Value emerging in Fiamma Holdings

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THE name Fiamma Holdings Bhd may not ring a bell but most Malaysian households probably have one or two home appliances distributed by the company.

Indeed, it is a big name in the distribution of electrical home appliances and healthcare products — Fiamma’s bread and butter.

Also, few may notice that the company’s core business of marketing and distributing such brands as Elba, Rubine, Tuscani and Haustern, is enjoying double-digit pre-tax profit margins that are considerably larger than those recorded by the contract manufacturers of these products.  

In its first nine months ended June 30, Fiamma’s trading and services segment posted a profit margin of 14% and contributed 78.5% to total revenue. It reported revenue and a pre-tax profit of RM197.81 million and RM28.28 million respectively.

Besides lucrative profit margins, the company owns decent landbank for property development, including a tract near Jalan Yap Kwan Seng, which is just a stone’s throw from KLCC.

Fiamma’s property projects have a combined gross development value (GDV) of over RM1 billion and it has retained certain portions of its commercial developments for rental income, thus adding to its cash pile of RM54 million or 37 sen per share. For instance, the company has leased out 60% or 110,000 sq ft of its commercial space in Wisma Fiamma, which houses its headquarters.  “This earns the company about RM3 million in rental income a year,” says a fund manager, who expects this to increase as Fiamma completes more commercial properties.

The cash-rich company is starting to get noticed by the investing public for its share price has been climbing steadily since April last year — up from RM1.20 then to an all-time high of RM2.95 on Sept 19. It closed at RM2.32 last Thursday.

Despite the rally, a fund manager says valuations indicate a deeply undervalued stock, pointing out that the company has decent landbank for property development that has not been revalued for many years.

Fiamma is trading at an undemanding 7.5 times historical earnings, which is very low, given its growing cash pile and reasonable dividend yields.

With net cash per share of 37 sen, shareholders were paying around RM2 for a stake in the company’s businesses of home appliance distribution and property developments as at last Thursday’s closing of RM2.32.

That Fiamma’s property segment is a key growth driver is evident in its earnings in its financial year ending Sept 30, 2014 (FY2014). In the first three quarters, the segment contributed RM53.12 million to revenue or 21% to overall group revenue of RM252.12 million.

Not only does the figure represent a doubling of revenue from RM20.1 million in the same period in the year before but pre-tax margins in the segment have also been encouraging. Its profit before tax (PBT) of RM19.55 million represents a profit margin of 36%.

In a Sept 17 research note, RHB Research says Fiamma’s property earnings are set to outpace those of the trading and services segment, which sees resilient annual revenue growth of between 4% and 13%.

RHB Research, which has a “non-rating” call on the stock, has pegged a fair value of RM3.30 to it, representing more than a 30% premium to the current market price.

“The group’s strategic parcels are held at low cost, which means high development margins. Its presence in the property market will likely broaden, given that it has over RM1 billion worth of projects at present.”

As the company has held on to its land, some of it for over two decades, a revaluation to reflect current prices could translate into a handsome return on investment for the group. This is because it can now unlock the value of its landbank, either via a disposal or by launching projects.

Fiamma is only trading at slightly above book value while its total assets had grown from RM325.53 million in FY2009 to RM420.29 in FY2013.

With its steady cash flow, Fiamma has paid out regular dividends. Gross dividend payout had doubled from four sen per share in FY2009 to eight sen per share in FY2013. During this period, its earnings per share also doubled from 13 sen to 26 sen. The group  remains committed to its payout policy of 30% of net profit, which translates into a dividend yield of about 3% to 4%.

Its burgeoning property division could potentially turn Fiamma into a developer to be reckoned with, implying that its shares could fetch a much higher valuation if its exposure to the segment is revalued upwards.

“Assuming a modest profit margin of 10%, the property segment’s contribution to the bottom line could be worth tens of millions of ringgit if its launches prove to be successful. Given its prime landbank in Kuala Lumpur and Johor Baru, the company is slated to launch mid to high-end apartments with high potential,” says a fund manager, who is tracking the stock.

However, it is worth noting that the company’s core businesses are sensitive to economic cycles, particularly consumer sentiment.

Amid expectations of a slowdown in consumer spending next year with the implementation of the Goods and Services Tax, this could be a test of Fiamma’s resilience.

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.