"I don"t eat feather meat of no kind"
Thailand has always been the land of food and vegetables. Since a larger part of this company is owned by current management, the capital increase recently announced (for every 100 shares owned, 68 new shares will be issued in November) shows that the biggest (and most knowledgeable) shareholder -believes in the earnings growth of CM.
As shown, CM has a stated policy of paying out 65% of its profits in annual dividends. So even while the capital increase will dilute earnings we think for the next two years the dividend yield on these shares will be enormous. With interest rates continuously dropping in Thailand and around the world, such yields will more and more look like a river of income in a sea of declining global yields.
Thai Union Frozen Foods, TUF (95):The company has had a sizeable sudden price drop. I think this is a goodbuying opportunity. Below 100 were the stock is now trading the trailingp/e is less than 5 and around 4 for calendar 1998. The company just clarified that it's fundamental business remains strong. The US Tuna association (I think this is the name) will starting January of 1998, initiate a big nationwide campaign to promote US households to consume more of this healthy Tuna. Studies show that currently it is viewed as a food to consume "occasionally"; through new advertised recipe's and other methods they are determined to change this US habit at the margin. US is TUF's top export market. With 95% of its revenues in US Dollars and a history of paying out very high dividends, TUF now is back on my solid "buy list".
Thai Storage Battery, Bat -3K (31.50):This firm is now back down and trading around it's last stated book value of 31. The first half year operating results were very near half my 500 mill. Baht yearly estimate. Sales of Batteries rose by 31% in 2 Q '98 through very robust export growth. Exports are about half of total sales. But their domestic sales go almost exclusively to the used car market and so are benefiting from Thai people keeping their older cars.On an operating basis Bat-3k reported a net profit in the 2Q. of 38 mill.vs. 31 mill. in the same 2 Q. period of 1997. At current levels the stockis trading at less than 4 times it's expected operating earnings per share for 1998. The company has a strong balance sheet and the financial ratios are impressive. As with the other 2 firms above, I recommend strong buy.
On the US market.Now that the mighty & manic Dow Jones got kicked a good deal lower it suddenly becomes fashionable to speak of 7000 and less. I do not share this overly grim scenario. While a new low may well be in coming before the next advance the now newly born doomsayers will probably be wrong. A recent study showed that of the 100 biggest firms in the world some 25 are in the US, yet these earn well over 50% of those 100 firms' total profits.There is no question that the US has some of the most competitive and well-run firms in the World. While Clinton may well get ousted, the Yen may well take another dive, South America may well start tumbling & rambling -still I think 1999 will be the year the US and Asia stock markets start rising again. The suddenly weaker US Dollar is a blessing rather than a curse. Still lower interest rates are coming and all kinds of other fine tuning tools are in the hands of the powerful and best in the world run US Federal Reserve. Most of you know that on an inflation adjusted basis US interest rates are still historically too high.
Japanese Pension funds are waking up.The Japanese Pensions funds are being deregulated and are quietly storming global financial markets. Second largest in the world is this army of capital; I mean here is well over a trillion US dollars flowing out of long dormant passive accounts. They will in time help awaken and revalue equity markets around the world! A giant has truly awakened.Japan has the oldest average population age in the world. A huge potential problem is now exploding to light -that current pension funds will not be enough for all retirees in 5 - 15 years down the road. Hence it is paramount that average returns are lifted and so regulators in Tokyo are now deregulating this previously closed and highly stagnant market. Portfolio managers from mostly the US are already attracting huge new accounts. Literally a "gold rush" type of activity is apparent and capitalizing on this trend. Boston and San Francisco, besides New York, is full of a new breed of Japanese speaking mutual fund whole-sales people calling on Tokyo.
Best Personal Regards to all our subscribers!
Paul A. Renaud
P.S.Below is what one respected subscriber sends me on Cape: (I stand by my purchase recommendation).
"I think CCPH and CAPE's results in the 2Q, and the 1Q, were influenced positively by depreciation of Yen vs. dollar. Without this depreciation, CAPE could have broken even, or even shown a loss in 2Q, as a result of lousy business conditions in monitor industry and CCPH's poor performance.
Before I mentioned to you that CCPH has substantial debt, which is not carried any more on CAPE's consolidated balance sheet, even though CAPE owns 50% of CCPH. The best way to get a handle on this is to look at CAPE's 3Q 1997 balance sheet, consolidated, which shows 100% of CCPH's debt.CAPE's current balance sheet looks VERY clean. But I have something in my notes indicating that Debt/Equity ratio might be about 1.5 if CCPH's results were included with CAPE's. (I can't remember whether I was including 100% of CCPH's debt in calculating this number, or just 50% corresponding to CAPE'sownership in CCPH.)
