Is FACBIND a value trap?
Value Investing Case Study 72-1: FACB Industries Incorporated Bhd: Cash-rich hidden gem or the ultimate value trap? Unveiling its untapped potential!
From mattresses to power plants, FACB Industries Inc Bhd’s (FACBI or the Group) journey has been extraordinary. Once a household name as Dreamland Holdings, the company diversified into the steel sector in the early 1990s. It was also the first Bursa company to invest in China.
There was a change in the controlling shareholder in the mid-1990s and the company was renamed FACBI. However, the new controlling party did not undertake any major business expansion or diversification.
The current bedding operations and investment in China were the existing operations at the time of the change in controlling shareholders. Furthermore, the Group is no longer in the steel business.
The cessation of the steel operations and the sale of a parcel of land resulted in the company holding about RM 200 million cash as of FYE 2024. With this cash reserve and the history with China, has FACBI reached its peak, or is it an untapped potential for savvy investors?
Join me as I carry out a fundamental analysis of FACBI to determine whether it is a hidden gem. Unfortunately, I think it is a cash-value trap.
Should you go and buy it? Well, read my Disclaimer.
Contents
- Company background
- Operating performance
- Financial position
- Valuation
- Conclusion
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Company background
FACBI was listed on Bursa Malaysia in the 1980s as Dreamland Holdings Berhad. Following its diversification into the stainless-steel pipes and fittings industry in the early 1990s, the company was renamed Kanzen Berhad. In the mid-1990s there was a change in the controlling shareholder of the company and it was renamed FACB Industries Inc Bhd.
The Group started as a mattress manufacturer and this is still a core business today. A pioneer in spring mattress technology in Malaysia, this bedding division operates under the "Dreamland" brand.
Apart from mattresses, the bedding division also manufactures pillows, cushions, bedding-related products, and polyester fibre. The bedding operations has three factories in Muar and more than 600 wholesale dealership stores in Malaysia.
The Group was the first Bursa listed company to invest in China with the first spring mattress joint venture in Tianjin, China in 1987. Today the Group investments in China cover the operations of manufacturing and sales of mattresses and its related products, and power generation.
Although the steel pipes and fitting business was the major revenue and earnings contributor in the 1990s, the Group is no longer involved in the steel business:
- The carbon-steel pipe business was discontinued in 2012.
- In 2013, the Group divested its stainless-steel pipe business for RM 34.5 million.
- The stainless-steel fittings business ceased operations in 2018.
As such I would classify the Group operations today into the following:
- Bedding. This is undertaken through its subsidiary – Restonic (M) Sdn Bhd – which is currently an 85.72 % majority-owned joint venture with Lembaga Tabung Angkatan Tentera.
- China. The only operation here is the power plant in China held via its 55 % owned Kanzen Energy Ventures Sdn Bhd. The rest of its China operations are treated as associates amounting to an investment of RM 24.8 million as of FYE 2023.
- Others consist mainly of cash amounting to about RM 161 million and securities of about RM 40 million in FYE 2024. The bulk of the cash came from the 2012/13 disposal of land and the steel pipe businesses.
In FYE 2024, cash and securities accounted for about 82 % of the total assets. I would consider FACBI a cash-holding company.
To get a sense of the contribution of each of the operations, I carried out a return analysis as shown in Table 1. You can see that the Group's overall return is low because:
- Only the Bedding operation is delivering good returns.
- A big part of the net assets is tied up in cash that historically generated low returns.
Note: FACBI has Jun as its FYE. As such unless stated otherwise, the years in this article refer to the financial years.
Operating performance
In looking at FACBI P&L statements, I noticed that it categorized interest income as part of “Other income”. This resulted in the interest income being part of the operating income.
In my usual analysis of the operating performance, I exclude the interest income and interest expense. This is because, in my valuation, I treat cash as part of the non-operating assets.
I had thus to re-cast FACBI’s operating income and hence the NOPAT to exclude the interest income.
Furthermore, I normally look at the past 12 years' performance to get a sense of the performance trend. In the case of FACBI, due to the changes in the business direction post-2018, it makes more sense to focus on the post-2018 performance.
In this respect, from 2019 to 2024 (refer to the left part of Chart 1)
- Revenue grew at 3.3 % CAGR.
