Is New Toyo International a Value Trap? (Part 1 of 2)

Value Investing Case Study 09-1: This is a case study of a group with 2 listed entities whose operations are intertwined. Although the holding company is listed on SGX, this case study should be of interest to Malaysians as the subsidiary is listed on Bursa Malaysia.

New Toyo International Holdings Ltd (New Toyo or the Group) is a specialty materials packaging group listed on the Singapore Stock Exchange (SGX).

It is currently trading at SGD 0.175 (as of 29 Jan 2021) per share compared to its book value of RM 0.35 per share (as of 30 Jun 2020) ie about a 50 % discount.

Why is there such a discount? Is this a value trap or a bargain? A value trap is one side of the value investing coin. The other side is that it is a steal, a bargain.

The Group has SGD 0.08 cash per share (as of 30 Jun 2020). At the same time, the value of the other assets is after accounting for impairments. Is the market expecting further impairment?

Join me in this 2-parts post as I lay out my case on why the market is wrong. It is not a value trap. Part 1 is presented here while Part 2 was published on 21 Feb 2021. An update was published on 13 March 2022

There is definitely an investment opportunity given the mispricing. Does it mean that you should go and buy? Well, read my Disclaimer.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

What is so unique about the Group?

Has it used its Funds in the Best Way?

Can you describe the Current Performance as Outstanding?

Is there a Rich and Unique History?

Is there a Great Future?

Pulling it all together - not a value trap

Valuation Date	29 Jan 2021
Company Name	New Toyo International Holdings Ltd
Stock Name in SGX	New Toyo
Company’s Stock Co	NO8
SGX Sector	Materials
Listing Date on SGX	April 1997
Financial Year-End	Dec
Latest Quarterly Results	2nd Quarter 2020, 30 Jun 2020
Shareholders’ Equity	SGD 152 million (30 Jun 2020)
Market Capitalization	SGD 77 million (29 Jan 2021)
Corporate Website	http://www.newtoyo.com/

Table 1: Company Info

What is so unique about the Group?

Founded in 1975, the Group is one of the largest producers of specialty packaging materials in the Asia Pacific region today.

The chart below shows the current corporate structure of the Group.

It has 2 listed entities in the Group - one listed under SGX and the other under Bursa Malaysia.

The Group operates in Singapore, Malaysia, Vietnam, Dubai, and China serving multinationals and local customers.

Chart 1: Group Corporate Structure

The Group has the following business segments:

Specialty Papers division headquartered in Singapore. This focuses on the production of laminated foil paper, coated paper, and metalized paper. The division has manufacturing plants in Singapore, Malaysia, Vietnam, and the United Arab Emirates.

Printed Carton and Labels division with gravure, lithography, or offset printing of packaging materials for cigarettes and fast-moving products. The division operates in Malaysia (6 plants), Vietnam (two plants), Australia, United Arab Emirates, and Indonesia.

A trading segment that focuses on tobacco packaging-related materials.

Case Notes

New Toyo International Holdings Ltd operations are handled through:

A group of companies that are held under Tien Wah Press Holdings Bhd (Tien Wah).

Other companies not under Tien Wah.

For this case study, the analysis and valuation will be on the consolidated basis of New Toyo International Holdings Ltd.

This is because the operations and strategy of the Tien Wah group are controlled by New Toyo International Holdings Ltd. As such Tien Wah group analysis and valuation should not be carried out independent of that of New Toyo.

The question then for Tien Wah shareholders - how do you value Tien Wah if its prospects are linked to those of another group? This is a practical question so that if you cannot answer it, you should not contemplate investing in Tien Wah but rather look at investing in New Toyo.

I will not attempt to look into the Tien Wah dilemma here.

When you analyze and value companies, you frequently come across such dilemmas. How you handle them will depend on your experience. If you are just starting out, rather than groping about it may be helpful to supplement it with third-party analyses. There are several financial advisers who provide such analyses. 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 tap into their business analysis, valuation, and risk assessment.

Has it used its Funds in the Best Way?

The Group has a total capital employed (TCE) of SGD 259 million as of the end of Jun 2020, with SHF and loan accounting for about 59% and 24 % of it respectively.

About 78 % of the TCE is deployed for its operations with the majority of the balance tied up in cash.

As you can see from the table and chart, it has deployed its funds effectively.

Items	Ref	SGD million
Shareholders’ Equity	SHF	152
Minority Interests	MI	44
Total Debt and Lease	Debt	63
TCE		259

Items	Ref	SGD million
Net Operating Assets	Net OA	203
Net Financial Assets	Net FA	45
Non-Operating Assets	Non-OA	11
Total		259
Table 2: Sources and Uses of Funds

Chart 2: Sources and Uses of Funds

The Group did not provide any information on how its funds are deployed regionally. However, it provided a breakdown of the non-current assets on a regional basis.

As can be seen from the chart, Vietnam accounted for the biggest portion with 31% followed by Dubai with 18%.

