Eng Kah Corp Bhd (Nov 22, RM3.18)
Recommend buy at RM3.19 with target price of RM4.25: Eng Kah’s business can be classified into five main categories: cosmetics, perfumery, toiletries, skincare and household products. The company derives more than 70% of its sales from perfumery, cosmetics and skincare products while toiletries and household products account for 14% and 16%. Notable brands in its stable include Sara Lee, Nutrimetics as well as some local home brands like Cosway.
Apart from producing more than 1,000 products for about 50 clients, including multinational companies (MNC), trading companies, multilevel marketing companies (MLM), supermarkets, retail chains and department stores, Eng Kah also develops new products and packaging designs for its existing clients. This distinguishes it from competitors and also gives it an edge in securing new contracts.
According to the Malaysian Cosmetics and Toiletries Industry Group (FMM-MCTIG), there are more than 50 small and medium local companies producing cosmetic and toiletry products. Eng Kah is considered one of the largest players in terms of size and product offerings. The industry is expected to grow by 10% to 15%, driven by: (i) a growing middle-aged population; (ii) the rapid increase in the number of skincare and healthcare centres; and (iii) the aggressive expansion of its customers’ MLM businesses, which can boost the demand for cosmetics and toiletries products.
We project Eng Kah’s earnings will grow by 20% to 30% in the next three years, fuelled by: (i) an enlarged customer base; (ii) a wider product range; and (iii) stronger contributions from its major contributor, Cosway, which is aggressively expanding its distribution channel.
In addition, short-term disruptions arising from the recent floods in Thailand, which is one of the major exporting countries for cosmetics and toiletries products, will also open up opportunities for Eng Kah to engage potential MNC.
Despite not having a dividend policy, the management has been generous in its dividend payout in the last five years, consistently paying out more than 90%. The low capital expenditure requirement for machinery has allowed the group to give out a large proportion of its earnings as dividends. Going forward, we expect the company to maintain its 80% to 90% dividend payout, which translates into a gross dividend yield of 7.1%, one of the highest dividend yields among small-cap stocks.
In a nutshell, we like Eng Kah because of its: (i) innovative and prudent management; (ii) very impressive dividend payout track record; and (iii) solid balance sheet. Eng Kah is now trading at 11 times FY12 price-earnings ratio, but we call a “buy” on the stock as the valuation is well supported by its dividend yield. Net profit for FY12 is projected to grow organically at about 9% driven by its existing business. Our target price is derived by pegging a 5% FY12 single-tier dividend yield, which is in line with the average dividend yield for small-cap stocks. — OSK Research, Nov 22
This article appeared in The Edge Financial Daily, November 23, 2011.
Recommend buy at RM3.19 with target price of RM4.25: Eng Kah’s business can be classified into five main categories: cosmetics, perfumery, toiletries, skincare and household products. The company derives more than 70% of its sales from perfumery, cosmetics and skincare products while toiletries and household products account for 14% and 16%. Notable brands in its stable include Sara Lee, Nutrimetics as well as some local home brands like Cosway.
Apart from producing more than 1,000 products for about 50 clients, including multinational companies (MNC), trading companies, multilevel marketing companies (MLM), supermarkets, retail chains and department stores, Eng Kah also develops new products and packaging designs for its existing clients. This distinguishes it from competitors and also gives it an edge in securing new contracts.
According to the Malaysian Cosmetics and Toiletries Industry Group (FMM-MCTIG), there are more than 50 small and medium local companies producing cosmetic and toiletry products. Eng Kah is considered one of the largest players in terms of size and product offerings. The industry is expected to grow by 10% to 15%, driven by: (i) a growing middle-aged population; (ii) the rapid increase in the number of skincare and healthcare centres; and (iii) the aggressive expansion of its customers’ MLM businesses, which can boost the demand for cosmetics and toiletries products.
We project Eng Kah’s earnings will grow by 20% to 30% in the next three years, fuelled by: (i) an enlarged customer base; (ii) a wider product range; and (iii) stronger contributions from its major contributor, Cosway, which is aggressively expanding its distribution channel.
In addition, short-term disruptions arising from the recent floods in Thailand, which is one of the major exporting countries for cosmetics and toiletries products, will also open up opportunities for Eng Kah to engage potential MNC.
Despite not having a dividend policy, the management has been generous in its dividend payout in the last five years, consistently paying out more than 90%. The low capital expenditure requirement for machinery has allowed the group to give out a large proportion of its earnings as dividends. Going forward, we expect the company to maintain its 80% to 90% dividend payout, which translates into a gross dividend yield of 7.1%, one of the highest dividend yields among small-cap stocks.
In a nutshell, we like Eng Kah because of its: (i) innovative and prudent management; (ii) very impressive dividend payout track record; and (iii) solid balance sheet. Eng Kah is now trading at 11 times FY12 price-earnings ratio, but we call a “buy” on the stock as the valuation is well supported by its dividend yield. Net profit for FY12 is projected to grow organically at about 9% driven by its existing business. Our target price is derived by pegging a 5% FY12 single-tier dividend yield, which is in line with the average dividend yield for small-cap stocks. — OSK Research, Nov 22
This article appeared in The Edge Financial Daily, November 23, 2011.
