Cover Story 2: Building a strong cash buffer in a pandemic

This article first appeared in The Edge Malaysia Weekly, on January 25, 2021 - January 31, 2021.
Cover Story 2: Building a strong cash buffer in a pandemic
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BURSA Malaysia-listed companies have realised how important it is to be cash rich when faced with an unexpected and severe situation like the Covid-19 pandemic.

This is especially given the tough economic conditions the business community has had to weather in the past year, with lockdowns enforced in Malaysia and its major trading partners to contain the spread of the virus, bringing activities practically to a standstill.

Many companies built up their cash positions in 2020 in anticipation of the severe economic downturn due to Covid-19, notes private investor and former investment banker Ian Yoong.

“Larger listed companies issued bonds and other fixed-income securities. It is a natural response to be conservative in the face of an impending severe economic downturn,” he says.

But how attractive is the investment proposition of cash-rich listed companies?

“Cash is an unattractive asset class; it generates a very low return. How many people do you know became millionaires by placing their money in fixed deposits? Cash is not king; a strong net cash flow is.

“Investors should look to invest in companies with a high free cash flow. The bulk of the cash generated should either be reinvested in assets that generate high returns on invested capital or paid out as dividends. Companies that excel at this [include] Scientex Bhd, Top Glove Corp Bhd, Hartalega Holdings Bhd and Kuala Lumpur Kepong Bhd,” he says.

Peter Lim Tze Cheng, founder and chief research officer of independent research firm Trident Analytics Sdn Bhd, says it is also important to look at how significant the net cash position of the company is as a percentage of its market capitalisation.

“It makes sense to do so, rather than just looking at the absolute net cash figure. Also, it is important to analyse where the cash stems from. Probably because of the economic slowdown last year, a lot of expansions could not happen.

“Also, a lot of companies undertook private placement exercises last year, which could also explain the reason for an increase in net cash.

“Then we also have companies that have a strong net cash balance, but don’t pay dividends and are not aggressive in their expansion plans. Hence the cash is left idle on their balance sheet. This could be a value trap for investors, as these companies likely have no intention to unlock their value,” he says.

Typically, in a normal business, an increase in cash position comes either from profits made for the year or the sale of assets and inventory, says TA Investment Management chief investment officer Choo Swee Kee.

“Glove makers and tech companies had a great year [in 2020] in terms of business profitability and, as such, it is not surprising that their cash positions improved significantly. [As for the property sector], sales have been slow and property developers have cut down on new launches. On the other hand, developers are selling down their inventory and this [has improved their cash position],” he explains.

Table 1 lists the 30 companies (excluding the financial sector, that is banks, insurance companies and stockbroking firms) with the highest net cash positions based on the latest available Bloomberg data.

We take a closer look at some of them.

Glove makers: From net debt to net cash

The year 2020 was undoubtedly one of the best years — if not the best — for glove companies. Because of the pandemic, demand for the product surged, resulting in glove makers listed on Bursa Malaysia reporting record earnings.

For the big four glove makers — Top Glove, Hartalega, Supermax Corp Bhd and Kossan Rubber Industries Bhd — the leap in demand and increase in profitability have significantly improved their cash position, with all four going from a net debt position in 2019 to a net cash position in 2020. Net cash here refers to the total cash of the company, less its borrowings and lease liabilities, both short and long term.

To put things into perspective, Top Glove was in a net debt position of RM2.34 billion as at Nov 30, 2019, but in a net cash position of RM765 million as at Nov 30, 2020. Supermax, meanwhile, was in a net debt position of RM232 million as at Sept 30, 2019 before turning to a net cash position of RM2 billion as at Sept 30, 2020.

Hartalega was in a net debt position of RM28 million as at Sept 30, 2019, before recording net cash of RM1.26 billion as at Sept 30, 2020, while Kossan recorded a net debt of RM421 million as at Sept 30, 2019, before turning to a net cash position of RM262 million a year later.

Prospects-wise, Top Glove, which has been under scrutiny of late because of the Covid-19 outbreak among its workers and the poor state of their living conditions, says it has earmarked about RM100 million for investing in workers’ facilities and accommodation, which includes building mega hostels in Klang and Banting with a combined capacity of 7,300 pax, fully equipped with amenities and facilities.

Meanwhile, Supermax is building five glove manufacturing plants that are scheduled for completion progressively from now until 2022. The new plants will add 22.25 billion units in new capacity, bringing the group’s total capacity to 48.42 billion gloves by the end of next year. The company is investing RM1.39 billion in these new plants.

Increasing cash pile for property developers

The Covid-19 pandemic was undoubtedly a dampener for the property sector, causing sales volume to drop. Nevertheless, two developers in particular — UOA Development Bhd and MCT Bhd — saw a significant increase in their cash pile year on year.

UOA Development’s net cash position increased from RM502 million as at Sept 30, 2019, to RM1 billion as at Sept 30, 2020. In a Sept 28 note on the company last year, CGS-CIMB Research said that it expected the disposal of UOA Corporate Tower to UOA Real Estate Investment Trust for RM700 million to potentially bump up UOA Development’s FY2020 dividend per share to 13 sen, from 10 sen previously, using a 62% dividend payout assumption.

UOA Development has a dividend policy of paying out 30% to 50% of its net earnings, and paid out more than 60% for FY2018 and FY2019, notes CGS-CIMB Research. The disposal of UOA Corporate Tower was completed in December last year.

For the nine months ended Sept 30, 2020 (9MFY2020), UOA Development reported a 24% y-o-y increase in its net profit to RM356.33 million despite a 26% decline in revenue to RM650.49 million, due to a fair value adjustment on investment properties of RM114 million as a result of the revaluation of UOA Corporate Tower.

