 4: Dividend yields


Chart 4: Apollo Food Holdings Historical Share Price

Currently, Apollo is trading at its long term support/resistance level of RM5.00. The likelihood of its share price moving below its support level of RM5.00 is possible.

Opportunity as an investor
As an investor, my key rule for a great investment is the price that I pay for it. The higher the purchase price, the lower the investment value.

The stock market as described by Benjamin Graham is a voting machine, allowing us to purchase stocks at varying prices depending on its ”mood.” As investors, our job is to pounce on opportunities when it is most favourable to us. When conditions are unfavourable, it is best to wait at the side lines.

Currently, the FBMKLCI has been on a bullish rally. Do check out this article on a technical review of the FBMKLCI to get an idea of its potential trend 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. The writer does not own 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.

Comments

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  3. Thank you so much for sharing your thoughts on Apollo. It was a great company I kept for several years due to its consistent good dividends. But the last few quarters of its not so exciting earnings prompted me to sell off. Definitely I will revisit Apollo again when it can improve on its earnings in future.

    ReplyDelete
    Replies
    1. Welcome Kassim ! Yup, I once held Apollo too... but alas, every good thing will come to an end... I really hope the management of Apollo is more dynamic and that they will introduce more exciting stock keeping units (SKUs) in the market. Hope they can introduce more positive change =)

      Delete
  4. I was watching this stock for past few months, it is 4.44 now, do you think it will keep dropping below 4.20? It's a good stock for those who want to keep it for dividend.

    ReplyDelete
    Replies
    1. Hi Lee,
      Looking at the charts, the down trend is still persisting. Although I see a strong bearish rejection pin bar on Feb 2, 2018, it may indicate immediate pullback to a higher price. Also note that the price action shows that Apollo is oversold at the moment, which may potentially indicate a pullback. Overall trend is bearish and I can only say more after its share price consolidates further.

      However, if you are looking to keep it for dividends, you would have a longer time horizon. At RM4.44, if dividends for 2018 is 20 (if 25) cents, your yield for 2018 is 4.5% (5.6%) -- conservative rate. So, it depends if you are satisfied with this yield.

      Delete

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