Supermax’s AGM (2)

Frankly speaking, my holding of few thousand units of Supermax shares do not motivate me much to go such a long way from Ipoh to KL in order to attend the AGM. However, my bester friend, Kam Chyuan who is investing into Supermax heavily, was unable to attend the AMG at work day because he is now working at Singapore. So he strongly urged me to attend the AGM not only for the benefit of myself but for him as well. He promised to bring me to his hometown Tualang and will pay me the Tualang prawn as the compensation for me to attend the AGM…^_^

After a long preliminary story about the ‘unbelievable couple’ and my best friend, it is now the next story going more into the actual theme, the AGM. The meeting started at 10 a.m. The company had arranged around 200 seats, and I roughly counted that there were less than 100 people were attending the AGM, including around 10 people were from the press.

I further noticed the majority of the shareholders who attending the AGM were retiree. This situation further explained that the AGM that hold at week day or working day might greatly affect the eagerness of the shareholders to attend the AGM. From my point of view, this was a negative sign of corporate governance as the company might indirectly discourage its shareholders to attend the AGM in order to pass certain resolution without strong objection or queries from minority shareholders. I hope the company should further improve on this issue by arranging the AGM at weekend in order to show their integrity to minority shareholders.

So the Executive Chairman cum Group Managing Director (“MD”), Dato’ Seri Stanley Thai Kim Sim commenced his speech in the AGM. He first to brief us the latest financial progress of the company base on the recent quarterly financial result. Actually what he briefed could be found from the quarterly financial result announcement that posted at the Bursa Malaysia’s website last month. So he mentioned that the company is showing a positive sign of further improving its financial fundamental although the business environment becoming more challenging now due to the financial crisis. He pointed out the following good sign base on the latest quarterly result:-

- Revenue increased by 0.5% (Year-on-Year basis, “YOY”);

- Operating Expenses reduced by 1.9% (YOY);

- EBITDA increased by 24.5% (YOY);

- Net Profit before tax increased by 43.4% (YOY);

- Cash flow increased from RM20 mil to RM70 mil; and

- Gearing at 0.75 times;

The abovementioned points are good sign that indicating the company is improving except the increase of the cash flow. The improvement of the cash flow is just merely reflected the company decided to cut the spending on the working capital and capital asset investment (“CAPEX”). The company had previously announced that it will cut its CAPEX spending at this year in order to reserve cash during the financial crisis, but I view this more like the company is going to repay the bond which is going to mature in this year end.

When the MD answered 1 of the shareholders inquire about the dividend policy, his reply further proved my view that the increasing cash flow is to service the bond repayable. Because the MD mentioned though there is an increase of the company’s profit, he will only consider to increase the dividend payout ratio or will pay a special dividend depends on the financial year end result. It is a typical reaction to say no if someone reply to you that he will reconsider lah or he will make certain action depends on something lah.

With the increase cash flow but the company has no intention to pay more dividend or spend more on CAPEX, it leaves only 2 options either to put the cash at bank to earn fixed-deposit rate or either to repay the bond or term loans to save the interest costs.

Actually I was quite disappointed that the company will not pay out more dividend since its profit is increasing steadily. Without having high dividend payout ratio, its P/E will be stagnant so do its share price. Maybe I should think it positively that after the company settles most of the debt, it will save a lot of interest cost. Just look at the company’s last year interest cost that stand as high as RM20 mil, then this gives me a clue that it could be a wise move to repay the debt with the extra cash flow. I hope the company could further reward its shareholders with more dividends after settling the bond and term loans.

The next point the MD presented to us was his forecast on the next quarterly performance. He informed that the next quarter result will be quite positive due to the A(H1N1) flu virus has now spread through worldwide, so glove sales will be increase due to the demand from the health industries. What a dismal situation that when everyone becomes sick and nervous because of the said virus, the company is making more money.

Moreover, the MD further mentioned that in order to capture more value in the value chain of the glove industries, it is the distribution business the most profit making segment. Thus he has an intention extend the business into the downstream business of the value chain by involving into the distribution of the glove.

The company recently setup a new distribution center at Brazil and its sales profit is increasing exponentially. It is because the Brazilian government has imposed a new regulation with a higher hygiene inspection standard this year and thus a lot of products from the glove players in Brazil have been detained by the government. In view of this, there is a great shortage of supply in the Brazilian glove market and Supermax is able to penetrate well into the market with its new setup distribution center. The MD also further predicted that the company could make a windfall profit during the next few quarters before the Brazilian glove market is back to its supply and demand equilibrium.

I strongly agree to the MD’s view on the value chain that distribution is 1 of the most profit making sector, its profit could be even surpass the profitability from the manufacturing segment itself. By manufacturing its own brand products and marketing these products by its own distribution line rather through 3rd party distributor, the company is able to stand at a better price bargaining position and thus capture most of the value created in the value chain. So the MD was quite optimistic to foresee the contribution of the distribution segment to the company’s profit will increase exponentially. Indeed, the profit distribution profit was growing at a CAGR of 25% to 30%.

The next topic in the AGM was the merger of Seal Polymer (“S.Poly”) and the acquisition of APL Industries (“APLI”). The MD was first talked about the merger of S.Poly seems not integrating very well into the company. It has several production lines not fully utilised efficiently. So it becomes 1 of the reasons that the company not to have CAPEX spending this year, because the company would like to upgrade and improve the manufacturing lines from S.Poly in order to fully utilised those manufacturing lines (target 90% utilisation rate) before the company further expanding.

Whereby the acquisition of 14.09% of APLI’s shares, the MD admitted the acquisition was a disaster and he decided to impair the investment of 14.09% of APLI’s shares which cost a hefty RM16 mil (APLI was delisted by Bursa Malaysia and now on its way of bankruptcy. I believe Supermax cannot claim back a sen after APLI’s liquidation because APLI has so much default debt need to pay to the senior creditors first). By impairing the holding of APLI, the company will no longer absorb losses from APLI, so Supermax’s bottom line will be back onto normal track. I wish this failed acquisition will give him a lesson that a company should be more conservative depends on its own organic growth rather than base on merger and acquisition.

Actually before involving into the merger of S.Poly and the acquisition of APLI, Supermax was doing fine by running its Own Brand Manufacturing ("OBM") policy well with a high net profit margin at around 14%. However, after buying the said merger and acquisition with a high borrowing, its net profit margin drop gradually from around 14% to 8% lowest at last financial year, which is even worse than those profit margin of some Original Equipment Manufacturing ("OEM") companies.

This is the reason that haunts me not to invest too much into the company. So the MD should lead the company to the OBM policy by focusing back onto its own brand name products in order to differentiate its products from other OEM such as Top Glove. He should know there is a Chinese saying that “there are no 2 tigers can crouch in 1 mountain (一山不能藏二虎)”. 

Last but not least, the 'unbelievable couple did not come out to voice their concern regarding the refreshment. They might already left the AGM as they could find it is very boring if they only care about door gift rather than the company business. Finally, the AGM was ended at around 11.45 a.m., last for 1 hour and 45 minutes.