London Biscuits – Value Buy?

Last year, London Biscuits Berhad saw its share price suffer due to its corporate exercises relating to the acquisition of a controlling stake in a public listed company (TPC Plus Berhad) and disposal of an associate company (Lay Hong Berhad) within the same year. Both these companies are involved in producing chicken eggs. The rationale behind London Biscuits getting involved in the egg business is that eggs are a major ingredient of their cakes and biscuits; therefore they want to control the source of their eggs.

Sadly though, the disposal of Lay Hong and the acquisition of TPC was not seen favorably by investors. Investors did not see any sense in buying an egg company (TPC) only to sell the existing one (Lay Hong) at a loss. The share price dropped from approx Rm 1.30 in July 2010 to approx Rm 0.70 in the middle of Oct 2011.

However, on 14^th October 2011 the shares were relatively heavily traded and the price rose to Rm 0.82. As at today (19 Oct 2011), it was last done at Rm 0.765. This followed the sale of its controlling stake in TPC announced in early October 2011.

From what we can tell, London Biscuits is now free of involvement in the egg business. On the bright side, this means that the nagging problem of holding non-core operations is no longer on its plate. On the negative side, they lost their favorable access to their eggs.

Now, why did London Biscuits sell TPC after all the trouble it went through last year? And why did the share price rise after it announced the disposal of TPC? These questions cannot be easily answered based on the information available to the general public. But what we do know is that the company is now mainly involved in the food production business without other operations to distract them.

Below is the five year group financial highlights (Click Image to Enlarge):-

One thing that is clear is that the company is good at growing revenue. Sales has been on a non-stop growth trajectory for the last five years. However, profits have not been so stable, going up and down during the same period. Sales growth which does not translate to profit growth signifies some problems with costs. The raw materials, which are mostly imported, are sensitive to foreign exchange rates and fluctuating commodity prices.

But even with these problems, the shares seem to be trading quite cheaply. With earnings per share of 17 sen for 2010, this represents an earnings yield of 22% if you buy it at the last done price of 76.5 sen. But before we go further, note that earnings suffered a hit in the third financial quarter of 2011, leading to a (unaudited-as-yet) reported earnings per share of only 14 sen for the financial year ended 30 June 2011. At this level, earnings yield drops to 18%; which is still pretty good value, but further shows the uneven nature of the company’s profits.

Concluding Analysis:

The share price of the company suffered last year due to negative publicity relating to investments in egg companies which were poorly perceived. This year, there are no more egg companies in the picture. The company seemed unsure about what they really wanted from their investments in egg companies and hopefully the recent disposal of TPC means that they are ready to put the whole egg business behind them and focus on their cakes. The poor earnings in quarter 3 are a concern, even though it came back strongly in quarter 4. If the company is committed to focusing on cake and biscuit production, we can see that they are adept at growing sales and profit growth should follow once they get their costs under control and as long as there are no unprofitable investments to be written-off. Going forwards, it can be hoped that the egg troubles of the company are a thing of the past. Net asset per share is strong at approx Rm 2 per share. If dividends are proposed at 1.5 sen per share as per last year, it would represent a dividend yield of approx 2%. The recent spike in share price after the announcement of the TPC sale could indicate some positive sentiment coming back. Current earnings of 14 sen coupled with a more favorable valuation at earnings yield of, say, 15% would result in a share price of 93 sen.

Andrew Chua

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(The above is an academic exercise which applies well-established securities-analysis methods and benchmarks on currently available investments. It does not constitute a recommendation to buy or sell any security. The writer does not own any shares of the above-stated company at the time of writing, and does not receive payment for the sale or research of any security. ~I lay down the facts; you make your own conclusion...)