Kim Teck Cheong is here to stay, says Lau

This article first appeared in The Edge Financial Daily, on February 2, 2018.
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KUALA LUMPUR: Kim Teck Cheong Consolidated Bhd (KTC) executive director Dexter Lau Wei Dick is frustrated with the performance of the firm’s share price, which since making its trading debut at 30 sen a share in November 2015 has shed 35% of its value.

The stock has fallen 28% during the last one year and closed at 19.5 sen on Tuesday, with a market capitalisation of RM99.5 million.

Lau’s beef with the share price is that investors do not understand how the business works, noting that it has been investing in warehouse facilities which would help the group achieve long-term returns.

The Sabah-based consumer packaged goods distributor has spent some RM20 million over the last two years to increase its warehousing facilities across Kuching, Sarawak; Kota Kinabalu, Sabah; and Brunei.

“I think they (shareholders) don’t understand that we need to put the infrastructure in place first so that we can then ask for business. Would you want to invest in a company that does not have the warehouse space or one that can provide the capacity?” the 38-year-old Lau told The Edge Financial Daily in an interview.

Lau conceded that the investments have impacted the group’s bottom line and cash flow, which he now plans to work on. As at Sept 30, 2017, KTC had a negative cash flow of RM26.95 million with total borrowings of RM154.25 million.

“We will not be spending any more on capital expenditure this year. The focus now is to work on reaching a healthy cash flow and deliver [higher] profits,” he said.

Still, Lau is aware that he has a lot of work to do convincing investors KTC can turn around the profit erosion seen since the financial year ended June 30, 2016 (FY16).

The group saw its net profit hit a record RM7.05 million in FY15, followed by two years of declining profitability in FY16 (RM1.85 million) and FY17 (RM1.12 million). However, it grew revenue from RM299.87 million in FY15 to RM341.13 million in FY16 and RM428.57 million in FY17.

Unfazed, Lau is confident that recent new distribution contracts will help boost the group’s net profit moving forward.

For Lau, the mission to continue growing the family-run business is personal. KTC was founded by his grandfather, the late Datuk Lau Yeong Ching, in 1938, having started out as a simple sundry shop in 1938. He is also the son of the group’s managing director Datuk Lau Koh Sing. The Lau family held a 72.17% stake in KTC as at Oct 17, 2017.

“I’m very positive [about our growth] as we are now in [the] consolidating stage and even though the profitability may not recover as fast as what I would want it to, at least I know I have a plan and direction for the company. I’m not running away, I’m still around, I’m still the same person and I’m still working on it and I think shareholders should ride with me,” said Lau.

“Our customers have demonstrated they are supportive of us [with the contracts offered],” he added.

Lau also said the group’s focus for this financial year and the next would be to deliver on new distributorships that were recently secured.

On Jan 10, KTC announced that four of its subsidiaries have been appointed as distributors for five companies, with estimated contributions of combined monthly internal revenue being RM14.7 million. The companies are Nestle Products Sdn Bhd, Heineken Marketing Malaysia Sdn Bhd, L’Oreal Malaysia Sdn Bhd, Oriental Food Industries Sdn Bhd and Sincere Match & Tobacco Factory Sdn Bhd.

As of end-FY17, the group had 7,355 sale and distribution points covering over 84 districts, of which it distributes more than 200 third-party brands for 37 brand owners.

The distribution of third-party brands contributes about 90% to the group’s revenue, while the remaining 10% is contributed by its own line of frozen, dry and bakery products under its Orie, Bamble and Creamos brands.

“I won’t stop to try and secure more businesses, but what we have now will keep us busy for the next few years because the brand names are quite big and will contribute a substantial amount,” said Lau.

At the same time, the group will review and rationalise its current third-party brand portfolio to terminate any non-performing distributorships.

As each distributorship will start over the course of the next few months, Lau expects contributions to be reflected progressively, with quite a small amount this year and the rest to be reflected in FY19.

KTC’s net profit dropped 30% to RM181,000 in its first financial quarter ended Sept 30, 2017 from RM260,000 a year ago on higher finance cost due to its investment in warehousing equipment and business infrastructure in Sarawak. Revenue, however, was up 20% to RM106.55 million from RM88.87 million.

Lau is confident that the numbers will pick up in the remaining quarters of FY18, forecasting double-digit sales growth for the year. In FY17, the group’s revenue grew 25% year-on-year to RM428.57 million.

The group’s revenue is contributed mostly from its Sabah operations at 68%, followed by Sarawak at 23%, Brunei 5% and Labuan 3%.