Balance Sheet analysis of Apollo Vs London Biscuits kcchongnz
We recalled the great growth story of LonBisc with sales growing unabated from 2006 through 2013 by 169%, or at a CAGR of 15.2% as shown in the link below. Despite of that, the net profit has been stagnant for the last 7 years, seriously out of sync with the revenue growth.
http://klse.i3investor.com/blogs/kcchongnz/52002.jsp
In analyzing the balance sheet, we look at the most important thing in the growth in equity, plus the dividends paid out. These two things determine if the company has increased shareholder value throughout the years. Figure 2 below shows equity of LonBisc has in fact grown by 165%, as much as the revenue growth for the same 7 years period, or a CAGR of 15%! The dividend yield is insignificant with less than 2% a year.
But how come such a great growth in equity when the earnings has been flat for the last few years? Yes, you probably guess it right; the growth is not from retained earnings of the past year which we should hope for, but with the money forked out from the shareholders pocket through right issues and private placement. The share capital, as a result, has doubled since 7 years ago to 142m now. On top of that, LonBisc’s borrowing has also been increasing every year unabated by 143% from 108m to 263m now as shown in Figure 2 below.
In contrast, the slower but steady growth Apollo has a steady increase of its equity of 5.3% a year. Together with a dividend yield of about 5%, shareholders of Apollo obtained a reasonable good return of more than 10% a year. The increase in equity was purely from retained earnings without any cash calls for the last 7 years. Net cash of company, which has zero borrowings, also increases in tandem with the net income growth as shown in Figure 1 above. For the most recent year, there was a spike of Apollo’s earnings accompanied by corresponding increase in cash.
In fact for LonBisc, the most alarming thing is about its growth in property, plant and equipment (PPE) which outpaced the growth of its revenue and total assets, whereas there is no growth in its earnings at all as shown in Figure 3 below.
The growth in receivables for Apollo is generally in line with its growth in revenue as shown in Figure 4 below. This signifies its good credit control. Inventories growth is slightly ahead of revenue growth which may signify better anticipated sales prospect ahead.
However, for LonBisc, while receivables grew generally in line with revenue growth, there is a drop in the growth of inventories last two years as shown in figure 5 below. Why? Is it because anticipation of no demand for its products, or short of money to maintain a healthy inventories? When taken into considerations with the high growth in PPE, there appear to be some “fishy” handling of its business by the management of the company.
Quality of assets
Property, plant and equipment made up of a whopping 77% of the total assets of LonBisc as compared to 45% of Apollo having a similar business as shown in figure 6 and Figure 7 respectively. Why must LonBisc require such a high outlay of fixed assets and burdening its balance sheet?
One can easily compare and contrast the good quality of Apollo’s assets with 25% in cash, 8% inventories and that of LonBisc with negative net working capital and just 4% in inventories as shown in Figure 6 and 7 below.
Financial strength
Table 1 below tabulates the liquidity ratios and long term financial strength of Apollo and LonBisc.
Table 1: Risks
Liquidity risk |
Apollo |
LonBisc |
Current ratio |
13.8 |
0.6 |
Quick ratio |
11.5 |
0.5 |
|
|
|
Long term financial strength |
|
|
Total debt/Equity ratio |
0 |
0.7 |
Am I required to explain which company is safer to invest in terms of financial strength?
In fact, the financial position of company is very precarious with both current and quick ratio below 1, or way too much short term liabilities than current assets. It would be very difficult for LonBisc to fulfil its short term debt obligation and can go kaput in case of economic downturn or another financial crisis, which we know do happen occasionally.
Apollo is very safe. However, it may not be good as the liquidity ratios are too high that there is inefficient use of cash assets. Why not distribute out to shareholders or buy back its own shares when they are cheap?
In any case, the pictures above paint a thousand words. I don’t think I am require to argue further which company has a better balance sheet, do I?
