Is Kumpulan Fima a value trap? (Part 1 of 2)

Value Investing Case Study 14-1: The first part in the fundamental analysis of Kumpulan Fima.

Kumpulan Fima Bhd (KFIMA or the Group) is trading at RM 1.92 per share (as of 28 April 2021) compared to its Book Value of RM 2.90 per share (as of the end of Dec 2020).

This is a significant discount considering that this is a brick-and-mortar group. The Group has been profitable over the past 12 years. Is the market suggesting that its assets are overvalued and/or that the Group is going to face some insurmountable problems?

For a company to be a value trap, the cheap price must be because there is a real reason for it. The trap springs after you have bought it.

Join me in a 2-parter as I analyze the Group and explore the risks it faced. I will argue that the market does not have any grounds for its assessment. KFIMA is not a value trap.

Part 1 is presented here while Part 2 will be published in 2 weeks' time.

Should you go a buy? Read my Disclaimer.

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

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Valuation date	28 Apr 2021
Company name	Kumpulan Fima Berhad
Stock name in Bursa Malaysia	KFIMA
Company Bursa Malaysia code	6491
Bursa Malaysia sector	Industrial Products and Services
Listing date on Bursa Malaysia	1996
Financial Year End	March
Latest Quarterly results	31 Dec 2020
Shareholders’ Equity	RM 814 million (31 Dec 2020)
Market capitalization	RM 535 million (28 April 2021)
Corporate website	http://www.fima.com.my
Table 1: Company Info

What is the core business of the Group?

KFIMA was incorporated by the Malaysian Government in 1972 with the canning of pineapples as its first business.

In 1981, KFIMA became the controlling shareholder of Fima Metal Box Bhd, now known as Fima Corporation Bhd (Fima Corp).

A decade later, KFIMA underwent a Management Buy-Out in line with the privatization policy of the Malaysian Government. In 1996 KFima was listed on the Main Board of Bursa Malaysia.

Today, KFIMA is a diversified group with 4 core business divisions - Manufacturing, Plantation, Bulking, and Food. They have also expanded beyond Malaysia to Indonesia and Papua New Guinea.

Manufacturing. The Group is the largest domestic security printer in Malaysia. It has a wide range of products and services eg travel documents and licenses. The Group also operates Malaysia's only banknote printing plant.

Plantation. KFIMA is involved in the development, cultivation, and management of oil palm and pineapple estates. The Group currently owns and operates 14 estates in Malaysia and Indonesia with a land bank totaling 30,898 hectares.

Bulking. The Group's Bulking division operates five liquid bulk terminals. Three of them are located in Port Klang while the other two are in Butterworth. This division handles and stores various types of liquids. It also provides transportation and forwarding services.

Food. This division manufactures and distributes canned fish in Papua New Guinea and Malaysia. It also provides third-party food packaging services.

The Group comprises two listed entities with oil palm plantations as the common business.

Kumpulan Fima Bhd. The core businesses are plantation, food processing, and bulking.

Fima Corporation Bhd (Fima Corp) - this is a 60% owned subsidiary of Kumpulan Fima Bhd. The core businesses are manufacturing and plantations.

The chart below illustrates that there is a limited business linkage between these two listed entities.

Chart 1: Corporate structure

Case Notes

Fima Corp and KFIMA appear to be “independent” businesses in the sense that there do not seem to be many transactions between them.

As the business structure illustrates, the only common area is the oil palm plantation operation. But even these operate in different regions.

KFIMA's plantations are in Johore and Sarawak.

Fima Corp's plantations are in Indonesia, Perak, Kelantan and Terengganu.

Furthermore, at the Board and management level, although Fima Corp is 60% owned by KFIMA, the only operational link I can find are:

Both KFIMA and Fima Corp have the same Managing Director.

Both have one common non-independent non-Executive Director.

As such I have analyzed KFIMA from a consolidated perspective rather than a Look Thru one.

As you can see, fundamental analysis is more than just using some formula. There are choices to be made in terms of which approach to use and what to assume.

So, if you are just starting out to analyze and value companies, it may be helpful to supplement it with third-party analyses and valuation.

