Is White Horse a Value Trap? (Part 1 of 2)
White Horse Berhad (White Horse or the Group) is the leading tile manufacturer in Malaysia that is currently trading at RM 0.60 per share (as of 2 Nov 2020).
This is much lower than its Graham Net Net price of RM 0.76 per share (as of 30 Jun 2020).
The Graham Net Net is often taken as a proxy for the liquidation value.
Even if White Horse is liquidated at RM 0.76 per share, there are still the fixed assets of RM 1.87 per share (as of 30 Jun 2020) available for the shareholders.
Is the market suggesting that all the fixed assets are worthless?
White Horse is definitely trading at a low price relative to its valuation. Is this a value trap? It is only a value trap if the valuation is wrong.
In this 2-parter I will lay out my case why I think White Horse is not a value trap.
I present Part 1 here while Part 2 was published on 22 Nov 2020. An update was published on 7 Nov 2021.
Now as to whether you should go and buy White Horse - see my Disclaimer.
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Contents
- What is the core business of the Group?
- How did the Group use its funds?
- What is the current status?
- How did the Group get here?
- What is the future of the Group?
- Pulling it all together
Valuation date |
2nd Nov 2020 |
Company name |
White Horse Berhad |
Stock name in Bursa Malaysia |
WTHORSE |
Company Bursa Malaysia code |
5009 |
Bursa Malaysia sector |
Industrial Products and Services |
Listing date on Bursa Malaysia |
Oct 1999 |
Financial Year End |
Dec |
Latest Quarterly results |
2nd Quarter, 30 Jun 2020 |
Shareholders’ Equity |
RM 599 million (30 Jun 2020) |
Market capitalization |
RM 137 million (2 Nov 2020) |
Corporate website |
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Table 1:
Company Info |
Case Notes I selected White Horse as a case study because this is a Group where the Asset Value is higher than the Earning Power Value. According to Prof Bruce Greenwald, you can get strategic insights by comparing the Asset Value and Earning Power Value. Refer to Fundamentals 02 White Horse is also a good case study of how to:
I am assuming that you have the skills and interest to analyze and value companies. If you don't have the interest or skills yet want to invest based on fundamentals, you can still do so by relying on experienced analysts. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can access their business analysis, valuation, and risk assessment. |
What is the core business of the Group?
- The Group initially manufactured and distributed red bricks and roofing tiles. Today the Group produces ceramic floor and wall tiles, interchangeable floor and wall tiles, and also porcelain tiles.
- Its products are sold in Malaysia, Vietnam, and exported to more than 30 countries around the world.
- The Malaysian Brand Laureate Awards 2010 - 2019
- Ceramic World, the Group’s showroom is recognized by The Malaysia Book of Records as the largest tile showroom in Malaysia
- The Readers Digest Platinum Trusted Brand Award 2010 - 2020 in the Wall & Floor Tiles Category
- The first tile manufacturer in Malaysia to be invited by the Italian Association of Ceramic as one of the exhibitors of CERSAIE since 2012. White Horse is ranked 18th on CERSAIE’s leading companies in terms of world production and consumption.
How did the Group use its funds?
Ref |
RM
million |
|
Shareholders’ Equity |
SHF |
599 |
Minority Interests |
MI |
0 |
Total Debt and Lease |
Debt |
158 |
TCE |
|
757 |
Items |
Ref |
RM million |
Net
Operating Assets |
Net OA |
672 |
Net
Financial Assets |
Net FA |
85 |
Non-Operating
Assets |
Non-OA |
0 |
Total |
|
757 |
Table 2: Sources and Uses of Funds (2nd Quarter Jun 2020) |
Chart 1: Sources and Uses of Funds |
What is the current status?
Chart 2: Performance Index |
- The revenue in 2019 is about the same as that 12 years ago. It rose to 59 % above the 2008 figures in 2014 only to see a continuous decline since then.
- The annual profits have been declining since 2014 with the Group suffering losses in 2018 and 2019. 2020 is likely to be another year of losses.
