Yoong Onn Corporation Berhad

Yoong Onn Corporation Berhad (KLSE:YOCB) is a micro-cap manufacturer and distributor of home linen, listed on Bursa Malaysia. The company produces bed and bath linen, bedding accessories and curtains. Their domestic market is the most important by far and represents 90% of the company’s revenue. Export markets are primarily Singapore and Vietnam.

Yoong Onn sells its products to third party retailers, like departmental stores, supermarkets and specialty stores, but the company also owns retail outlets itself. Other markets are institutions like hotels, resorts and cruise ships. Seeing these markets, it is no surprise that the company felt the impact of Covid-19 in their fiscal year 2020 (ended June 30). Revenue was down 21% to RM201.71 and net income was down 36.6% to RM14.5m. The company has since recovered somewhat. In the first half of fiscal 2021, revenue was down 2.0% YoY, but net income has increased by ~77% from RM7.3m to RM12.9m. This was mainly due to lower operating expenses and cost saving initiatives.

The company is cautiously optimistic about the rest of fiscal 2021:

The local retail market and export sales will remain challenging and competitive in moving forward. Nevertheless, the management has taken various austerity measures including streamline operations, pro-active marketing strategies and with the Group’s underlying fundamental strength of efficient business operations, financial stability and wide distribution network, the Board expects the impact is mitigated and a satisfactory growth in the financial performance of the Group for the coming financial year ending 30 June 2021.

Source: page 9, H1 report for fisc. 2021. Bold text mine.

Here’s some basic financial data about the company:

Share price: RM0.97
Outstanding shares: 158,652,700
Market cap: RM153.9m (~$37.5m USD)
Cash & short-term investments: 99.4m
Total liabilities: 32.2m
Book value: 244.2m
NCAV: 177.7m
Net income fisc. 2020: 14.5m
Net income H1 fisc. 2021: 12.9m
P/BV: 0.63x
P/NCAV: 0.87x
Trailing P/E: 10.6x

It seems likely that the company will benefit from the easing of Movement Control Orders in Malaysia if the pandemic is brought under control in the coming months (hopefully). In the US, home furnishing stores have done well coming out of the pandemic. I don’t know the specific situation in Malaysia and of the company, but so far Yoong Onn has yet to see a boom in sales. It is possible that their business relies more on freely accessible retail stores and that their products don’t lend themselves that well for online sales. If people are allowed, and feel safe to visit stores again, the business could see a nice recovery in sales.

Even without a sales recovery the company looks to be on track to produce a decent result for fisc. 2021. Net income for H1 was 12.9m. If they can earn around 20m for the full year, this would give the company a P/E multiple of 7.7x.

The cash balance of 99m looks very high and should provide some downside protection. Partly the elevated cash levels are due to working capital movements. As sales pick up, hopefully over the next year, inventories and receivables will consume some of that cash, but I do think that perhaps 40-50m of the cash can be considered excess.

Capital Allocation

Perhaps that relatively large cash balance is also dampening the valuation of the company. The company does pay a dividend, but it is a little on the low side. The company paid a 3 sen dividend in fiscal 2020 (3.1% yield) and the pay-out ratio was just 33%, which looks a bit low given the company’s cash balance. In fisc. 2019, a dividend of 5 sen was paid.

I should also note that the company had some debt in the period 2012-2014 of around 20-25m, but this has since come down and is currently only 6.4m. I think it’s a bit too early to say the company is a cash hoarder, as there was some debt in prior years and also because sales have grown at a reasonable pace over the last decade, requiring more working capital. That said, management certainly looks conservative when it comes to returning capital to shareholders.

This last point is also reflected in the buy-backs the company has done over the years, or rather the absence of them. Fiscal 2020 was the first year since the company’s IPO (2010) that the company repurchased shares. The company bought back 1.26m shares at an average purchase price of RM0.60 per share.

One other minor thing I noticed on the subject of capital allocation was that the company spent 12.3m in fiscal 2019 to buy a number of office suites. These offices are for the company’s own use though, so not for investment purposes.

Management and Insider ownership

The company is controlled by two brothers, Chew Hon Foong and Chew Hon Keong. They own 52.9% of the outstanding shares. Their compensation was RM785k and RM674k for fisc. 2020, which is around US$191k and $164k respectively.

Conclusion

Yoong Onn Corporation Berhad looks like a fairly attractive net-net. For investors looking to invest in a basket of these companies, I think it is a solid choice.

I have bought a small position. Net-nets are not a large part of my portfolio and I don’t really take the fact that a company is a net-net into consideration anymore. I do like picking up a collection of small positions in micro-cap, illiquid, cash rich companies like this when I come across them. As a group, they tend to do well. Much of the discussion between investors about companies like this stems from the fact that a large group of investors is looking to invest their portfolio in 6-8 companies. I would never put a company like this in such a concentrated portfolio, but that doesn’t mean that investing in a diversified group of these types of companies in a portfolio won’t work well.

There’s a reasonable chance that earnings grow nicely as the Covid-19 pandemic subsides. I think capital allocation at this company is a concern though. You can find dozens of dirt cheap, cash-rich companies in Japan, but I have found it hard to do well investing in them. I do think that Yoong Onn is a bit better than those, because there is some growth in sales and net income over the years and the dividend is also higher than is typical for Japanese companies. There’s also not a long record of cash-hoarding yet, so I think this offers a better chance that management uses the cash effectively.

Disclosure: long Yoong Onn Corporation Berhad (KLSE:YOCB)