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 and valuation.

How did the Group use its funds?

The Group has a total capital employed (TCE) of RM 1.14 billion as of the end of Dec 2020, with SHF accounting for about 72 % of it. But only about 59 % of the TCE has been deployed for its operations.

The balance is held as cash, investments in securities, and associates. You can look for yourself from the table and chart.

Items	Ref	RM million
Shareholders’ Equity	SHF	814
Minority Interests	MI	231
Total Debt (incl lease)	Debt	93
TCE		1,138

Items	Ref	RM million
Net Operating Assets	Net OA	673
Net Financial Assets	Net FA	366
Non-Operating Assets	Non OA	99
Total		1,138
Table 2: Sources and Uses of Funds (3rd Quarter, 31 Dec 2020)

Chart 2: Sources and Uses of Funds

What is the current status?

The Group reported a YTD Revenue of RM 358 million and PAT of RM 49.8 million for the period ended 31 Dec 2020. For the same period last year, the Group had a YTD Revenue of RM 379 million and PAT of RM 32.4 million.

The Group attributed the lower revenue to the lower revenue from the Manufacturing, Bulking and Food divisions. Covid-19 was mentioned as the main cause for the decline in the Manufacturing and Food divisions’ revenue.

The better profits were due to the improved Plantation and Bulking divisions’ profits. This has more than offset the lower profits from the Manufacturing and Food divisions.

Note that all the 4 core business divisions were profitable in the 9 months ended Dec 2020. This was unlike the 9 months ended Dec 2019 where the Plantation division incurred a loss.

The Group revenue has been on an uptrend over the past 12 years. But the PAT and gross profitability have been declining as can be seen from the Performance Index chart below.

Chart 3: Performance index

You can see that the profits hit a high in 2012 and have been declining since then.

There is no one simple explanation for the decline in profit and gross profitability. This is because of the diverse business of the Group. As such you would have to look at specific segment performance.

Even so, there are a few extraordinary events worth pointing out:

The marked reduction in profit in 2017 was due to the impairment of RM 29 million to cater to the land title issue in the Group’s Indonesian plantation.

The 2018 results were affected by the loss of a major supply contract by the Manufacturing division.

The deterioration in the profits has resulted in a decline in the returns. From 2009 to 2011, the average ROE was 16 % compared to the past 3 years' average ROE of 5 %.

Table 3: Past 3 years performance

Note 1. Gross Profitability = gross profit/total assets

You may think that with a 5 % average ROE for the past 3 years, the Group is not generating enough returns for the shareholders.

But this is because not all the cylinders were firing. If you analyze the performance by the various divisions, you have the picture as illustrated below.

Table 4: Division's performance

Notes

1) TCE = Total Capital Employed as of FYE 2020

2) Average Revenue and EBIT was time-weighted average from 2009 to 2020

3) Corp/Others include inter-co elimination. The bulk of the TCE was cash, securities, and investments in associates.

The Plantation and Food divisions did not generate enough returns (EBIT/TCE) compared to the Manufacturing and Bulking divisions. At the same time, the returns from cash and securities were not significant to offset the inter-co eliminations.

Part of the reason for the low return from the Plantation division is the legal dispute over a significant part of the land in Indonesia. This has affected the plans to expand the planted areas. I will cover this in detail later.

How did the Group get here?

Although the Group started in the canning of pineapples, over the years it had ventured into non-food sectors. These include such diverse businesses as security printing, stock-broking, and trading.

Not all the new ventures were success stories and by 2009, the Group had exited the non-profitable ones to focus on the current 4 divisions. In fact, in 2009, the Group even decided to exit from the pineapple canning business.

From an operations perspective, the Group looks like a conglomerate. It has 4 diverse businesses - security printing, plantations, food, and bulking.

The Group’s revenue has grown over the past 12 years with each division contributing different growth as can be seen from the chart below.

By 2020, the Manufacturing division revenue had shrunk to 27 % of the Group’s revenue compared to 43 % in 2009. This division revenue had actually been growing until 2017/18 when it lost a major supply contract.