- Gross profitability has been declining since 2010 due mainly to a declining gross margin.
- From 2008 to 2010 the average ROE was 10 %, but for the past 3 years, it has deteriorated to an average annual loss of 7 %.
Table 3: Past 3 years of performance |
How did the Group get here?
- No doubt, the larger % currently is also due to the declining Malaysian sales, but it does show that international sales may have to play a bigger role going forward.
- In 2019, international sales were RM 163 million compared to RM 73 million in 2012.
Chart 3: Historical revenue profile |
- Adding 2 kilns to its Malaysian operations
- Acquiring the Vietnam facilities
- The Malaysian facilities were operating at 94% of capacity at that juncture. It was more cost-effective and faster to acquire an existing factory than build one.
- It would enable the Group to expand its exports
- According to the Circular issued for the acquisition, the Group's annual production capacity would be increased from 28.0 million m2 to 40.7 million m2.
- I thus find it strange that in the White Horse website under the factory section, the Group current capacity is stated as 35 million m2.
- Furthermore, in 2018 and 2019, the Group’s annual production was only 22 million m2 and 16 million m2 respectively.
- The cash conversion cycle which averaged 196 days from 2008 to 2010 has deteriorated to an average of 274 days from 2017 to 2019.
- The administrative, selling and distribution expenses that average 17 % of sales from 2008 to 2010 have risen to an average of 21 % of sales from 2017 to 2019.
- The lower production volume has meant that the gross profits have declined from an average of 33 % from 2008 to 2010 to 15 % from 2017 to 2019.
Chart 4: Historical profit and expense profile |
- Introducing new products as well as rationalizing its inventory control system
- Lowering production cost eg heat recycling projects, downsizing of manpower,
- Stopping major capital expenditure since 2016.
- RM 21.4 million (net) from written off and/or written down inventories
- RM 12.1 million from impairment of Property, Plant, and Equipment
- RM 49.1 million of unrealized forex losses
What is the future of the Group?
- The decline in the Malaysian revenue is merely due to being on the down part of a business cycle
- The declining sales are not due to some secular or technological changes.
- There is the export potential
Malaysian demand
- The number of Malaysian property transactions peaked in 2014 and declined from then. However, it seemed to have bottomed in 2018.
- White Horse Malaysian revenue seemed to follow Malaysian property transactions. The correlation is 0.65.
Chart 5: Correlation between White Horse revenue and Malaysian property transactions |
Global demand
- The global ceramic tile industry is projected to grow by 7.2 % per annum over the next 5 years.
- On the basis of product type, ceramic floor tiles dominate the market, accounting for more than half of the total market. Ceramic floor tiles are followed by wall tiles and others.
- The residential sector represents the leading segment, holding the majority of the global market. Owing to their lightweight, anti-skid, and anti-bacterial properties, these tiles are preferred for use in places where hygiene is of prime importance.
- Inkwood Research estimated that the market for ceramic tiles will grow at a CAGR of 8.05% from 2019.
- Grand View Research estimated the global ceramic tiles market will grow at a CAGR of 6.7 % from 2020 to 2027.
- Research and Market - Ceramic tiles manufacturing is an environment-friendly process. Recent technological advancements have also enabled manufacturers to further reduce the emissions of carbon and other harmful gases during production.
- Inkwood Research - There is an increasing demand for eco-friendly ceramic tiles. There is a growth in the use of ceramic tiles as a substitute for other materials.
- Grand View Research - Ceramic tiles are durable, rigid, and environment-friendly materials. They comply with green building standards.
Pulling it all together
- Ceramic tile is not a sunset product.
- The Malaysian business has declined due to the soft property market. I expect the Group to return to profitability when the property market recovers
- There is growing global demand and hence export potential
Reading guideIf you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation. I suggest that you check up the Foundations series - Fundamentals 01, Fundamentals 02, and Fundamentals 03. I also have a Definitions page in case you are not familiar with the terms I have used.
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Disclaimer & DisclosureI am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
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