Leading company, growing faster then SET, trading at discount valuation.
SE-ED (5.30) is another small cap stock which I have viewed favorably from time to time in past years.
It was a selection which I gave to Forbes Magazine early in year 2001 as a chosen prime example here of a small cap company, whose stock I (back then) viewed rather favorably. A year later SE-ED was up more then 200% in value. It was a model portfolio selection in the past -then later price corrected, after a fabulous run. In June ’05, I picked it back-up as a selection in to my currently active model portfolio. I wrote-up SE-ED in year 2001 in a positive article back then, published by the Nation Newspaper.
SE-ED was selected in year 2002 as one of Forbes 200 "best under a Billion", no doubt on my back then expressed enthusiasm. (See Forbes Global Magazine on October 28, 2002). By mid-year 2003 SE-ED had soared to just about 8 Baht per share. But then, over the following two years, slowly but surely gave back 40% of that value, so settling around 4.8 – 5, for the first half of 2005.
You can see more on this with Forbes, SE-ED and me at:
http://www.thaistocks.com/index.php?module=Pagesetter&func=viewpub&tid=1&pid=285
I walked away when this stock had soared in value back in September of 2002 at similar to current prices and with the SET index around 360. While the stock had a 200% run (warrants adjusted), it was a bit early in hindsight. Since back then, I did not write about SE-ED again.
Here is what I wrote 3 years ago at then market price 5.50:
"SE-ED stock had a fabulous performance since I wrote an in-dept report in March of 01. I stopped updating as at current prices, and with trading volume very low, it lost its punch. SE-ED is much reliant on being a successful publisher. In 2 Q of ’02 it made a close to 2 million provision for returned goods. In general the growth rate appears to be slowing. Costs may be rising faster then sales and this is the key for future earnings progress. The 2002 p/e is around 9-10 which is not cheap. With the SET around 350 -360 currently I find better values elsewhere. I would today rate SE-ED, "take profits" but only assuming you invest in other less valued Thai stocks."
After the nice long consolidation over the past 18 months, I decided to re-introduce it to my current model portfolio back in June of 2005, at 5.15. Since that SE-ED paid a 0.10 interim dividend, so the cost basis in the model is more like 4.95.
Taking profits (or occasionally incurring a loss) and moving-on has definitely been a successful investor theme & advocated strategy here all along. I did this with various other selections as well, like examples which come to mind are: AJ, APRINT, HMPRO, KCE, SVI, OGC, MACO, METCO, SSF, TUF and others. Just the inverse of traders strategy, I think some investors here make a mistake staying far too long with large positions in the same old companies. More then a few previous chosen value examples here, after a huge price run-up, ended up with a mean price correction.
You can see my first original article on SE-ED at this link ("Strong long term buy", March 15 2001):
http://www.thaistocks.com/index.php?module=Pagesetter&func=viewpub&tid=2&pid=39
And here you can see a 5 year graph on SE-ED:
http://today.reuters.com/stocks/Overview.aspx?symbol=SEED.BK&chart=6
***
I visited in person SE-ED company a few times in past years -as I just did again a couple of weeks ago. I came away feeling renewed bullish and so here today re-affirm my long term buy view and my reasons why.
SE-ED at today’s price of 5.30 is now firmly back on my select Thai small cap choices and so firmly remains a choice in my current running model porfolio.
After some nice growth years SE-ED went through a period of consolidation. Last year was a difficult year for this dominant bookstore operator. A slowdown in the 3Q of 2004 hit earnings. The slow down came from:
1) early closing time imposed by the Thai government in its attempt to mandate energy savings, the early closing times hit SE-ED at its best selling hours of the day.
2) the company had expanded in min-book stores which did not go well. These have either been closed or re-negotiated and so this problem is dealt with.
3) higher sales of lower margin magazines due primarily to an influx of new magazines.
4) An operational problem, where books inventory were stored in their corporate office building so creating a huge "pipe fog" problem; this due to all books needing to be moved-up and down by the always busy single service elevator. This is past now, as the SE-ED book inventory area is in a separate building. No more shared elevators!
All these problems were dealt with head-on. The consumer has since adjusted to buy during a higher variety of times, during the day. This is evidences by SE-ED’s last two earnings reports, where solid improvement in sales and earnings have been witnessed.
Here is what management recently noted about the first 6 months of 2005:
"The company net profit for first six-month (2005) was THB 81.94 million, representing 5.15% of total revenue, an increase of THB 21.29 million or up 35.11%.and THB 0.27 EPS. The company's first six-month total revenue rose to THB 1,592.13 million, an increase of THB 217.65 million, or up 15.84%."
Here is the link on all management had to say at the posting of the second quarter results:
Hence, my take is that these problems of last year are now over and the company is back on its long term track record. The managing director of SE-ED was recently quoted in the BBK Post that his companies’ earnings are likely to grow 30% annually over the next several years -and I believe this is probable.
