Ticker: SGX:K03
Industry: Food Distribution
Business Overview
Remember the nostalgia that comes back when we eat these ice gems and cream crackers?
I am sure many of us are familiar with Khong Guan biscuits, but do you know they also have other businesses?
Khong Guan Limited, headquartered in Singapore, is an investment holding company with businesses ranging from wholesale of wheat flour, biscuits, oatmeal, pulses and cereals, to the trading & distribution of fast-moving consumer goods. They operate primarily in Singapore & Malaysia, and export their products to over 30 countries worldwide. They operate through 3 key business segments: Trading of Wheat Flour & Consumer Goods, Investment Trading, and Investment Holding.
Group Structure
Source: 2018 Annual Report
- United Malayan Flour (1996) Sdn Bhd (UMF) is a wheat flour miller in Penang, Malaysia.
- Swee Hin Chan Co. Sdn Bhd (SHC) imports and trades wheat flour and starch products.
- Tong Guan Food Products Sdn Bhd (TGF) distributes biscuits and flour in Sabah, Malaysia.
- Khong Guan Food Products Pte Ltd distributes biscuits in Singapore.
Like many of you, I thought Khong Guan is only involved in the biscuit business.
Share Price Performance
For the last year, the share price of KGL has declined marginally by 7.15%. Over the last 5 years, KGLâs stock price has had mixed performance with respect to the STI.
Growth Profile
Khong Guanâs revenue grew by 6.5% in 2018, mainly due to higher sales from their trading subsidiary dealing with the import of starches. However, net profit declined by 16.5% attributed to an increase in cost of wheat grains and challenging market conditions for wheat flour.
The company also paid off all its debts in 2017 and did not take on any new debts in 2018.
Revenue Forecast
I expect Khong Guan to continue to drive positive revenue growth over the next couple of years as TGF continues to grow its distribution of popular and branded household products through the addition of new agencies for popular consumer brands. Furthermore, SHC is exploring overseas export markets for future growth with its strong supply network in Penang. UMFâs oat milling subsidiary is also constructing a new plant to meet the increasing oats products demand.
I tapered down its revenue growth in 2024 due to increasing cost of raw materials and increasingly stronger competitors domestically and in overseas markets. Unless Khong Guan continues to drive efficiency and productivity with its high cost of capital, and be innovative in its product offerings, it will be hard for them to be a dominant player.
Profitability Forecast
Khong Guanâs profitability for the past few years has fluctuated but remained positive. With the building of UMFâs new plant and increasing market competition, I project that there will be a decrease in margins to 1% for FY2019. Thereafter, profitability will increase up to 3% when the subsidiaries manage to grow their distribution network locally and overseas.
I do not forecast margins to rise further unless Khong Guan is able to drive costs low by being lean on manpower and reducing capital expenditure while being efficient at employing capital.
Sales/Capital
The company has kept sales/capital relatively constant over the past few years. However, their sales/capital still falls largely below the industry average. I awarded a largely conservative future sales/capital as they do not seem to have efforts to improve efficiency in using capital. This also does not deviate largely from the past few years.
Cost of Capital
The risk-free rate that I used here is the returns of the 10-year Singapore Government Securities bond, and the implied market risk premium. I also used country risk premium because majority of Khong Guanâs revenue comes from its operations in Malaysia.
It is also alarming to find out that Weighted Average Cost of Capital (WACC) exceeds the terminal value return on capital.
Target Price
After discounting the cashflows at the cost of capital, I arrived at a target price of $1.80. This is 18 cents lower than the current price of $1.98, representing a downside of 9.09%.
With the assumptions I have made, the shares of Khong Guan Limited seem overvalued. I may have been too conservative in my assumptions, but even when I change them to become optimistic, the target price still does not exceed the current trading price.
This is definitely one stock that I would skip.
Ticker: SGX:K03
Industry: Food Distribution
Business Overview
Remember the nostalgia that comes back when we eat these ice gems and cream crackers?
I am sure many of us are familiar with Khong Guan biscuits, but do you know they also have other businesses?
Khong Guan Limited, headquartered in Singapore, is an investment holding company with businesses ranging from wholesale of wheat flour, biscuits, oatmeal, pulses and cereals, to the trading & distribution of fast-moving consumer goods. They operate primarily in Singapore & Malaysia, and export their products to over 30 countries worldwide. They operate through 3 key business segments: Trading of Wheat Flour & Consumer Goods, Investment Trading, and Investment Holding.
Group Structure
Source: 2018 Annual Report
Like many of you, I thought Khong Guan is only involved in the biscuit business.
Share Price Performance
For the last year, the share price of KGL has declined marginally by 7.15%. Over the last 5 years, KGLâs stock price has had mixed performance with respect to the STI.
Growth Profile
Khong Guanâs revenue grew by 6.5% in 2018, mainly due to higher sales from their trading subsidiary dealing with the import of starches. However, net profit declined by 16.5% attributed to an increase in cost of wheat grains and challenging market conditions for wheat flour.
The company also paid off all its debts in 2017 and did not take on any new debts in 2018.
Revenue Forecast
I expect Khong Guan to continue to drive positive revenue growth over the next couple of years as TGF continues to grow its distribution of popular and branded household products through the addition of new agencies for popular consumer brands. Furthermore, SHC is exploring overseas export markets for future growth with its strong supply network in Penang. UMFâs oat milling subsidiary is also constructing a new plant to meet the increasing oats products demand.
I tapered down its revenue growth in 2024 due to increasing cost of raw materials and increasingly stronger competitors domestically and in overseas markets. Unless Khong Guan continues to drive efficiency and productivity with its high cost of capital, and be innovative in its product offerings, it will be hard for them to be a dominant player.
Profitability Forecast
Khong Guanâs profitability for the past few years has fluctuated but remained positive. With the building of UMFâs new plant and increasing market competition, I project that there will be a decrease in margins to 1% for FY2019. Thereafter, profitability will increase up to 3% when the subsidiaries manage to grow their distribution network locally and overseas.
I do not forecast margins to rise further unless Khong Guan is able to drive costs low by being lean on manpower and reducing capital expenditure while being efficient at employing capital.
Sales/Capital
The company has kept sales/capital relatively constant over the past few years. However, their sales/capital still falls largely below the industry average. I awarded a largely conservative future sales/capital as they do not seem to have efforts to improve efficiency in using capital. This also does not deviate largely from the past few years.
Cost of Capital
The risk-free rate that I used here is the returns of the 10-year Singapore Government Securities bond, and the implied market risk premium. I also used country risk premium because majority of Khong Guanâs revenue comes from its operations in Malaysia.
It is also alarming to find out that Weighted Average Cost of Capital (WACC) exceeds the terminal value return on capital.
Target Price
After discounting the cashflows at the cost of capital, I arrived at a target price of $1.80. This is 18 cents lower than the current price of $1.98, representing a downside of 9.09%.
With the assumptions I have made, the shares of Khong Guan Limited seem overvalued. I may have been too conservative in my assumptions, but even when I change them to become optimistic, the target price still does not exceed the current trading price.
This is definitely one stock that I would skip.