Monday, June 7, 2010

The Good: Freight Management Holdings Bhd

Call it coincidence, the four companies that attracted me to do a research on them happen to be the small caps. I have to admit investing in a small cap does gives a considerable higher returns than "blue chips" but it also comes with higher risk - or does it? Do Sime Darby rings a bell?

Freight Management Holdings Bhd (FMHB), founded by couple of husband and wife, Mr Chew Chong Keat and his wife, Ms Gan Siew Yong in 1988, they have grown over the years and got themselves listed in the KLSE Second Board in 2005 and to the main board 2 years later in 2007. FMHB is an international freight forwarder which acts as an intermediate between importers/exporters and carriers. Its principal activities includes sea/rail/air frieght management services, tug and barge operations, warehouse and distribution, custom brokerage and project management....basically a one-stop logistic service provider.

Historically, seafreight has been the main contributor in the freight services segment followed by air and rail freight. The incorporation of FMHB subsidiary in Singapore which provides Tug and barge services in 2006 have contributed well into FMHB revenues coming in second overtaking air and rail freight revenue. Revenue from sea freight being the most efficient transportation cost and volume wise, has been growing steadily since 2002 with the growth of external trades. Despite being the only 3 rail freight provider between Malaysia and Thailand, this segment faces challenges as locomotive shortage problem has affected its business. To solve this problem, FMHB provides its own trucking services which is lessen delivery time but with a higher charge to its customer. Its air freight segments however focuses more on the lower segment has it faces competition from DHL in the higher segment.

FHMB involves in both Full Container Load (FCL) and Less-than a Container Load (LCL) in its sea and rail freight activities. Although FCL contirbutes higher revenue, LCL gives better margin (more than 20% higher) than FCL. Why is this so? They are able to have multiple charges based on individual consignment while paying the same rate per container.

Historical Business Performance
  • Overall revenue for FMHB has been growing steadily at the average rate of 12.5% where profits before tax is increasing at the average rate of 20.2% on the back of improving COGS margin (FY06-FY09).
  • From a source of mine, FMHB has been sending their sales force for extensive trainings which explain the increased of SGA expenses ratio.
  • Over the past 5 years, trades receivable is low (less than 3 months). The best part, it is decreasing!
  • Doing a super stress test liquidity test ([current assest-inventories-receivables]:current liabilities) on FHMB may not have done justice to them given the fact that their revenue are driven by a widely diversified sources. So to test the liquidity, I'll do it a bit different. this method is created by me, so no accuracy guarantee ya. We all know LCL comes from multiples sources and cost wise to the customer is significantly lower than LCL. So, I give a guess that receivables from LCL are more collectible. LCL contributes 40-45% of freight revenue over the past 5 years, so i make a guess that 40% of those receivables are collectible. This may not be super accurate but I think this gives a better picture.

  • FMHB has been paying dividend consistently and on FY09, a total dividend of 34sen were distributed after the adjustment of bonus shares issued. That is a dividend yield of 4.3% on the price of RM0.80.

What I like about FHMB is that it is a light asset player. Most capex has been spend for business expansion rather than cost capex. Is their growth sustainable? That we'll have to go back to how freight forwarders business works. Freight forwarders hanlde all the documents, requirements and legalities because sending package internationally requires all these which help to reduce burden of their client. Freight forwarders normally have established good relations and networks with other logistic companies. What would this translate to? A better rates for their client. When a freight forwarder receive a project, they'll post an advertisement for bidding and they'll pick a list of best options with all points considered to their client. Once their client pick the bidders, the rest are all left to the freight forwarders. A good freight forwarding service can save the client untold time and potential headaches while providing reliable transportation of products at competitive rates. Networks is the strong point of a freight forwarder. FMHB has a network of 107 agents in 127 countries worldwide. This kind of business is only well known to locally, and we could see, FHMB is acquiring JV with many local firms in different countries - a good sign of growth. (A special thanks to a close source for all the informations regarding logistic business)

