Stock Review – FIAMMA (6939) - 4 (FIAMMA HOLDING BERHAD)

Bursa Malaysia - 6939

Bloomberg - FHB:MK
Yahoo - 6939 .kl
Webpage - http://www.fiamma.com.my/

Recommendation: -

Date	Status	Price	Current Price (RM)	Accumulate Dividend (RM)	Gain / Loss (%)
28/6/2015	BUY	1.81	1.70	0.00	-6.08%
11/12/15	SELL	1.70	2.31	0.00	+35.88%

On 7 January 2016, FIAMMA prices shot up almost 26 % and continue to 13% the next day make a total of almost 43% in the two day. The sudden spike of the price is most probably the proposal of bonus issues.

Let us look into the bonus issues announcement on 6 January 2016 and the annual report 2015 announce on 29 January 2016 to check whether the sell called still maintain.

Announcement on 6 January 2016

Let look into these multiple proposal which cause the price of FIAMMA spike up. In the announcement there are multiple proposal which going to be table for voting in the EGM on 23 February 2016 after the 33^rd AGM. Let look into the proposal one by one and what is the effect:

i)                  Proposed share split (2:1 share split)

If this proposal is pass, FIAMMA share will split from RM 1.00 to RM 0.50. These will cause more liquidation in FIAMMA stock as the share outstanding double. The stock split will make FIAMMA price cheaper and affordable to small investor.

Some investor will think the drop of the share price after the stock split is a good time buy the stock and wait for it to rise back to the price before split. However this will not the case, the stock price drop to half after the stock split because the company is shares between more people after stock split (double the number of outstanding share 1:2 stock split). In actual this does not increase the value of the FIAMMA shares.

ii)               Proposed bonus issue (1 bonus share for every 2 shares owned)

Bonus issue is another way a company can gives back to their investor. If this proposal passes, the investor who has 100 shares in FIAMMA prior to the AGM will have 300 shares (100 shares from stock split and 100 bonus shares).

This will cause the treasury share of FIAMMA decrease and more share outstanding in the market. These will dilute the earning per share.

iii)            Proposed ESOS (Employee Stock Options)

ESOS will only benefit to FIAMMA employees and directors. If this proposal passes, option will distributed to FIAMMA employees and directors.

They (employees and directors) are eligible to exercise the option 20% per year up to 5 years if they exercised their option the stock price will be dilute.

CONS:

Bonus issue is similar to dividends issue in term of financial. Bonus issue will reduce the Earning per share of the company. ESOS will not benefit financially to normal investor. It might dilute the share if the employees and director exercise their option.

Exercise of 800,000 Warrants on 6 January 2016

This exercised of 800,000 warrants will dilute the shares outstanding. However some investor did not realised these and push the shares price up after the proposal of bonus issue which announce on the same day. The proposal had not approved yet if the EGM vote no for the proposal there will not be any bonus issue.

CONS:

Exercise of warrant will dilute the share.

Annual report 2015

From the annual report 2015, FIAMMA had a loan of RM 168,245,00.00 to be settle in one year time and FIAMMA does not had enough cash to pay the debt base on the annual report.

The diluted earning per share for 2015 increases from 27.34 sen to 36.75 sen. However there is RM 24,838,000 gain in fair value of investment properties which is just paper asset. If we removed the RM 24,838,000 from 2015 earning, the diluted earning per shares is 20.61 sen which is lower that 2014.

2015 annual report showed there is a negative operating cash flow which is not a good sign for a company. The finished good in 2015 had increase compared to 2014 while the work in progress good is reduced significantly in 2015. These might be a sign that FIAMMA inventory is obsoleted.

CONS:

There is large amount of loan to be settle in these financial year The increase in EPS for 2015 is cause by increment of fair value of investment properties which is just paper gain. Operating cash flow is negative for 2015 FIAMMA goods might be obsoleted as the finished good increase and the work in progress good reduced significantly.

Summary of Stock Reviews

Stock Review – FIAMMA (6939) - 3 (FIAMMA HOLDING BERHAD)

Bursa Malaysia - 6939
Bloomberg - FHB:MK
Yahoo - 6939 .kl
Webpage - http://www.fiamma.com.my/

Fourth Quarter End 30 September 2015

For these quarter FIAMMA had increase their profit by increase the fair value of their fair value of their investment property by RM 24,838,000. These is what we always say paper gain not until FIAMMA sell their investment properties these profit is just on paper and FIAMMA had to paid income tax with the money they do not earn.

FIAMMA also recorded a higher asset compared to previous year. However by looking at the fourth quarter report these is just paper gain on their asset such as property, plant and equipment, investment properties and land held for development. FIAMMA had reduce their cash and cash equivalent holding by 19.61%.

