Eng Kah enters joint venture agreement with Cosway China

KUALA LUMPUR (Jan 27): ENG KAH CORPORATION BHD [] has entered into an agreement with Cosway (China) Co. Limited to establish a joint venture company in China to manufacture cosmetics, toiletries and household products.

The company said on Friday that Cosway China had acquired the entire interest and control of Guangzhou Cosway Cosmetic Manufacture Co. Ltd which would be the joint venture company (JVC) to manufacture cosmetics, toiletries and household products.

Eng Kah said it would acquire a 30% stake in the JVC and provide the manufacturing experience, expertise, TECHNOLOGY [] and production management and know-how to the JVC in order for the JVC to commence its manufacturing activities to support the business of Cosway China.

The company said the joint venture was in line with its plans to expand and develop its manufacturing business overseas, including in China.

Eng Kah said it would finance the equity participation via internally generated funds, and that there were no liabilities to be assumed by it arising from the proposed joint venture business.

“The proposed joint venture business is expected to contribute positively to the future earnings of the company,” it said.



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KLCI dips on mild profit taking, lags regional markets

KUALA LUMPUR (Jan 27): The FBM KLCI fell on Friday, and lagged key regional markets as mild profit taking chipped off some of the previous day’s gains.

The FBM KLCI closed 2.96 points lower at 1,520.90, weighed by losses at select blue chips.

Gainers led losers by 459 to 370, while 292 counters traded unchanged. Volume was 2.28 billion shares valued at RM1.85 billion.

At the regional markets, Hong Kong’s Hang Seng Index rose 0.31% to 20,501.67, South Korea’s Kospi gained 0.39% to 1,964.83 and Singapore’s Straits Times Index rose 0.75% to 2,916.26, while Japan’s Nikkei 225 fell 0.09% to 8,841.22.

The China and Taiwan stock markets are closed for the Chinese New Year holidays.

Meanwhile, European shares retreated from a six-month high on Friday, in a mild technical pullback after the previous session's strong rally and with Greek debt talks still firmly in focus, although equities still remain on course for their sixth week of gains, according to Reuters.

On Bursa Malaysia, HLFG lost 36 sen to RM11.90, Genting PLANTATION []s down 15 sen to RM9.50, Warisan, MPI and CIMB fell 11 sen each to RM2.55, RM3.58 and RM6.86 respectively, while Sunchirin, NCB, Metrod and Yinson lost 10 sen each to RM1.65, RM3.90, RM1.95 and RM1.98 respectively.

Among the gainers, Bintulu Port added 32 sen to RM7, Boxpak up 28 sen to RM2.64, IJM Corp 25 sen to RM5.70, Lysaght 23 sen to RM1.90, Eng Kah 22 sen to RM3.50, Hartalega, DRB-Hicom and Maybulk gained 21 sen each to RM6.90, RM2.71 and RM2.65, while Southern Acids added 19 sen to RM2.40.

The actives included TMS, Compugates, DRB-Hicom, Karyon, DBE Gurney and Maybulk.



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Eng Kah’s valuation supported by its dividend yield

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.



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