The point is that both Singapore and Malaysia accounted for only about 1/3 of the non-current assets. This is in line with the Group revenue profile where both these regions accounted for only 28 % of the Group 2019 revenue.

The Group may have its roots in Singapore and Malaysia, but the majority of the Group business today is outside these 2 countries.

Chart 3: Non-Current Assets Deployment

Can you describe the Current Performance as Outstanding?

The Group reported a YTD PAT of SGD 5.1 million for the half-year ended 30 June 2020 compared to a loss after tax of SGD 3.9 million for the same period last year.

This was despite a lower YTD revenue of SGD 129.4 million for the half-year ending 30 June 2020 compared to SGD 153.8 million for the same period last year.

The main reason for the better profit performance this year was the higher gross margin following the cessation of the Tissue operations in Sep 2019.

This cessation also helped to lower administrative costs as well as explains why the current revenue is lower. The Group is facing a turnaround as can be seen from the Performance Index chart.

Gross profitability has been declining since 2013.

The Group suffered losses in 2017 and 2019. The consolidation of the operations affected the 2017 bottom line by as much as SGD 12.7 million. In 2019, the Tissue segment had a loss of SGD 11.2 million.

Note that the profits in 2016 and 2018 were boosted by SGD 12.9 million and SGD 7.9 million from the sale of properties. Without these, the 2016 PAT would be at the 2008 level and there would be a loss after tax in 2018.

Chart 4: Performance Index

The average ROE and gross profitability of the past 3 years have declined compared to those for the period from 2008 to 2010.

From 2008 to 2010 the average ROE was 10% compared to the average - 3 % for the past 3 years. This was because the average gross profit margins for the Speciality Paper and Printed Carton and Label segments for the past 3 years were lower than the respective averages for 2008 to 2010.

The above decline is despite that the average revenue for the past 3 years is about 8 % higher than that for 2008 to 2010.

Table 3: New Toyo past 3 years performance

To get a better understanding of whether all the business segments have been pulling their weight in terms of the returns on the funds employed, I analyzed the segment performance as shown in Chart 5 below. Note the following in the analysis:

As the Tissue business has been discontinued, I have grouped it together with the Investments and Other unallocated items.

The Trading segment also acts as the central group procurement but only the external revenue is considered.

Chart 5: Segment performance

The analysis showed that the poor return for the Group is because only the Specialty Paper segment has generated an acceptable return (EBIT/TCE).

The Printed Cartons and Label segment which accounted for 60% of the Group’s funds in 2019 only achieved a 3 % return.

The Speciality Paper segment which employed about 21% of the Group funds in 2019 achieved a 13 % return.

The Investments and Others segment which accounted for 18% of the Groups’ funds in 2019 was not profitable.

Is there a Rich and Unique History?

The Group started its laminated paper operations in 1975 when the current founder Chairman set up a factory in Jurong, Singapore. The Group subsequently

Diversified into printing and the manufacturing of corrugated containers and tissue paper.

Expanded its operations to other countries in the region.

This diversification and expansion programme was undertaken through organic growth, joint ventures as well as acquisitions.

For example, in 2004, the Group acquired a 24.44 % holding in the Bursa Malaysia listed Tien Wah which was in the similar lamination and gravure printing business. At the same time, the Group frequently closed or divested unprofitable units. For example:

The Group completely divested out of the corrugated carton box business by 2015.

The Group ceased the tissue manufacturing operations in September 2019 after operating for less than 2 years.

In 2017 the Group ceased the Australian and Malaysian production plants and relocated their operations to Vietnam and Indonesia.

Charts 6 and 7 below show how the Group revenue profile has changed over the past 12 years.

Chart 6: Revenue by Business Segments

The current Trading segment revenue is a much smaller portion of the 2019 Group revenue compared to that in 2008.

The Singapore and Malaysian revenues have declined from 54% of the Group revenue in 2008 to 28 % by 2019.

The Group no longer has any revenue from Pakistan (by 2011) and Australia (by 2019).

Over the past 3 years, the Group has been building up its presence in Indonesia and the Middle East

Chart 7: Revenue by regions

In summary, the business model of the Group involved continuous streamlining of its operations and seeking new markets.

In spite of the diversification efforts, over the past decade about half of the Group’s revenue came from a single customer in the tobacco industry.

This meant that the Group performance, especially for the Printed Carton and Label segment has been tied to that of the tobacco industry.

Impact of business model

The New Toyo business model has resulted in frequent disposals and acquisitions of new plants and businesses as well as new ventures.

Over the past 6 years, there have been occasions where such investments have not worked out. The Group had reported the following:

2014 - There was SGD 2.3 m one-off sales rebates and SGD 0.8m redundancy costs in the Printed Carton and Label segment.

2017 - Apart from the consolidation expenses of SGD 12.7 million, admin expenses were higher by SGD 3.5 m due to the set-up costs in Indonesia and Dubai.