Besides that, FIAMMA increase their non current borrowing by 22.6 times and current borrowing by 40%. FIAMMA also had negative operating cash flow in year 2014 and positive financing cash flow. These means that FIAMMA is getting their cash from debt than their operation.

CONS:

Profit mostly from increase in fair value of investment property. These are just paper gain. FIAMMA do not had any profit in reality until they sell the investment properties. The increase in asset on 2015 is just paper value and FIAMMA cash and cash equivalent reduce by 19.61%. Increase of current and non-current loan and borrowing Having negative operating cash flow and positive financing cash flow.

Share Buy Back

Lately FIAMMA start to accumulate its own stock, in the month of August and September FIAMMA had brought back RM 269,364.12 worth of shares which is 172,300 shares. As of 10 December 2015 FIAMMA owned 8,721,000 of treasury shares or 6.02%. They can buy back the share until it reach 10%. I personally do not see any point for FIAMMA to buy back their shares at the moment. FIAMMA share buy back is maintaining their stock price at RM 1.60 – RM 1.8 level for the past few months. 

With share buy back FIAMMA should has negative financing cash flow however the financing cash flow for 2015 is show otherwise. These mean FIAMMA is borrowing more money and only buy back some of their stocks. Instead of share buy back FIAMMA might use the money for other investment and borrow less money.

CONS:

Share back back recently but increase their borrowing.

Summary of Stock Reviews

Stock Review – FIAMMA (6939) - 2 (FIAMMA HOLDING BERHAD)

Bursa Malaysia - 6939
Bloomberg - FHB:MK
Yahoo - 6939 .kl
Webpage - http://www.fiamma.com.my/

Income Statement

For Q3 2015 FIAMMA recorded lower revenue compared to Q3 2014. This is mainly because the decline of the property revenue where Menara Centara had been completed in early 2015 and the revenue had been fully recognised in March 2015. Currently the property segment will only depend on the revenue from Vida Height in Johor. The property market in Johor is slowing down in 2015 hence the property segment did not do well in these quarter.

However the trading and services segment had 10.4% growth compared to last year despite there is GST implemented this year. As I had stated in the earlier post many new houses is completed within 2015 and 2016 these will help to increase the sales for FIAMMA which focus on home appliances. However the depreciation of the Ringgit Malaysia had increase the cost of good sold of the company and might reduce the profit margin of FIAMMA. With the large depreciation of Ringgit Malaysia in the last few weeks to make it to 17 years historical low, these will cause a challenge to FIAMMA on the fourth quarter as well (July 2015 – September 2015).

PROS:

Implementation of GST did not affect the revenue of the service and trading segment.

CONS:

Revenues from the property segment had drop significantly upon completion of Menara Centera in Kuala Lumpur.

The depreciation of Ringgit Malaysia might increase the cost of good sales of the home appliances as the brands are mostly imported from oversea and denote in USD.

Balance Sheet & Cash Flow

In these quarter there show a significant increase in the land for property development compare to previous quarter (Q3) these is because of the bought of the land in Kuala Lumpur in 30 April 2015. However the cash and cash equivalent balance has reduced about 50% in the Q3 2015 compared to Q2 2015. The reduction of cash might due to the increase of the inventory cost and the trade payable payment in US dollar.

For Q3 2015, FIAMMA also double its non-current liability, these might be because of the money borrowed to purchase the land in April 2015. Besides that, the trade payable also increase mainly due to the US dollar trade payable.

As for the cash flow, the operating cash flow for Q3 2015 is negative. This is mainly due to the increment of inventory cost due to depreciating Ringgit Malaysia. However these company is still able to sustain the short term effect of depreciating Ringgit Malaysia because it had large cash reserved. If these Ringgit Malaysia still depreciate these company might face a very large challenge and might not be sustainable anymore.

CONS:

Cash and cash equivalent balance reduce 50% compare to Q2 2015. Non current liability had double compared to Q2 2015. Negative operating cash flow.

Summary of Stock Reviews

Stock Review – FIAMMA (6939) (FIAMMA HOLDING BERHAD)

Bursa Malaysia - 6939
Bloomberg - FHB:MK
Yahoo - 6939 .kl
Webpage - http://www.fiamma.com.my/

Key Value Investor Criteria: -

Description	Value	Criteria	Point
Price to Tangible Book Ratio	0.73*	< 1	5/5
Stock Valuation	CAPM => 3.12% Return (2008-2014) => 18.59% Undervalue by 15.47%	CAPM < Return	5/5
Return on Asset	7.86*	> 0	4/5
Return on Common Equity	12.17*	> 0	5/5
Quick Ratio	1.61*	>1	4/5
Long term Debt / Total Capital	30.69*	<50%	4/5
Continue Dividend over Past 10 Years / Since Inception	Yes	Yes	2/2
Cash From Operation	Positive > 5 years	Positive	5/5
Total Point			34/37

Note:

 *            Data obtain from Bursa Marketplace on 27/6/2015

By scoring 34/37 (91.9%), we will look into the annual report and the latest quarterly report of FIAMMA before making the decision to buy the stock.