- PAT grew at 29.1 % CAGR.
- From a capital efficiency perspective, there was also an uptrend in gross profitability (gross profits/total assets).
There were several reasons for the better profit growth:
- Profits started from a low base of RM 2.3 million in 2019 to reach RM 8.1 million in 2024.
- Gross profit margin grew from an average of 36% in 2019/20 to 41% in 2023/24.
- The profits from its associates grew from RM 0.1 million in 2019 to RM 2.5 million in 2024.
I have earlier mentioned re-casting the operating income to exclude interest income and expenses. On such a basis, FACBI only generated positive NOPAT for the last 3 years when looking at the 2019 to 2024 results.
This resulted in an average ROIC of negative 0.7 % from 2019 to 2024. For the same period, the average ROE was 2.4 %. Refer to the right part of Chart 1. These returns are lower than the WACC and cost of equity meaning that no shareholders’ value was created.
I have earlier pointed out the reason for the low returns. Unless the Group allocated a greater sum to its operations, I would not expect improving returns.
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Chart 1: Performance Index and Returns Note: The profit spike in 2014 was due to a one-off gain of RM 62 million from land sales. |
Efficiencies
When I looked at other capital and operating efficiencies metrics, there were improving trends from 2019 to 2024. Refer to Chart 2.
- Operating efficiencies post-2018. You can see improving trends in all 4 metrics. Note that a declining operating expense ratio trend indicated an improvement.
- Capital efficiencies post-2018. There were improvements in all 4 metrics. Note that a lower cash conversion cycle in 2024 compared to that in 2019 meant an improving trend.
While the operating and capital efficiencies post-2018 were better than those pre-2018, you can see that the trends have leveled off over the past few years. As such I am not sure that there will be improvements post-2024.
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Chart 2: Operating and Capital Efficiency Trends |
Peer comparison
There are 4 Bursa Malaysia companies in the bedding business. Apart from FACBI, the other 3 are:
- HHRG. Formerly known as Heng Huat Resources Group, HHRG is principally involved in the manufacturing and trading of biomass material and value-added products, focusing on oil palm empty fruit bunch fibre and coconut fibre. HHRH also manufactures and distributes its brands of bedroom furniture like mattresses and bedding sets.
- Lee Swee Kiat (LEESK). LEESK is one of the most extensive mattress manufacturers in Southeast Asia with one-stop production lines including natural latex foam, polyurethane foam, and various spring productions. More than 50% of LEESK products are exported. LEESK operates a retail chain store under the International Brands Gallery.
- Yoong Onn (YOCB). Yoong Onn is a leading integrated designer, manufacturer, distributor, and retailer of home linen and bedding accessories in the region. As far as I can tell, it does not deal with mattresses.
As can be seen, there are only 2 mattress manufacturers in the peer group. For more details on LEESK, refer to Is LEESK one of the better Bursa furniture stocks to invest in?
As can be seen from Table 2, FACBI is the smallest in terms of the 2023 revenue. But I would rate its revenue growth as average.
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Table 2: Peer revenue |
I looked at the trends of 4 metrics to get a sense of how well FACBIs performed compared to its peers – return on capital, EPS, EBIT margin, and Free Cash Flow margin. Refer to Charts 3 and 4.
Overall, while FACBI struggled with return on capital and EBIT margin, it has made strides in Free Cash Flow margin and has shown stability in EPS. The reliance on its cash reserves to support earnings could be a double-edged sword, leading to questions about future growth and sustainability.
- While FACBI's return on capital and EBIT margin was not the best, it became the worst performer over the past 2 years.
- FACBI seemed to have improved its Free Cash Flow margin relative to its peers over the past 2 years.
- FACBI seemed to have a more stable EPS compared to its peers. But I am not sure whether this is because a big part of the earnings came from its “stable” cash position.
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Chart 3: Bursa Peer Return on Capital and EBIT Margin |
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Chart 4: Bursa Peer Levered Free Cash Flow Margin and EPS |
Financial position
I have already mentioned that FACBI is a cash-holding company with about 200 million cash and marketable securities, equal to 82 % of its total assets as of Jun 2024.
As such I would consider it financially sound. Its other positive points included the following.
