The blog entries do not represent a recommendation to buy or sell. Please consult your financial experts before making any decisions.

Wednesday, September 10, 2014

Keep in View (KIV) - NTPM

NTPM started its operation in 1975 and today it is involved in manufacturing and trading of tissue papers, toilet tissue, serviettes, napkins and other paper related products and trading of cotton and investment holding. NTPM is not very well known in Malaysia but most of us use its products everyday. Think of Premier, Cutie, Royal Gold, Intimate and Diapex.

From the 10 Years financial highlights below, we can safely decipher that the revenue of NTPM is on an uptrend. In fact its Compound Annual Growth Rate (CAGR) of 10.1% is quite impressive. Truth to be told, the consumer tissue segment has sort of plateaued. The bulk of the revenue growth in the past five years came from personal care segment (sanitary napkins, facial cottons and diapers) especially the own developed diaper under Diapex brand. Diapex has established itself as a mid-range disposable diaper and from my brief online research, Diapex also receive plenty of favorable reviews from malaysian moms.

Well, as usual, lets go into the usual pulling factors and risks involve in this stock.

The pulling factors:
1) Brand and market share in Malaysia
To be honest, I used to think that Premier, Cutie, Royal Gold, Intimate and Diapex are foreign brands. For most malaysians, foreign brands = good quality. I admit I am one of them. That is actually how good the branding job that NTPM has done.

Locally, NTPM has a market share of 50% in tissue products, 10% in baby diapers, 11% in sanitary napkins and 30% in facial cottons. In the tissue space, NTPM goes head-to-head with much bigger Kimberly Clark (Kleenex) but still manage to be a market leader. Kudos to NTPM!

As for the sanitary napkin (Intimate) and baby diapers (Diapex), it lags further behind Kimberly-Clark (Kotex, Huggies) and Pampers (Whisper, Pampers). NTPM is apparently growing these two products as it plans to commission a new RM20mil plant in Nibong Tebal to double the production of personal care products by end of 2015.

2) Prudent Management and value for shareholders
If one were to buy RM1000 worth of NTPM shares since IPO, total dividend received would be RM802.81. The dividend yield is really not bad at all. Together with the stock price at 72cents@10.09.2014, one would have got about 240% return in a span of 11 years. In short, the management is serious about enriching the shareholders. Note that the shareholder equity (see 10Years financial highlights above) is consistently growing annually too.

Another thing that strikes me is that the management had the guts to trim the dividend in 2012 (see 10Years financial highlights above) when the market outlook was not so good and the company earnings fell. Back then, the chief culprit was the rising raw material prices. Trimming the dividend is the right thing to do as we cannot expect the business to be rosy all the time. When put in such situation, some companies would choose to distribute dividend first and then do a cash-call a few months later e.g. Oldtown. What a waste of money and time! So far, NTPM has done all the expansions and capex from its own pocket and bank borrowings without making any cash-calls.

3) Indochina Expansion
NTPM's Current ratio for its export and domestic market are 30% and 70% respectively. A fleet of 130 trucks enables NTPM to deliver products to the domestic market as well as to southern Thailand in the north and to Singapore in the south. However, both of these markets are already saturated with dominant leaders.

The real expansion opportunity lies in Indochina namely Vietnam, Cambodia and Myanmar. NTPM plans to build two plants in Vietnam and one in Myanmar. As a start, they have bought a 25 acres land in Binh Duong province to build a USD19.7mil tissue manufacturing plant with 2 machines capable of producing 10,000 tonnes per year. That equivalent to 1/8 of Vietnam's total tissue consumption in 2013. According to the normally conservative MD Lee See Jin, that is a level that can be easily achieved. Luckily, the plant is not damaged during the Anti-China riot in May 2014. The plant should be operational from third quarter of 2014 and start contributing to the top line soon.

a) raw material prices and other overheads
The rising price of wood pulp is not good for NTPM. Although NTPM sources about 80% of its raw material from waste paper, which is cheaper than pulp, the price rise will have some effects on NTPM as well. Waste paper only costs between RM450 to RM850 per tonne in Malaysia while wood pulp currently costs about USD875 per tonne.

NTPM is also feeling the effects of the higher electricity and natural gas tariffs which took effect from Jan and May 2014 respectively. The latest gas tariff revision saw natural gas prices increase to RM19.32 from RM16.07, an increase of 20% per million British thermal unit (mmbtu).

Due to these factors, the first quarter result for FY2014 do not look so pretty:
Although the revenue recorded a marginal increase, the net profit almost halved. Things might not be rosy now but based on the track record of the management team, I am fairly confident that they can turn things around. The management has embarked on energy, waste and water management as well as shipping and transportation optimization to further reduce the production cost but there will be a time lag in view of the implementation.

b) Volume war
The usually conservative MD observed that NTPM will be in for a bumpy ride ahead due to the new focus of their rivals. The rivals are increasing their sales volumes by sacrificing margins and NTPM might need to do the same as well to protect its market share. Below is the excerpt from first Quarter report for FY2014:

NTPM is a buy for me especially at current price of 72cents. It offers a dividend yield of 4% based on forecasted 2.9cents dividend for FY2014. Due to the current low cash level in Huat fund, I will have to sell some share before entering. I guess I just have to hope that the share does not rise so quickly.