Did London Biscuits sell the wrong ‘egg’?

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KUALA LUMPUR: London Biscuits Bhd incurred a loss of RM230,000 when it disposed of its entire stake of 23.86% in poultry player Lay Hong Bhd to QL Resources Bhd for RM11.85 million.

In a filing to Bursa Malaysia Securities yesterday, London Biscuits said the disposal would allow the company to realise its investment in Lay Hong, and that the proceeds would increase the company’s cash and bank balance position.

The layer cake producer had originally invested RM12.08 million in Lay Hong since 2006. Apart from Lay Hong, London Biscuits also has a 33.65% stake in another poultry firm, TPC Plus Bhd.

But did London Biscuits sell the wrong egg?

After all, Lay Hong is quite a profitable company and its selling price was on the low side. At the sale price RM1.05 per share, Lay Hong was valued at just 0.52 time its book value of RM2.00 and at a trailing price-earnings ratio of 4.7 times.   

Interestingly, the sale created some “egg-citement” on the local bourse yesterday, with Lay Hong emerging as the top gainer, surging 44.5% or 53 sen to close at RM1.72 with 1.12 million shares traded. It has risen 90 sen or 109.8% year-to-date.

For the financial year ended March 31, 2010, Lay Hong posted RM10.33 million net profit on the back of RM388.75 million revenue. Earnings per share was 22.33 sen. Comparatively, TPC Plus recorded a net loss of RM751,000 on the back of RM53.54 million revenue for the financial year ended Dec 31, 2009, with loss per share of 0.94 sen. TPC Plus has been making losses since 2006.

Given Lay Hong’s stronger profitability, why did London Biscuits sell its stake in Lay Hong instead of TPC Plus?

Four years after it invested into Lay Hong, London Biscuits bought the 32% stake in TPC Plus in February 2010 for RM7.86 million, or 30 sen per share.

In April 2010, it launched a conditional offer to acquire the remaining shares it did not own in TPC Plus at 30 sen each. The offer failed when acceptances were received for about 48% of the company’s shares, less than the 50% needed.

TPC Plus’ shares rose 1.5 sen yesterday to 27 sen with 2.65 million shares traded.

London Biscuits CEO Datuk Seri Liew Yew Chung said then that the takeover was a win-win deal as it guaranteed London Biscuits a constant supply of eggs which are the main ingredients for confectionery.

He added the deal would also help mitigate against fluctuating egg prices as it pursued a fixed price strategy with TPC which was estimated to save costs by 20%.

“To my knowledge, London Biscuits is working on an arrangement with TPC to make the latter the main supplier of eggs. I am unaware if the same arrangement was made with Lay Hong,” an analyst told The Edge Financial Daily.

What is interesting to note is that Liew sits on the boards of both Lay Hong and TPC Plus.

Liew was appointed as the non-independent and non-executive director of Lay Hong in December 2006. Last month, he was appointed as the executive director of TPC Plus.

However, yesterday he resigned from his position in Lay Hong, according to a Bursa filing. His father, Datuk Seri Liew Kuek Hin also ceased to be alternate director to Datuk Seri Liew Yew Chung.

London Biscuits could not be reached for comment.

For the third quarter ended March 31, 2010, London Biscuits posted RM4.04 million in net profit, or 4.64 sen per share, on the back of RM50.92 million in revenue.

The company currently sits on a cash pile of RM15.61 million. Its borrowings, which consists of term loans, bank overdraft, and banker’s acceptances and revolving credit, stand at RM176.35 million.

With shareholders’ fund at RM195.64 million, its net debt of RM160.74 million translates to a net gearing ratio of 0.82 tims.

As such, the disposal of Lay Hong could be seen as a move for London Biscuits to pare down its debts. And Lay Hong appears to be a more attractive company for potential suitors than TPC Plus.

Much of London Biscuits’ debt was accumulated through an aggressive expansion strategy over the years which included acquiring new plant machinery, buying a competitor, Kinos Food Industries and stakes in several listed companies such as Lay Hong, TPC Plus and Khee San Bhd.

In Sept 2007, London Biscuits acquired 18.420 million shares, or a 30.7% stake in Khee San Bhd for RM27.630 million, or RM1.50 per share. Unlike Lay Hong and TPC Plus, which represented upstream diversification, the purchase of Khee San, a manufacturer of sweets, was meant to widen London Biscuits’ product range.

However, the Khee San purchase has not turned out well financially. Khee San’s shares last traded at 56.5 sen, or 62.3% below London Biscuits’ cost three years ago.

Khee San’s earnings have also not been particularly exciting. The company earned net profit of RM1.39 million, or 2.32 sen per share, on revenue of RM51.93 million for the nine months to March 31, 2010.   

For the financial years ended June 2008 and 2009, Khee San’s net profit was in the range of just RM1.6-1.7 million. In FY2007, it posted a net loss of RM0.88 million.

London Biscuits closed unchanged yesterday at RM1.16 with 1.22 millions shares changing hands.

This latest corporate development has no doubt created some “egg-citement” for the long-ignored poultry sector.

Still, many investors will be left wondering if London Biscuits sold the right egg company. Or, as an analyst asked: “Did the cake company bite more than it could chew?”

This article appeared in The Edge Financial Daily, August 25 2010.