How much would I pay for Freight Management?
  • Cost of revenue ratio is actually been decreasing over the past 5 years due to increasing higher contributions from higher margin services such as LCL. But I'll take the average of 79%
  • SGA expenses ratio grows at the average of 8.5% and I estimate it to grow over the next 5 years. But it is likely to stay stagnant somewhere in the period but I'll take the worst case.
  • Depreciation is averaged at about RM5.5million per year
  • Capex is estimated about RM8.5million per year on average as well.
  • Income Tax remains 25%
  • On the revenue front, FHMB revenues mainly derived from these four countries, Malaysia, Singapore, Australia and Indonesia. Average trades growth from Malaysia is about 12.9%, Singapore 11.3%, Australia 7.09% and Indonesia 14.2%. If the average stays for within the next 5 years, total trades growth from these countries is going to be about 15%. This is higher than FHMB average 4 years growth which is about 12.5%. To stay conservative, I pick the lower ones which is 12.5%.

This would make a below RM1.105 FHMB purchase price a low risk purchase. (Note: the lower the price you pay, the lower the risk)

To be honest, I really like FHMB to be in the Great List as it is one of the leading freight forwarder in this country and pretty well-known for its efficiency in this region. Its well-established networks over the years and its well-known name in its industry gives itself a high competitive barrier to its smaller competitors. The only reason why it is in the Good List is because of its low net operating profit margin below 10%. This is probably because of the nature of FHMB business as a middle person of transportation which makes it looks something like a retailer in consumer industry. But unlike retailers, FHMB able to pass any rise in cost to its customers and do not have inventories to worry about. But as you can see from the table below, it is improving and has all the potential to be in the Great List. If i were you, I would allocate a small portion for this company.

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...

Took me time to read the whole article, the article is great but the comments bring more brainstorm ideas, thanks.

- Johnson

JW said...

Capex increased to 19,896,000 in FYE2010 which is more than net profit. Should we be concerned?
Also, what are your views on its expansion in Vietnam? Good or bad for investors?
Thank you.

LuZeeker said...

I'm not sure how you get RM19.896 mil in capex. Would you mind to share?

It looks Rm15.8 in my acc as of 2010 AR ended June 10. If it generates a negative cash flow, as for now, it can be expected but if we are following it, we should have the corporate dev under a rel scrutiny because if that is the case, they are financing their capex by incurring more debt. (Debt level has increased in Q1).

However, I estimated maintenance capex at about RM6mil base on their depreciation charge but I do expect this to increase as their expansion will continue over the next few years.

Vietnam, is one of the emerging market in SEA. To be honest, I'll be happy if the expand into one of these market. Question is how they do it? The management has announce their strategy to expand via M&A or JV which are the better strategy for me. If the management make a good M&A, that should work out well for investor.

JW said...

Page 114 #36 Other segment information > Capital expenditure
Is it not the correct figure to look at?

I've bought a small amount of freight today at 0.98 :)

Merry Christmas n Happy New Year to you

LuZeeker said...

Yeap, I can see why the discrepancy. The total actual Capex is RM19.896mil but about RM4mil of them are financed by loan as well as hire and purchase lease (installment plan).

Erm..for me..if I were to calculate the current year cash flow, I'll look at the RM15.8mil because that RM4mil are the cash flowed in.

Well, Happy New Year to you too :)

JW said...

Is it normal for a company to have such a high percentage of capex expenditure?
How can we find out on what the 19 mill is spent on? From the AR, it doesn't tell in details.

LuZeeker said...

Well such capex does happen. There are company who make acquisition which takes more than a year of cash flow either with reserved cash or debts.

Ermm..i'm afraid you find out much actually. You can only see the spend it on Plant,Property and Equipment. To know if it is expansion or maintenance, you have to look at the corp development. Invested amount is roughly capex minus the acquisition.