2018 - The learning curve affected productivity in Indonesia and Vietnam. There were start-up costs for Dubai and the Tissue operations.

2019 - apart from SGD 11.2 million losses from the closure of the tissue business, there was SGD 6.2 retrenchment and impairment cost for the Dubai operations

The reported costs and losses amounted to SGD 36.7 million, equal to about SGD 6 million per year. This is significant as, without such costs, the average PAT for the past 6 years would double.

Is there a Great Future?

New Toyo operates in the packaging printing industry. Although the Group revenue has only grown at a CAGR of 2.9 % from 2008 to 2019, this is not a sunset industry.

According to Research and Markets, the global market for packaging printing is projected to grow from USD 350.6 billion in 2019 to USD 440.6 billion by 2024. This is an estimated CAGR of 4.7%.

“The Asia Pacific region is projected to be the fastest-growing market during the forecast period, followed by Europe. In the Asia Pacific, China is estimated to be the largest consumer for packaging printing, followed by Japan.”

New Toyo's business model of streamlining the operations, joint ventures, and divestments is like what has been reported for the industry.

Markets and Markets reported that key players in the packing printing sector have adopted various strategies to strengthen their product portfolios, expand their market presence, and enhance their growth prospects. Such strategies included forming partnerships and acquisitions.

At the same time, New Toyo operates in a small segment of the global packaging printing market.

Apart from regional markets, the global packaging printing market can be segmented based on the following:

Printing technology - flexography, gravure, offset, digital, and screen printing

Material - labels, paper & paperboard, plastics, and metal.

Printing ink - aqueous, solvent-based, UV-curable, dye sublimation.

Application - food & beverages, household, and cosmetics, pharmaceuticals, adhesives, and sealant.

However, while New Toyo is not in a sunset industry, after more than 40 years in the industry, I do not expect the industry to provide a quantum leap for the Group.

While there are other geographical and application segments that New Toyo could tap into, it would be expanding into an established industry.

As such I would expect the current business to provide a “steady-base” in earnings. Any quantum leap would have to come from diversification into other sectors.

In this context, New Toyo took a step in this direction in 2016 when it formed a joint venture with Lum Chang Holding Ltd, an established SGX listed property developer.

The joint venture was to develop a mixed commercial project in Petaling Jaya, Malaysia on the former factory site of Tien Wah. The project looks promising as there have been several successful mixed development projects on former factory sites within a stone throw of the Tien Wah’s land.

I estimated that the project would contribute at best about SGD 15 million to its bottom line over a 5 years development period. (Refer to Note 1). This was based on the size of the land and that New Toyo has about 27% ownership interest in the joint venture.

Unfortunately, this project has been delayed due to the soft property market in Malaysia. Still, this should provide one profit source for the Group when the market recovers.

Tobacco

Although New Toyo did not provide any breakdown, based on its single customer contribution, I estimated that about half of the Group revenue is tied to the tobacco industry.

Given this link, it is useful to note that the tobacco industry is expected to grow about 2% to 3 % per annum based on BAT and Statista forecasts.

“Total tobacco consumption, including illicit, declined 2% from 2018 to 2019; this decline rate is forecasted to remain between 2%-3% over the next three years, while the retail value of tobacco sales is expected to increase by between 2%-4% each year, driven principally by pricing” BAT

Chart 8: Tobacco revenue Source: Statista

Pulling it all together - Not a value trap

New Toyo is undergoing a turnaround with average negative returns for the past 3 years compared to the average return of 10% a decade ago.

Part of the losses in the past few years was due to the impairment and retrenchment costs incurred in closing down some of the units and partly due to the start-up costs of the new operations in Dubai and China.

The packaging printing industry is not a sunset industry and globally the market is projected to grow at 4.7 % CAGR till 2024. This would be positive for the New Toyo turnaround plan.

As such, if the Group can maintain or even grow its revenue, it should be profitable. This is demonstrated by the half-year 2020 results.

Because of the impairment charges over the past few years due to plant closure, the book value should reflect the fair value of its assets.

At the same time, the continued operations meant that:

There is no reason for further impairment.

The book value should continue to grow.

Although I have yet to determine the intrinsic value of New Toyo, the current book value of SGD 0.35 per share compared to the current market price of SGD 0.175 (as of 29 Jan 2021) per share should provide ample margin of safety.

While a firm conclusion would depend on a detailed assessment of the intrinsic value, I would conclude that New Toyo is not a value trap.

However, if you want a more definitive answer, join me in Part 2 of this series

End of Part 1 of 2

Part 2 of 2 was published on 21 Feb 2021

An Update was published on 13 Mac 2022

Note

1) The development profit was based on the following assumptions - Plot ratio of 10 for the 3 acres site with 80 % development efficiency, selling price of RM 800 per sq ft net floor area and 20% PAT margin, and RM 1 to SGD 0.33 exchange rate.

Reading guide
If 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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I 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.

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