Meanwhile, MCT saw its net cash position increase from RM124 million as at Sept 30, 2019, to RM519 million as at Sept 30, 2020. Its latest available cash balance exceeds its market capitalisation of RM270 million as at Jan 18, 2021.

As part of the group’s cash management efforts, it took a RM515 million loan from its ultimate holding company, Ayala Land Inc — the largest property developer in the Philippines — in December 2019 to repay all outstanding borrowings, which helped take some of the debt burden off its balance sheet.

Looking ahead, MCT says it has ongoing developments in Cyberjaya and Dengkil that cater to the affordable segment, which is expected to remain resilient, particularly for first-time home buyers.

Another developer that has managed to maintain a healthy cash balance is SHL Consolidated Bhd. As at Sept 30 last year, the company reported a cash position of RM345 million, constituting 73% of its market cap of RM474.56 million, with practically zero debt. This has stood the group in good stead —while it said the Covid-19 pandemic and the Movement Control Order had a significant financial impact on its property development segment, it added that these factors would not affect its ability to meet its commitments over the next 12 months because of its high level of liquidity, mainly in the form of cash and deposits.

Tech and telco: Healthy cash pile while expanding

Technology and telecommunications industry players are not expected to be cash rich, given that they have to continue to invest in new technologies and infrastructure to stay ahead of the game.

Nevertheless, a few players have managed to keep their balance sheets healthy while embarking on expansion plans. Telecommunications provider TIME dotCom Bhd, for one, has seen its net cash position grow from RM235 million as at Sept 30, 2019, to RM468 million as at Sept 30 last year.

In a Nov 27 note last year on TIME, ­Alliance­DBS Research said the company’s balance sheet remained strong, and this would help support capex spending, potential mergers and acquisitions and capital management initiatives.

“TIME is currently building a new purpose-built data centre in Cyberjaya, which can offer up to 240,000 sq ft of white space when fully developed. RM100 million will be spent initially on Phase 1 (60,000 sq ft) to construct the foundation, common infrastructure, and a six-storey building block. This will double TIME’s current data centre capacity and also help to attract potential clients with bigger requirements,” the research firm said.

Meanwhile, Outsourced Semiconductor Assembly and Test (OSAT) service provider and leadframe manufacturer Malaysian Pacific Industries Bhd (MPI) reported net cash of RM918 million as at Sept 30, 2020, from RM733 million in September 2019. According to a Nov 25, 2020, note by CGS-CIMB Research, MPI is funding the expansion of its Carsem Suzhou (CSZ) plant in China with internal funds. The first phase of expansion will raise its production floor area at CSZ from 140,000 to 190,000 sq ft.

Meanwhile, OSAT service provider Inari Amertron Bhd reported net cash of RM625 million as at Sept 30, 2020, from RM448 million a year ago. In a Jan 7 note on Inari, RHB Research said it expected robust demand for Inari’s products to continue in the first half of the year, due to the increase in components for the latest 5G range of smartphones, and strong sales, which prompted a major phone maker to increase production.

“With the additional capacity, margin improvement and alleviated worries over technological competitiveness, we continue to favour the stock as a proxy to the 5G trend,” the firm says. RHB Research expects Inari to set aside capex spending of RM150 million for 2021.

Consumer companies: Prudent cash management

Consumer companies are known for their generous dividends; as such, a strong net cash position is not surprising.

Hong Leong Industries Bhd, which sells motorcycles under the Yamaha brand and ceramic tiles under the Guocera brand, reported a strong net cash position of RM1.3 billion as at Sept 30, 2020 — 51% of its market cap of RM2.6 billion.

For its first financial quarter ended Sept 30, 2020, Hong Leong Industries reported a 20% y-o-y drop in net profit to RM50.72 million, on the back of a 9% decline in revenue to RM652.66 million due to the impact of the Covid-19 pandemic. In June last year, it ceased some of its businesses under the industrial operating segment, namely the distribution of building materials, and manufacturing and sale of concrete roofing products.

Meanwhile, Amway (Malaysia) Holdings Bhd, one of the country’s leading direct selling players, reported a net cash balance of RM239 million as at Sept 30, 2020, from RM184 million a year before.

Amid the Covid-19 health crisis, the group has delivered a strong year-to-date growth performance, contributed by increased demand for immunity-boosting health supplements, cleansers, air treatment equipment and similar products.

For the nine months ended Sept 30, 2020, Amway reported a 7% increase in net profit to RM42.63 million, while revenue increased by 17% to RM837.4 million.

On Aug 21 last year, the group’s wholly-owned subsidiary, Amway (Malaysia) Sdn Bhd, entered into a sale and purchase agreement for the disposal of an industrial building in Seberang Prai for a cash consideration of RM2.05 million. The disposal was completed on Oct 8, 2020.

Beverage and dairy product manufacturer Fraser &Neave Holdings Bhd (F&N) reported a net cash balance of RM377 million as at Sept 30, 2020. Last week, the group completed the acquisition of three F&B companies, namely Sri Nona Food Industries Sdn Bhd, Sri Nona Industries Sdn Bhd, and Lee Shun Hing Sauce Industries Sdn Bhd, for RM60 million.

The proposed acquisition is in line with F&N’s ambition to be a stable and sustainable F&B leader in Malaysia, with halal food as its new pillar of growth.

CGS- CIMB Research in a Jan 20 note says that Sri Nona’s flagship product, the NONA Ketupat (rice cake) range, is the No 1 one ketupat brand in Malaysia. Also, Lee Shun Hing’s range of oyster sauce is among the top three in its category.

“We understand that F&N had earlier stated that it will finance the acquisitions via internally generated funds. F&N does not expect the acquisition to have a material effect on its consolidated earnings in its financial year ending Sept 30, 2021,” the research firm says.

 

 

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