K C Chong (17 May 2014)
Appendix
Table 2: Balance sheet of Apollo, trend
Year |
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
2007 |
2006 |
Revenue |
156% |
141% |
124% |
112% |
123% |
127% |
108% |
100% |
Net Income |
155% |
105% |
86% |
119% |
101% |
101% |
118% |
100% |
Net cash |
152% |
133% |
130% |
146% |
100% |
77% |
109% |
100% |
Receivables |
161% |
126% |
106% |
98% |
97% |
169% |
115% |
100% |
Inventories |
177% |
153% |
168% |
130% |
109% |
103% |
103% |
100% |
PPE |
151% |
154% |
152% |
129% |
119% |
109% |
104% |
100% |
Total assets |
143% |
134% |
130% |
127% |
117% |
112% |
108% |
100% |
Total debts |
||||||||
Total liabilities |
140% |
136% |
136% |
129% |
116% |
128% |
120% |
100% |
Share capital |
100% |
100% |
100% |
100% |
100% |
100% |
100% |
100% |
Common equity |
143% |
134% |
130% |
126% |
118% |
110% |
106% |
100% |
Table 3: Balance sheet of LonBisc, trend
Year |
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
2007 |
2006 |
Revenue |
269% |
235% |
216% |
207% |
171% |
128% |
109% |
100% |
Net Income |
103% |
94% |
110% |
123% |
117% |
72% |
80% |
100% |
Net cash |
-259% |
-238% |
-214% |
-188% |
-189% |
-178% |
-141% |
-100% |
Receivables |
246% |
198% |
236% |
146% |
124% |
103% |
114% |
100% |
Inventories |
174% |
160% |
202% |
188% |
197% |
108% |
103% |
100% |
PPE |
319% |
294% |
222% |
215% |
194% |
140% |
118% |
100% |
Total assets |
268% |
241% |
237% |
196% |
176% |
146% |
117% |
100% |
Total debts |
243% |
218% |
201% |
178% |
173% |
176% |
133% |
100% |
Total liabilities |
228% |
202% |
223% |
178% |
161% |
156% |
116% |
100% |
Share capital |
200% |
187% |
135% |
135% |
110% |
110% |
102% |
100% |
Common equity |
265% |
241% |
193% |
176% |
154% |
135% |
119% |
100% |
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safety of balance sheet = safety of investment. i understood kcchongnz now.
kikiki
2014-05-22 20:58
Hi Rookie, have you ever wondered why Mr Market willing to assign a lower PE to LONBISC?
Still, its 10 over years of high PPE spending really make me uncomfortable. For the past 10 yrs, its PPE spending was 13% - 36% of its total sales. Can you imagine if you own a business, and for every RM100 you earn, RM12 - RM36 will go to the machine by default and your on paper operating margin was just 13% (min) - 25%(max - 10yrs ago)? And that does not include the finance cost which account for another 6% - 7% of total sales. Ok, fine, they bought so much PPE because they expect for higher growth in the future. But looking back at its ROE, it seems it is on the 'bearish' trend too. So, they spent high capex just for the sake of maintaining high fixed assets?
Well I am not going to guess or speculate what is management intention or whatsoever. Before we are clear of what is the "for some reasons" of the high PPE spending or sure that their PPE may reduce, as a cautious investor I shouldn't have put my money on this counter.
2014-05-23 09:49
lmenwe, 'stupid acquisition'? u mean TPC by Lonbisc? If product need egg, just purchase the egg?
2014-05-23 22:36
Yes. One even sell at a loss to QL but QL had successfully turn it around and make profit! This kind of quality also cry for foul for its low valuation. Lol!
2014-05-24 04:32
lmenwe, not QL, shld be HL (Huat Lai Resources Bhd). TPC still PN17? last qtr make profits rdy:
http://www.bursamalaysia.com/market/listed-companies/company-announcements/1627365
2014-05-24 05:22
i think is lay hong not this counter. I can't remember exactly. But where is ze moola had made a very detail comment on the stupid management! With them still on the board I will never risk my hard earn cash on them! MSC's stupid management is another classic example! Almost all their investment end up with losses!
2014-05-24 16:14
rookie
Good analysis on Apollo and London Biscuit... but please also check on their PE... Apollo is good but it is priced in as it has high PE about 12x or 33% higher than LONBISC 9x
2014-05-22 18:56