Our recent meeting with London Biscuits reaffirmed our confidence in management’s growth plans and continuous efforts in managing borrowings and improving its overall balance sheet position. Growth remains focused on its potato chips line, with new machine being added in going forward. Meanwhile, its recent issuance of RM100m medium-term notes (MTN) with maturities between 3-7 years will be utilized to refinance existing bank borrowings, support working capital requirements and finance new machine capital expenditure. Supported by the two factors, we believe our Outperform call is justified with TP of RM1.03, pegged to 10x our FY17 EPS.

Growth plans going forward. LBB has allocated RM20m (20%) from the issuance of RM100m MTN as capex for a new potato chips production line, expected to be operational in October 2016. The new machine which will be LBB’s third potato chips line is intended to vary the chips sizes to cater for different demands. The target is to benefit from end-year spending, as customers are expected to lock in supplies then, before logistics services halt nearing Chinese New Year in January 2017. Currently, LBB runs on one shift for its potato chips, and it plans to run at longer 16 hours shift, as it gradually places out larger raw materials orders in matching the demand. As to date, average utilization rate for potato chips line is 40-50%, while 9MFY16 potato chips contribution to revenue is less than 5% as compared to overall Group revenue. LBB plans to grow its potato chips selections to c.30% of revenue in 5 years, which should reflect in better earnings performance as potato chips command higher margin of 25-30%.

Aiming for improvement of balance sheet. LBB’s quarterly net gearing has been on an improving trend over the year. Latest value was 0.46x (as at 3QFY16), lower than the previous quarters of 0.48x (2QFY16), 0.52x (1QFY16) and 0.59x (4QFY15), which implied management’s continuous effort in managing its borrowings level. Though net gearing is likely to be slightly affected in the near term due to the MTN issuance, it will keep on improving in medium to long term as LBB continue paying off its term loans. About 60% of the MTN is allocated for refinancing of short term debts, and though savings is expected to be minimal, the move will i) aid LBB to meet its immediate financial commitments, ii) reflect a healthier liquidity position and iii) should cushion its cash flow requirements and survivability.

Source: PublicInvest Research - 4 Aug 2016