The revenue for the other 3 divisions has grown so that by 2020, all the 4 divisions seemed to have about similar contribution to the Group’s revenue.

The Plantation division grew via planting on existing plantation land as well as acquisitions of estates.

Chart 4: Segment revenue

In terms of regional contribution:

The Indonesian operation is mainly from the oil palm plantation while Papua New Guinea’s main operation is fish canning.

The Malaysian operations cover the 4 business segments. The Malaysian contribution has shrunk from an average of 70 % of the Group revenue from 2009 to 2011 to an average of 51 % from 2018 to 2020. This is the result of a reduction in the dollar revenue for the Malaysian operations as well as the growth of the Group’s revenue.

As can be seen from the chart, the growth came from Papua New Guinea.

Chart 5: Revenue by regions

Each divisions’ profits were driven by different factors as they operated in different sectors of the economy.

The Manufacturing division's profit is today smaller than that a decade ago due to the loss of a major supply contract.

The Plantation revenue is dependent on the planted acreage as well as the palm oil prices. The Group had about 7.6 hectares of planted oil plan in 2010. This grew to 14.6 hectares by 2020. KFIMA's plantation business is relatively small. Its planted area is less than 1 % of the total planted areas of the top 3 plantation groups in Malaysia (Sime, KLK, and IOI).

The Food division incurred a loss in 2009 partly due to the cessation of the pineapple canning operation. This is a low profit-margin business.

The revenue growth in the Bulking business came from added storage capacity. But as can be seen from the table below, the profit margins have declined over the years.

Chart 6: Segment EBIT

Over the past 12 years, while the Group’s revenue has grown, the profits have declined. Excluding the 2 extraordinary events (Indonesia land title issue and the loss of a supply contract), the declining profits were due to:

A decline in the gross profit margins.

An increase in the Selling, General and Admin expenses both in terms of dollar terms as well as % of the revenue

Table 5: Key statistics for 2 different periods

What is the future of the Group?

The Group is structured like a conglomerate with 4 diverse business segments. The economic factors affecting each of the business segments are different. As such I will look at the 4 segments separately.

Manufacturing

The Group's main manufacturing arm was originally the Malaysian government printing operations. It printed many of the government’s security and confidential documents such as passports.

It was privatized and became part of KFIMA which then continued with the government printing business.

Chart 7: Manufacturing division's revenue profile

The Group did not provide a breakdown of the various product categories until 2017. In 2016/17, the supply contract for travel documents expired and the Group lost the tender to a more tech-oriented proposal. The result was a large drop in revenue as can be seen from the chart.

The Group said that it would adapt the business to be a multi-platform one as well as expand to the nearby geographies. But, the Group has not been able to find a replacement business on the same scale. So the Manufacturing division revenue has plateaued over the past 3 years.

The Manufacturing division's historical performance was due to its government printing legacy. I am not sure whether it can win back the travel document business. The real challenge is whether it would also lose the transport business. As such I would not project a bright future for this division.

On a positive note, the 2020 revenue is about the same size as that in 2009. So even if there is no growth, if the division can maintain its current position, it will still contribute to the Group's bottom line.

Plantation

The Plantation division is now focused on palm oil. In 2020, the pineapple plantation accounted for less than 3 % of the division revenue.

KFIMA Plantation division is a small operation in the context of the Malaysian oil palm plantation industry.

Palm oil is a global commodity with cyclical demand. Malaysia is the second-largest palm oil producer and exporter globally. Malaysia has 32.6 % of the international palm oil industry market share. But, the export volume has been dropping over the past 5 years due to the European Union's concerns over sustainability.

But the industry does not look like it is a sun-set one. Firstly, the industry is moving towards a sustainable model although it looks like a long road ahead.

Secondly, palm oil is relatively cheap because it is something of a wonder crop. It grows relatively quickly, is easy to harvest, and is productive.

“A hectare of oil palm can reliably produce four tonnes of vegetable oil every year, compared to 0.67 tonnes for rapeseed, 0.48 tonnes for sunflowers, and just 0.38 tonnes for soybeans. Under ideal conditions, high-yield oil palm cultivars can produce more than 25 times as much oil as soy can for the same area of farmland”. BBC

Based on the above, there are still growth opportunities for the Plantation division. I see the following sources of growth:

New plantation land through acquisition. The Group currently has 528 hectares of pineapple plantation land that could be repurposed for palm oil.