By looking at the stock valuation using CAPM method FIAMMA is able to provide 3.12% return which is quite high. Any stock provide about 10% return is a good stocks. Besides that by looking at the stock historical price, it is currently provided 18.59% which means that the stock is currently undervalue by 15.47%.

However with such a good valuation and ratio, as a value investor we always look into the annual report, quarterly report and any announcement before making any investment decision.

Company Profile

FIAMMA consists of two main business segment as followes:

1)   Trading and services – 84.3% of total revenue (2015 2Q report)

2)   Property Development – 15.2% of total revenue (2015 2Q report)

1) Trading and services

This segment is the main business for FIAMMA. FIAMMA distribute various brands of home appliances, sanitary ware products, home furniture and medical devices & healthcare products. Some of the well know brand distributed by FIAMMA are kitchen appliances:-ELBA, electrical home appliances: - FABER, MAYTAG & Whirlpool bathroom and sanitary ware:- Rubine & Haustern, healthcare product :- Omron, Spirit & Tuttnauer.

With the government of Malaysia implementing GST effective on April 2015 it will affect the sales and the nett income of the trading and services segment. However with the current blooming property industry in Malaysia which had seen many properties is expected to be completed in 2015 and 2016. These will cause an increase in sale in the home appliances, kitchen appliance and bathroom & sanitary ware product. This might indirectly increase the sales for FIAMMA’s trading and services segment.

2) Property Development Segment

FIAMMA is just enter into property development market in 2007 when FIAMMA acquired 5 parcels of lands in Kuala Lumpur. In 2008 FIAMMA acquired 3 more parcels of lands and two property development companies which are Uniphoenix JayaSdn Bhd and Oaksvilla Sdn Bhd.

FIAMMA launched its first project in 2012; Menara Centara in Jalan Tuanku Abdul Rahman, Kuala Lumpur. The project complete in early 2015. Currently FIAMMA has completed two projects: Menara Centara, Kuala Lumpur and Taman Kota Jaya, Johor. There is one ongoing project : VIDA Height, Johor. With many parcels of land still available in FIAMMA land bank including their existing warehouse in Bandar Manjalara, the property segment is expected to be growth in the near future.

PROS:

There are many residential properties in Kuala Lumpur and Johor are expected to be completed in 2015 and 2016. These will increase the sales of home appliances, kitchen appliances and bathroom & sanitary ware in these areas. FIAMMA might had increase their sales as well due to these reason.

FIAMMA had many lands in Kuala Lumpur and Johor (Malaysia prime location for property development)

FIAMMA is planning to move their warehouse to Klang which is nearer to the port, port Klang which will reduce the logistic cost to shift the goods from the port to the warehouse.

FIAMMA is expected to rent out the extra space at their new warehouse to third partly, these will increase their revenue.

CONS:

GST is implemented in April 2015, these is expected to affected the sales and net profit of FIAMMA for both trading & service and property development segment.

The depreciation of Ringgit Malaysia might reduce the net profit for FIAMMA since its had subsidiary in Singapore and import their product from other country to Malaysia. Besides that, it also had account payable denoted in USD.

Financial Statement

From most recent quarterly report end 31 March 2015 there is an increase in property, plant and equipment (PPE) from RM 35,627,000 to RM 67,479,000 (89.4% increase), these is due to FIAMMA going into SPA to purchase about 113,910 sqft of land for about RM 430.00 per sqft near Kuala Lumpur. While I would say these is a fair dual and the purchased is expected to be completed in year ending 30 September 2015. RM 4,898,130 had pay as deposit for the land purchase and RM 44,083,170.00 is expecting to be payable within 120 days from the date of SPA. The translation is completed 30 April 2015.

There is an increase in borrowing from RM 68,936000 (30 Sept 2014) to RM 91,084,000. The increase due to the increase of non current term loan which mean the company had more than 12 months to pay off the loan. With the current cash position of RM 111,459,000 (March 2015), the company is able to pay off the loan anytime. The increase of the term loan is most likely cause buy the purchase of 2 lands 30 April 2015.

PROS:

FIAMMA had reduces its current liability and increasing the non- current liability between the period Oct 2014 to April 2015. This might be a good move by the management as there are expecting the central bank to increase the interest rate.

FIAMMA had completed to purchase to more lands in Kuala Lumpur with a reasonable price of RM 450 per sqft.

CONS:

GST is implemented in April 2015, these is expected to affected the sales and net profit of FIAMMA for both trading & service and property development segment. This effect will shown on the Q3 report. Until June 2015, there are still 32,830,468 warrant expiring 26 November 2018 is not exercise when it is exercise the will dilute the earning per share.

Summary of Stock Reviews