Operating earnings remain solid.
Modernform (Modern 21.7) Remains to me, an interesting domestic recovery play with a dominant market share, low debt, high cash dividends and conservative besides experienced management.
While more then a few selections performed superbly for most of us during this globally turbulent past year, still a few have been clear disappointments. Overall, most members will agree 2002, yet once again, was a year which belonged in pride to the Thai high yield, smaller cap, high dividend yielding securities. While a few big caps will surely sooner or later catch-up, as the SET resumes its bull phase next year; I do think the trend to superior investment remains with higher yielding, lower p/e ration, smaller cap Thai value shares. My earlier prediction of a higher SET index by year end was too optimistic but I blame that squarely on the US and Sadam troubles.
Modern was one selection which dropped in value recently along with the SET benchmark, I think this is because it owns 900,000 shares or 4% in Picnic Gas and Chemical (PICNIC) whose stock was suspended, since the 1997 economic crisis. This just resulted in a one time accounting write down of 66 million Baht, in the 3rd Quarter '02. A one time event which does not however effect the improving operating earnings -nor the impressive free cash flow for Modern. The 3 Quarter this year did show a solid operating profit of 44 million; this was up 22% YOY and 3% QOQ, or much in line with my expectation.
Hence, Modern a reported loss of 22 mill for the 3rd Quarter, or 0.27 Baht per share. But note this -already provision for- incurred loss will help reduce the expected income tax liability for this year. While reported profits for 2002 should come in around 116 million, if you add back the one time 3Q. loss of 66 million Baht, you come up with 182 milion. Or slightly above my own 170 million expected.
This loss will not affect shareholder equity nor cash flow as they already made a provision for this. I duly note that I was not told about this when I visited MODERN late last June.
A dividend discount model shows the stock being valued around 32 Baht per share but I do not know what interest rate they used in calculating this. The stock is now selling below its book value of 24.6. I was told by management that if their stock dropped below book value for a while they will be buying back some of their shares (Treasury stock). Modern holds some 83 million Baht in cash and owns outright its handsome 26 floor building on Srinakarindr Rd., called Modernform Tower. I would think this building is valued well below its market value in the balance sheet and hence Modern's true book value is understated.
Modern sells 94% of total sales in Thailand. In fact, exports showed a decline of 10% YOY and 16% QOQ. Clearly this firm is now focussing on domestic sales where the average gross margin is 31% vs. only 25%, for exports. Residential furniture make up 25% of sales and office furniture some 50%, furniture accessories make up 15%. Also, some 5% - 15% price firming of their products has been recently implemented, this was evident already in the 3 Quarter.
I remain convinced that Modern can pay at least a 1.75 Baht for this years operation (probably payable next April/May '03) Also, the 4 Quarter '02, should demonstrate strong earnings growth due to substantial tax benefits and their annual sales promotion, which is held every October. I expect the annual cash dividend to grow at least 12% over the next 2-3 years.
Modern's D/E (times) ratio was a low 0.24 as of 2 Quarter of this year and is expected to stay this low or drop even more next year. This makes MODERN having the second lowest D/E ratio according to recent Tisco research report. Oddly or not, Tisco does not have a buy rating on Modern.
And for the first half of this year, Modern reported a strong 110 million Baht cash flow from operating activities. This compares to a total of 158 mill for all year 2001. I also noticed from a company handout that Modern expected to generate some 1.6 Billion Baht in sales for this year. But more recent research shows expected 1.8 million of total sales this year, improving to 2 Billion for next year.
What event or trigger will it take to make the shares soar past 22 Baht?
Perhaps the prospects of an anticipated solid 4Quarter earnings report? Perhaps the Bangkok Post announcement on December 12 of Steelcase Inc, the world largest office furniture maker, now shifting focus on the Asian Pacific market. Steelcase just invested 30 million US$ in product research and development in the region. Mr. Taksa Busayapoka, the Chief Executive Director of Modernform, whom I met last June in person, said that his company hopes Steelcase products would help boost its furniture sales by 20% next year to 2 Billion baht.
Steelcase's Thailand plant involves an investment with Modern to produce new stylish office furniture. Steelcase commands a 22% market share in North America and is now focussing on Asia as its high growth market. (See Bkk Post December 12, page 3 of the Business section).
I view Modern as a growth stock with high current cash dividends while we wait price potential appreciation. I view remains a long term buy on this stock.
There are foreign shares available for MODERN, that is at my last looking. Note that as a foreign to Thailand national, I always recommend to buy the local shares first and then to convert the chore portfolio choices to Foreign shares, for long term investment. This can be done at a minimal cost as long as the legal foreign limit on the stock in question has not been reached. At the very least Foreign shares It assures you getting the Annual report and even full voting rights if you want. If the Foreign allowed limit fills up some day, you may even sell your F shares at a premium on the Foreign board. There is no downside as you can always sell F shares on the local market.
Best Regards to all our Valued Members,
Paul A. Renaud.
