| 21 Dec 2015, 8:34:09 AM
APOLLO to rise 37% to RM6.80 by Jun-2016
Author: fayeTan | Publish date: Wed, 16 Dec 2015, 10:17 AM
1Q16 earnings surged 96% to RM11.2m
Recall that Apollo Food Holdings Berhad (APOLLO) registered a very strong 1Q16 earnings which saw its net profit jumped 96% YoY to RM11.2m. The increase in 1Q16 profit is due to improved efficiency as its operating expenses declined by 67% to RM2.2m (from RM6.6m last year). It appears that the Company strategies to invest in modern production machineries has produced positive result. In the Chairman Statement included in the Page 33 of FY15 Annual Report, it was mentioned that "Continuous improvement on our production planning, stringent quality control and investment on newer and modern production machineries with higher output and more automation to use less labour are the prerequisites for our Group to remain competitive in this very challenging market environment. We will therefore continue to focus our efforts in this direction on improving our overall performance."
Accordingly, EPS jumped by the same magnitude of 96% to 13.98 sen. The Company share base is always stable at 80.0m.
Beneficiary of higher USD as 42% of revenue is to overseas
In FY15, APOLLO revenue from overseas market is RM90.1m or 42% of the Group's total revenue of RM212.6m. You can verify this from FY15 Annual Report Page 96.
2Q15 earnings growth likely to DOUBLE last year figure (to be announced in two weeks time)
Am I crazy to do such estimate? NO, I AM NOT. Here’s my justification:
The cost saving is likely to be permanent. Once a company change its machine and increased its efficiency, the cost decline against last year should remain.
2QFY16 refers to the month from Aug-2015 to Oct-2015. Within this period, the magnitude of USDMYR surge yoy is 30.6% is higher than 1Q15’s 15.8%.
By assuming double, actually I am conservative. It can easily more than double
Net cash of RM100.0m
Cash is RM100.0m and zero debt. Hence, net cash is RM100.0m. The good cash level means that the Company can easily expand its operation without affecting its annual dividend of 25.0 sen or RM20.0m a year.
Superior cash generation power
Operating cash flow last year is RM35.7m, Investing cash flow RM6.4m, Pay dividend RM20.0m.
After the effect of RM2.0m exchange rate difference, cash level increased by RM7.3m in FY15.
Warn you that cash level increased when their net income declined in FY15.
Since FY16 earnings outlook is much better (I am looking at least 75% growth yoy), it is possible that the extra cash will be used to either increase dividend or investing in new machineries to improve business.
APOLLO theoretically worth RM6.80 or 37% UPSIDE
APOLLO is worth RM6.80 per share. Let’s work out the value of APOLLO.
I am looking at FY16 net income to grow by 75% to RM44.3m on the back of the improved efficiency and higher USD this year. As the number of shares is 80.0m, FY16 EPS should hit 55.38 sen.
Fair PE is 12.3x in line with the Company's average 5-year historical PE.
By multiplying 12.3x to 55.38sen, you will get RM6.81 (round up to RM6.80).
Triple catalysts are expected for the stock:
Dec-2015: 2QFY16 earnings will be announced and I expect it to double yoy as explained above.
Mar-2016: 3Q earnings will be announced, as long as USD stays above 4.20 we can expect great earnings again!
Jun-2016: Record high earnings will be announced. The FY16 earnings expected at RM44.3m will easily break FY14's record of RM33.5m.
Liquidity is not an issue (AJINOMOTO is the best example)
I assume some investors will complain that the liquidity of this stock is low (minimal volume traded daily).
To address this, just look at AJINOMOTO in which the liquidity is also low but share price has surged >30% this year.
Bottom line, earnings and company fundamentals matters more.