The reason CCPH did poorly in the 2Q was because of its Taiwanese manufacturing operations. This is another indication that CAPE (and DELTA) is doing better than the Taiwanese.
Danger to CAPE in CCPH's operation -- in addition to the Taiwanese manufacturing, CCPH also has subsidiaries that are distributors for CAPE. Most of CAPE's accounts receivable are due from CCPH subsidiaries. Also, although I'm not aware of any loan guarantees, you could have something happen like KCE and Avatar -- but not as bad.
Here are high, medium and low cases for this company, say over the next 5 years.
1. High case.CAPE pays down debt. Margins increase to 7% after tax. (Achievable based on DELTA's results.) Revenues double. (Consolidated revenues grew 30% from 1994 to 1997. At this rate they double in less 2 years. CAPE achieved this while increasing number of outstanding shares from 237 million to 268 million, and interest expense in 1997 was about the same as 1994. Even when they weren't making money, they increased revenueswith very little dilution to shareholders.) Number of shares increase to 332 million, as warrants are exercised when share price increases. This is a liquid stock in a visible industry. P/E of 12 when economic conditions in Thailand and the PC-component industry return to normal is a reasonable assumption.
Assumptions result in:
Revenues = 29.5 billion BahtNet profit = 0.07 x 29.5 = 2.064 billion Bath/year = 6.2 Bath/share P/E= 12 means share price of 75 Bath/share, or 15x increase in price.
2. Medium case.CAPE does 1:1 rights issue for 268 million shares. Warrants are exercised so total issued shares becomes 268 million + 332 million = 600 million shares. They use 1.2 billion Baht to clean up CCPH. (It wouldn't surprise me if it would cost CAPE considerably less than billion to clean up CCPH if the other 50% owner in CCPH came up with their 50% of the cost). Revenues remain stagnant (don't increase) but margins increase to 7%. P/e=12. Results in following:Revenues = 14.75 billion Bath/yearNet profit = .07 x 14.75 = 1.03 billion Bath/year = 1.7 Bath/share P/e=12 means share price of 20. Total return is 4 for 1.
3. Low case.CCPH goes bankrupt. CAPE loses accounts receivable. PC industry remains in lousy shape. Bath and Yen go up against dollar. Everything goes wrong, and CAPE goes bankrupt. Total return is "0".
How's that for a range? I think "2" is a little pessimistic, and I thinkthat the chances of "1" are better than "2". I think this is a good risk for the price. I think CCPH and CAPE's results in the 2Q and 1Q were influenced positively by depreciation of Yen vs. dollar. Without this depreciation, CAPE could have broken even, or even shown a loss in 2Q, as a result of lousy business conditions in monitor industry and CCPH's poor performance.Before I mentioned to you that CCPH has substantial debt, which is not carried any more on CAPE's consolidated balance sheet any more, even though CAPE owns 50% of CCPH. The best way to get a handle on this is to look at CAPE's 3Q 1997-balance sheet, consolidated, which shows 100% of CCPH's debt.CAPE's current balance sheet looks VERY clean. But I have something in my notes indicating that Debt/Equity ratio might be about 1.5 if CCPH's results were included with CAPE's. (I can't remember whether I was including 100% of CCPH's debt in calculating this number, or just 50% corresponding to CAPE's ownership in CCPH.)The reason CCPH did poorly in the 2Q was because of its Taiwanese manufacturing operations. This is another indication that CAPE (and DELTA) is doing better than the Taiwanese.Danger to CAPE in CCPH's operation -- in addition to the Taiwanese manufacturing, CCPH also has subsidiaries that are distributors for CAPE. Most of CAPE's account receivables are due from CCPH subsidiaries. Also, although I'm not aware of any loan guarantees, you could have something happen like KCE and Avatar -- but not as bad.
The Nation Newspaper September 7 '98:Business Exports fall 9% on lack of liquidity".The top-ten export products included computers and equipment worth Bt25.11 billion, electrical appliances worth Bt13.30 billion, apparel worth Bt10.81 billion, rubber worth Bt7.67 billion, integrated circuits and parts worth Bt7.44 billion, rice worth Bt6.92 billion, tinned seafood worth Bt6.05 billion, plastic and plastic products worth Bt5.57 billion, gems and jewelry worth Bt5.01 billion, and automobile and auto parts worth Bt4.21 billion. Compared to figures recorded for July, the value of most products declined. For example, the biggest decline among the top-five export products in August was in gems and jewelry, falling by 24.81 per cent. Garments fell 18.50 per cent, rice by 13.18 per cent, canned seafood by 11.35 per cent, and plastic and plastic products were down 9.11 per cent, he remarked. He emphasized that there were only two items, automobiles and parts, and integrated circuits and parts, which experienced positive export growth at 2.38 per cent and 1.31 per cent, respectively. "