Increased in % of the land area planted. As of 2020, about half of the available land has been planted.

More mature palms. In 2020, the mature areas accounted for 86 % of the total planted areas.

Improved productivity - higher FFB (free fruit branches) yield and higher oil extraction rates.

A profile of how the division has grown over the past 10 years can be seen from the table below.

Table 6: Plantation division history

Notes

a) From the list of properties - oil palm plantation. Includes 19,876 ha in Indonesia and the agricultural land in Perak.

There is still the potential to increase the planted areas and improve the FFB yield. This could be done over the immediate to mid-term without considering further land acquisitions.

Note that from 2009 to 2020, the division's revenue grew at 6.4 % CAGR. I expect this to continue although I am confident it should be higher.

Food

The Food division has two segments:

Manufacturing and distribution of canned and frozen fish in Papua New Guinea (PNG). This accounted for 96 % of the Food division revenue in 2020.

Trading of food products and contract packing services of powdered beverages and condiments. These were mainly carried out in Malaysia.

The Group did not provide a breakdown of the above segment revenue. However, I estimated that the Food division revenue growth appears to be driven by the PNG operations. This grew at a CAGR of 5.7 % from 2009 to 2020. In 2009, PNG contributed 88 % of the Food division revenue. This increased to 96 % by 2020.

According to the National Fisheries Authority of PNG, the fisheries potential of PNG is yet to be realized.

Tuna is the largest PGB fisheries. The catch from PNG waters accounts for 20 % to 30% of the regional catch and is about 10% of the global catch.

Export value is now doubled that in 1999.

But as shown earlier, this is a low-margin business. While there are prospects of export growth from PNG, I would not expect double digits growth in revenue or profits from the Food division.

However, there is no reason why the division revenue growth rate cannot be sustained at its historical CAGR of 4.9 %.

Bulking

From 2009 to 2020, the Bulking division has managed to double its revenue by growing at a CAGR of 6.5 %. But as shown earlier, the margins have halved. Effectively the profits were at a standstill if not decreased slightly.

This is mainly a storage business where revenue growth is constrained by storage capacity. The Group currently has 278,790 MT of storage tank capacity.

Long-term growth would depend on capacity expansion. In the past KFIMA had expanded through acquisitions as well as the construction of new storage tanks. For example:

In 2009, the Group bought out the minority interest in one of its joint ventures.

New storage tanks with 13,000 MT capacity were added in 2013.

The Group has said that capacity expansion is one of the division’s key focus areas.

Conclusion

In 2020, the 4 divisions contributed about the same amount of revenue to the Group. Leaving aside the issue of cyclical product prices, I would conclude that:

The Plantation division is the one with the best growth prospects.

The Manufacturing division would have the worst.

There are still growth prospects for the Food and Bulking divisions.

Given that these 4 divisions are of equal size in 2020, I would expect that the Group would be able to achieve a long-term growth rate of at least that of the GDP.

You may think that this is nothing to shout about. However, when you look back at the 2.8 % CAGR from 2009 to 2020, the GDP growth rate looks attractive.

Pulling it all together

The analysis has shown that:

The Group is financially sound with 1/3 of the TCE held as cash. The borrowings is less than RM 100 million.

The Group has been profitable every year over the past 12 periods covered.

In terms of TCE, the Group is focused on the plantation sector. This is also the most promising growth division of the Group.

There is still growth potential. While this may not be double-digit, it looks to be better than what the Group had achieved from 2009 to 2020.

A value trap is a stock that while appearing cheap is actually a dud because it is facing some insurmountable problems.

Looking at the summary above, KFIMA does not look like a group facing insurmountable problems. Now before we can conclude that it is definitely not a value trap, we should compare the price with its intrinsic value.

Join me in Part 2 of this series as I value KFIMA.

End of Part 1 of 2

Part 2 of 2 will be published on 6 June 2021

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.

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.

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.

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