- From 2019 to 2024, it had a negative Reinvestment. I defined Reinvestment = CAPEX + Acquisition – Depreciation & Amortization + increase in Net Working Capital. The negative value implies that the amount spent on CAPEX and/or the increase in Net Working Capital was smaller than the Depreciation & Amortization. This is a good position as it meant that the company did not have to allocate funds to support its Bedding growth.
- Its Debt Equity ratio was 0.53 as of the end of June 2024. This had come down from its 2019 high of 0.67.
Its negative points are
- From 2019 to 2024, there was only positive cash flow from operations half of the time. During this period, the Group generated RM 0.9 million cash flow from operations compared to the cumulative PAT of RM 33.6 million. This is a very poor average cash flow conversion rate.
- Its capital allocation plan is nothing to shout about. Refer to Table 3.
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Table 3: Sources and Uses of Funds 2019 to 2024 |
Since the operations are small, the strong cash position more than offset the negative points. As such I would rate FACBI as financially sound.
Valuation
I normally used the Free Cash Flow to the Firm approach to determine the intrinsic value of a firm. Under this approach,
- I first discount the cash flow from the operations.
- I then add the value of the non-operating assets to determine the value to the firm. The non-operating assets generally cover cash, marketable securities, and investments in associates.
- The value of equity is then arrived at by deducting debt and minority interest from the value of the firm.
In the case of FACBI, the operation is only a small part of the business and I estimated this to be RM 3 million. The bigger contributors to the value of the firm are cash, securities, and investments in associates. Refer to Table 4.
We then have the intrinsic value of FACBI of RM 2.51 per share. But a bit part of this came from the non-operating assets. The cash value is equal to RM 1.92 per share. FACBI’s market price as of 9 Sep 2024 was RM 1.15 per share. While there is more than a 30% margin of safety, the safety came from cash and other non-operating assets.
You can see from Chart 5 that the intrinsic value of FACBI is very close to the Asset Value. You should not be surprised as a big part of the intrinsic value comes from non-operating assets.
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Table 4: Components of intrinsic value |
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Chart 5: Valuation |
Valuation model
In valuing FACBI, I based it on the operating profit model shown in Chart 6. Given the low revenue growth, I ignored growth and based it on the Earnings Power Value.
EPV = FCFF / WACC.
FCFF = EBIT(1 – t) X (1 – Reinvestment rate).
EBIT = Revenue X Contribution margin – Fixed cost.
Reinvestment rate = 0 for the EPV case.
Table 5 illustrates the calculation. The WACC was based on the first-page result of a Google search for the term “FACBI WACC” as shown in Table 6.
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Table 5: Sample calculation |
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Table 6: Estimating the cost of funds |
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Risks and limitations
FACBI is essentially a cash-holding company. While there is a margin of safety, you must remember that it comes from the non-operating assets.
In my article “Eksons is now a value trap (Oct 2023)” I have written that cash holding companies can be a value trap. Have a look.
But when you look at FACBI, the positive point about the cash is that it is not a new feature. The cash has been with the companies for about a decade and management has exercised good corporate governance over its usage.
Unfortunately, it is not a corporate governance issue. It is whether management has plans to channel it to more productive uses.
For the past 20-odd years, FACBI has been controlled by Tan Sri Datuk Chen Lip Keong, the person behind the FACB Group of companies. He bought into the company in the mid-1990s but has not done anything differently from an operating perspective.
Tan Sri passed away in Dec 2023 and it appears that the management of the company has been taken over by his son. Whether this will lead to a fresh look for the company remains unknown at this stage.
Conclusion
I would summarize the key aspects of FACBI as follows:
- The main operations came from the Bedding segment which used up about 13% of the net assets.
- The Group has about RM 200 million or about 82 % of the total assets in cash and marketable securities.
- The stock is trading below the estimated Earnings Power Value with growth, offering a good margin of safety.
My main concern is the low level of operating income and the risk of it being a cash-value trap.
So, is FACBI the ultimate under-the-radar stock, or merely a cash-rich company resting on its laurels? With its stable Bedding division and a hefty cash pile, the potential is undeniable - but only if management takes steps to invest more strategically.
Until there is clarity on the investment direction, it may be better to sit on the sidelines. The last thing you want is to be caught in a cash value trap.
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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.
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.
Disclaimer & Disclosure
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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