SE-ED now operates 182 branches, up from 68 when I first visited this company in March of 2001. The company opened 31 new branches last year and is expected to open 26-32 this year. The largest super-discount stores have now been mostly maxed-out around Thailand -along with their SE-ED bookstore branches. They are not likely to expand anymore here as there is a government mandated limit & quota now on these. (Makro, Lotus, BigC, Carefour).
The new expansion (up to a total of 300) will so come from Thai provincial smaller department stores which are very fragmented around the country. (Even the troubled southern province of Yala now has a profitable SE-ED bookstore). The company believes it can achieve up to 300 total bookstores in Thailand by year 2008 to 2009.
At that time the book store market will probably become saturated. People all over Thailand will buy books and magazines if these are readily available. As is now, most Thai people from the provinces must travel to a larger metropolitan area, to shop for books and magazines. No doubt, if book stores are more available in the provinces, book & magazine spending will increase.
Thai people are reading more:
One way to judge that Thai people are reading more is by looking at the number of sold copies a book has to achieve to reach a "best seller". Some 15 years ago it took just 10,000 copies to achieve this status, now the number must pass 1 million copies.
SE-ED is also the publisher of 10 different science and technology magazines. The company distributes (both books published by SE-ED and books from other publishers) wholesale, to over 700 different bookstores nationwide. "Book Variety" is a well known SE-ED TV-show broadcasted on channel 1 every Saturday from 9 to 9:30 AM.
The future beyond year 2008:
Over the next 3-4 years SE-ED will expand around the country, in the provinces with another 100 or so, new bookstores.
For growth beyond this, SE-ED has started to invest (80 mill. Baht paid up capital) in a new concept of private schools, called "Ploen Pattana’schools. With a curriculum from pre-kindergarten up to 12 grade. The main shareholders consist of private firms which play an important role in "family institute" and in "educational circles", around Bangkok. SE-ED is the main shareholder in Ploan Patt Company. Currently they have some 500 students, this should increase to 900 next year and 1500 within 2 years. The school’s concept is to fill the wide gap between the expensive international schools and the other available local schools. So to address head-on, the "creativity gap" which too often Asian children have tilted towards, as compared to Western style educated youngsters. Within 5 years SE-ED plans to have a significant new business with these Ploen Pattana schools. These schools is what will sustain SE-ED with a continued long term growth path, beyond the book stores.
Here is what they recently announced regarding their new venture in Ploan Patt:
"The board of director has been approved the investment plan in Ploen Pattana School project which is the capital fund invest in Ploen Patt company limited for the amount of not more than THB 26.0 million or not more than 32.5% of Ploen Patt company capital fund. Aforementioned transaction is not a related party. (capital fund 80 million baht). The company management has been assigned to draft detail of agreement and evaluate the appropriated amount for further deal."
Large shareholders:
Nation Multimedia used to own about 13% of SE-ED shares, but recently ownership changed to Grammy, the entertainment giant. Grammy now owns 13.21% and so are the largest outside shareholder. They paid 5.50 for this block of shares, as I recall. The founders of the company still own about 40% of the shares and they have no interest in selling more to Grammy or otherwise. The free float is about 30%. The number of shares outstanding is 321 million, there is small number of convertible warrants still outstanding (3,588,740) convertible every three months at 1.65 per share. This represent only around 1.2% of the total outstanding shares -and so is not significant. There are about 23 million ESOP warrants outstanding as well, these no doubt are warrants given to key employees.
SE-ED reduced its dividend payment this year, reflecting last years reduced operating results, yet the reasons stated where as follows:
The dividend of 38.42 million which was less than the same period last year dividend payment of THB 46.47 million due to the new regulation to reserved for repurchasing stock in total amount of treasury stock price. So the dividend payment of Q4 2004 which has paid in May 2005 was decreased.
This is not totally clear to me but it seems SE-ED re-purchased back some of its own stock recently. I show this as Treasury stock where they list to own 19.7 million shares of their own shares. This they must have bought when the stock languished last year.
My own earnings forecast for this year and next:
SE-ED earned 0.28 per share for the first 6 months of this year, as compared to 0.20 Baht per share for the same period last year. My view is that SE-ED can earn around 0.58 - 0.60 per share this year and 0.72 to 0.75 next year. Besides the transition time being over, some of the new profit drivers are: in November of this year the latest "Harry Potter" book will be translated into the Thai language, just about guaranteeing a huge seller which SE-ED will capitalize on. Higher margin children books are selling very well, so are simple religious books on Buddhism -whereas various more competitive IT books have slowed down. While overall readership levels in Thailand are still low, there is tremendous growth potential left. And primarily because of the Thai language barrier, not much competition is coming from the global Internet, i.e. from large book/discounters like Amazon.com.
Hence at the current market price of 5.30, SE-ED is trading at an undemanding year 2005 p/e of only 9.1 -and dropping to a p/e of only 7.3, for next year. At a discount to the SET averages, this strikes me as too low considering that here is another leading company (majority market share with 25-30% of total book sales in Thailand) in an important consumer industry and growing considerably faster then the average yearly profit growth on the SET, for the next several years.
Best Regards,
Paul A. Renaud.
