Monday, May 31, 2010

The Good: NTPM Holdings Bhd

A Brief Background
Founded in 1975 by Mr. Lee Sin Jin, Nibong Tebal Paper Mill (NTPM) Holdings Bhd is the largest tissue manufacturer in Malaysia. Its principal activities involved manufacturing and trading of tissue papers and toilet tissue. Its competitor, Kimberly-Clark is the world leader in tissue products and was once biggest in Malaysia before being displaced by NTPM. They started to enter into the sanitary napkin market in March 2003, pretty much like Kimberly-Clark what did. Its other activities included other paper related products and trading of cotton and investment holding.

Products Brand
Tissue Products: Premier (facial tissue), Cutie (toilet tissue), Royal Gold (Premium tissue), CONV
Personal Care: Intimate (sanitary napkins), Diapex (diapers), Premier Cotton
Personally, I like consumer names primarily because it is easier to do “scuttlebutt” on their products. For NTPM case, I take a visit to Tesco, Giants and Jusco. A quick glance at the shelf, I see it is mainly dominated by the names of Premier and Cutie (by NTPM) as well as Scott and Kleenex (by Kimberly-Clark). There are other brands as well just that they occupy only a small portion of the shelf. If I am not mistake, Jusco tissues are made by NTPM as well. Yeap, NTPM does seem to have establish its brand name here. So, I went on to ask some customers around including some of my friends on which one would they prefer. Some of them say “Aren’t Premier a better brand?”, “We have been using Premier all the while, they are good”, some don’t bother and some say it is cheaper. Hmm…cheaper….
Has NTPM tissue owns a piece of consumer mind? Well, I know some people like carrying facial tissue around and for most of the time, when they take it out from their bags/pockets, it’s Premier. I could say well done, NTPM.
The group expanded their product range since March 2003 by selling sanitary products (Intimate) as well as baby diapers (Diapex) which command a higher margin than its primary product. They have been intensifying marketing the Intimate brand name by having popular local Miss Fish Leong and Stacy, Akademi Fantasia 6 winner as ambassadors.

Historical Performance
NTPM did not fail making their products a well-known brand in this region.
  • Sales have been increasing at the average of 13% annually from 2005-2009 while operating income increases the rate of about 20%. Gross profit ratio remains steadily 57%-59% while operating income ratio stays around 12%-16%. That’s a pretty good margin for a manufacturer and it's consistent. This might show that it does have competitive advantage in its playground.
  • They do shown a slowdown in inventories turnover from 3.4 months to about 4.1months.

  • Historically they do show a slight illiquidity (less than 1). As of January 2010, its liquidity ratio stands at 0.79. A little illiquid for me. However, they are able to generate free cash flow at about RM25mil to RM30mil which could well cover their short term debt.
  • Probably due to their capability to generate strong cash flow, they have rather been generous with their dividend payout. For the past 5 years, their payout rate stands above 50% or in fact at the range of 57%-76%.
  • The group’s manufacturing facilities have been operating at full capacity at 75% to 80% (impossible to reach 100% btw). So, we should expect investment in new manufacturing plant shall we hope for higher growth.
  • As of 2009, export demand has surged by 21% driven by the demand by the Oceania region and the US. They are also making inroads to Vietnam and Nepal. NTPM tissue products are perceived as “greener” as they have more of their tissue composition made of recycled waste paper material instead of virgin pulp.
Now, from the description above, NTPM does look like the Coca-Cola of our own – or does it? You see, the reason Coca-Cola is able to sustain its growth for a long period of time even until now is because it has a unique taste. In fact it is so unique that it is not replicable. Now, try differentiate NTPM tissue versus the other brands. Find anything special? If Kimberly-Clark can be so easily being overtaken, so can NTPM.

One of the reason NTPM is able to dominate our local market is because they are selling it at a cheaper price. NTPM is able to achieved that by having more recycled waste paper in their tissue as compare to the one Kimberly-Clark made and thus lower its cost. This however, affected the quality of their tissue as virgin pulp made tissues are softer and at least guaranteed cleaner. I am not a big fan of those corporation who needs to win competition by selling their products at a lower price. Well there is some exception (will talk about it someday) but not NTPM. Kimberly-Clark can do the exact same way to compete. Furthermore, it’ll make NTPM difficult to adjust their price to inflation because they are ceilinged by the likes of Kimberly-Clark. All these could affect the sustainbility of their growth.
How about their other products? If you go to the supermarket to see, Intimate and Diapex is yes, cheaper (I could be wrong because I don’t buy those products, but that is what I could see so far).
However, this could be a good medium term investment as there are potential upside to the current market price. These are the assumption I made to get this valuation.
Cost of Revenue: The average COGS over the Sales over the past five years has been 41.3%.
SGA Expenses: Average SGA Expenses is about 31.4%
Depretiation: Depretiation wise is about the same as Capex at about RM18.6million
Capex: Assuming the group decided for another factory in around the next 5 years, I took the average about RM23.3million. Bare in mind, the group exports are expanding.
Revenue: Tissue market is already saturated in Malaysia and could see the group expanding into other countries. Besides, their entrance i to sanitary products seem to be doing well. For that, I am quite confident they are able to maintain their average 13% growth over the next 5 years.
With 14% discount, NTPM is valued at RM0.83.
Hey, didn’t I always stress for good-long term investment? Yes, I am still. NTPM does look like a good investment and really got me excited few months back. The only reason I got turned off is because there is still a big question mark on the sustainability of its growth over the longer term.
Will I invest in NTPM? Yes, IF, I have some extra cash and I want to invest somewhere and can’t find any good one.
This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at


Anonymous said...

I would like to exchange links with your site
Is this possible?

LuZeeker said...

sure :)

JW said...

NTPM profit has been sliding for the past 2 quarters. How can we find out what is causing this?

LuZeeker said...

According to NTPM, this is due to the rise of cost of raw materials. It can be found in their quarterly report notes.

JW said...

Ok thanks.
Does the DCF value need adjustment based on these eroded earning?

LuZeeker said...

Actually that depends on the way the individual calculating the DCF.

But definitely, the rise of raw materials will hv impact on the earnings in the shorter term. And DCF definitely would change if NTPM can't react to this rise of costm

But if your projected cost of revenue has in some way factor in this rise (using the 5 yrs avg for example), then there shouldn't be much change to it.

Anyway, valuation is not rocket science. It is almost impossible to get exact valuation I bet even the ceo doesn't. What we try to do is to get as close as possible. One way to protect urself is to have margin of error.

Anonymous said...

Nothing is beautiful from every point of view.