Muar Ban Lee Group Bhd (MBL) is a palm oil machinery manufacturer, specialising in oil seed crushing machinery. MBL designs and manufactures palm kernal crushing plants, palm oil mills and palm oil waste treatment plants. Last year, MBL expanded into the edible oil milling business in Indonesia.
The company has over 20 years of experience in the industry, with businesses based in Malaysia and Indonesia, and sales spanning the globe, especially to Indonesia, Thailand, Guatemala and Nigeria.
In 2016, MBL’s revenue surged 192.3% to RM179.8 million, driven mainly by its newly acquired edible oil milling business in Indonesia. Pre-tax profit and net profit both roughly doubled to RM16.5 million and RM11.9 million, respectively.
Among its 2 main business segments, manufacturing contributed 52.8% of the company’s revenue and 68.8% of segment pre-tax profits in FY Dec 2016, while edible oil milling accounted for 39.8% of revenue and 31.2% of segment pre-tax profits.
MBL is currently trading at 1.1 times book and about 10.1 times earnings. Fully diluted P/E will be about 12.7 times assuming full conversion of its outstanding warrants and dilution from the recently proposed private placement exercise.
Its sector peer is CB Industrial Product Holding (CBIP, Fundamental score 3.0/3.0: Valuation score 2.4/3.9), which is trading at 11 times earnings and 1.4 times book, with fairly stagnant growth versus MBL, albeit from a much larger base. MBL also offers a cheaper exposure to the plantation sector, trading at half the sector’s average.
Exposure to fast growing markets
Prospects for the plantation sector, to which MBL’s fortunes are tied, are inevitably linked to palm oil prices. Despite fears of higher post-El Nino output and rising inventory, palm oil prices have remained firm, trading around RM2,800 per tonne, fuelled partly by high soybean oil prices.
An environment of firm and stable prices will help to spur further investments in the palm oil sector. However, new plantation land availability in Malaysia is also becoming more limited. Hence, we like MBL’s exposure to the faster growing areas for new palm oil cultivation – Indonesia and Africa.
Indeed, a look at the 2016 annual report suggests that growth in Malaysian equipment sales rose just 4.3% for the year to RM11.3 million, and accounted for just 6.2% of total group revenue. However, growth in equipment sales to Indonesia (excluding revenue for the milling operations) doubled from RM35.5 million to an estimated RM75.9 million. Sales to Nigeria, in particular, grew over 12-folds, from RM0.6 million to RM7.4 million. The company also sells to Guatemala, Thailand, Colombia and Papua New Guinea, among others.
Growth catalysts
Over the longer term, MBL’s growth will be anchored by capacity expansion of its mill equipment manufacturing plant, as well as further expansion of its Indonesian edible oil milling business. Earlier this year, its CEO stated that MBL plans to double its current capacity, with capacity utilisation rate standing at 90%. It also plans to buy land in Indonesian cities like Surabaya or Medan to set up service centres for spare parts processing purposes.
The company’s expansion into the edible oil milling industry in Indonesia has proven to be a lucrative one. In 2016, this division contributed RM71.8 million in revenue and RM4.2 million in segment pre-tax profits.
While milling margins may be thin, return on investments and assets appear high. According to its 2016 annual report, this division has segment assets of RM18.8 million with liabilities of RM3.7 million. The company acquired a 33% stake in Indonesian PK crushing plant operator PT Banyuasin Nusantara Sejahtera in Oct 2016 to further grow the business.
Growing profits
MBL’s revenue has been on an upward trajectory since 2014, after the company recovered from a period of weak performance in 2012-2013 due to lower sales. Since then, its sales, customer base and scale of operations have expanded significantly, driven by rising sales to emerging markets and the acquisition of the edible oil milling business in Indonesia.
Between 2014 and 2016, revenue increased almost four-folds, from RM46.3 million to RM179.8 million, while net profit almost tripled from RM4.1 million to RM11.9 million. The disproportionately slower growth in profits was due to the lower-margin edible oil milling business. The company generated EBITDA of RM19.2 million in 2016.
Despite the last two years’ aggressive expansion exercise, MBL’s balance sheet remains strong.
As at 30 June 2017, it had net debt of just RM4.9 million, or a low net gearing ratio of 5%. The company has historically been conservative and in net cash position, with net cash peaking at RM37.5 million in Dec 2012, before the recent expansion exercise.
The company has a subsidiary, Sokor Gemilang Ladang Sdn Bhd, which holds land rights to develop 789 ha of land into plantation land in Kelantan. The company was planning to sell the land at RM35.1 million, which will yield an exceptional gain of RM10 million, but the deal fell through.
MBL has proposed a private placement exercise, which it hopes to raise around RM10 million. The private placement and future potential land sale will strengthen its balance sheet for future expansion. As profits grow and its cash position rises, MBL should also be in a position to declare better dividends. Total dividends paid out for 2016 was RM3.65 million, which translates to a yield of around 1.5% and 31% pay-out ratio.
MBL will soon reach RM1.50 - 1.80 level. Strong support and continue interest in this counter has persistently pushed the share price higher. I believe the coming QR will be good.
No one will buy private placement if company's operation is not good. Furthermore, private placement is priced at a discount to market price and as such buyers tend to benefit more if further price increases. Private placement will definitely dilute EPS but cash flow improvement for the company.
MBL is neither overpriced nor a poor performance counter. I would think RM1.30-RM1.50 be a fair price for MBL. With the proceeds from sale of associated company, more cash will be available for distribution of dividend.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
padawan
45 posts
Posted by padawan > 2017-10-27 17:50 | Report Abuse
lets see...something is happening