Why I like : Eurospan Holdings ?

Company Introduction
Eurospan Holdings is listed in Bursa Malaysia 2nd Board. It is a major export oriented manufacturer of wood based products, the Group produces a wide range of Ready-To-Assemble (RTA) as well as Fully Set-up/Assemble (FA) dining tables, desk, dining chairs, floor chair, coffee tables, corner tables and baby chairs. The Group utilizes wood materials combined with modern furniture accessories and advance technological process to produce quality furniture to meet the high expectations of overseas customers.

Reasons I'm loving it:

1. China is not a threat

China has now become the factory of the world with globlalisation. With their abundance supply of cheap labour and property, big amount of cheap China exports are making their way to every corner of the world. There is no way we could compete with them in price. Therefore, I avoid investing in businesses that provide goods/services that China can provide. Furniture is of course no rocket science, every layman can produce his own furniture with little skills and imagination. How can Eurospan compete?

It specialises in making Ready-To-Assemble(RTA) furnitures which could be shipped more cheaply to overseas market compare with China products that are Fully Set-up which incur higher shipping costs due to the requirements for bigger space for shipping.

Besides, it is expanding downstream activities to produce more value-added features. The company will be spending more than its current allocation of 1.3% of its revenue to research and development next year. More focus will be put on differentiation strategy of penetrating new markets with a range of affordable to premium quality wooden dining sets as well as cabinets.

Furthermore, it had reduced reliance on rubber wood by using different types of wood and non-wood materials. Currently rubber wood content makes up of about 20% to 30% of the materials used for furniture manufacturing which makes it competitive in light of the escalating rubber wood prices.

2. The institutions don't own it and the analysts don't follow it

'If you find a stock with little or no institutional ownership, you've found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you've got a double winner.' Peter Lynch.

If you browse through the analysis of shareholdings in the Annual Reports, you will find that the biggest institutional shareholder is Lembaga Tabung Angkatan Tentera (LTAT) with shareholdings of 2.45% which they held since listing in year 2000. And if you google this company for analyst's report, you could find none! What better company to invest than this which is under-researched and with no competition for stocks accumulation at cheap price?

3. Low PE/High Earnings Yield

Eurospan made a full year profit after tax (PAT) of 14.45cents, and at its current price of 94.5cents it is selling at 6.6times historical earnings. This is about 15% earnings yield. What is more impressive is its ability to generate Free Cash Flow of 18cents, which makes its Price / Free Cash Flow a mere 5.25 times. (Free Cash Flow or Owner's Earnings in Warren Buffett's term is the Earnings + Depreciation - Capital Expenditures.) In the other words, it is cold hard cash generated by company that can be used to benefit shareholders by raising dividends and/or buying back its own shares. Over the last 3 years, it has generated Free Cash Flow substantially higher than its accounted earnings. (eg. Year 2004 FCF of 14 cents vs PAT of 4 cents, 2005 14 cents vs 12 cents and 2006 18 cents vs 14 cents.)

4. Cash cow

As a result, it has accumulated a cash hoard of 60cents and NO DEBT even after paying out average 50% of yearly earnings. This year Eurospan is paying out handsome dividends amounting to 8cents per share gross, which is an impressive 8.5% yield! It has steadily increased its dividends for the past 3yrs from 2cents to 8cents last year in tandem with its growing earnings. The stock will be traded ex-dividend on 20th Nov 2006.

5. Ability to pay out handsome dividends

Looking at its fat cash hoard and its ability to extract cash from its operation with its low capital expenditures requirements(see attached picture for figure), it should have no problem keeping or even increasing the dividends next year and for the years to come. We like management that reward shareholders instead of using the cash for 'diworsification'. And so far the company has not (mis)used any of the cash for investments outside their core competency of furniture. Instead they have been ploughing the money back into research & developments in expanding downstream activities in producing more value added features.

6. Great upside, no downside!
This stock offers a valuation that is too hard to ignore. Just imagine that the company generates FCF even at NO GROWTH of 18cents/yr for the next 2 years, it would accumulate 36cents. Add this to the cash hoard, it will have 96 cents. Which will be more than the share price now. Unbelievable!

Which company can provide you the safety of capital which in the worst-case-scenario of NO GROWTH, in 2 years time will trade around your purchase price? (Under the most persismistic market, companies usually trade around its cash hoard) And in the normal-case-scenario, assuming a conservative estimation of 10x FCF plus cash, it shall trade around RM1.80+RM0.96=RM2.76 which is a whopping 200% gain in 2 years!

Disclaimer: This report is provided for general information only, is not to be considered as investment advice and should not be relied upon for investments decision. Visitors please exercise your own judgements for investments decision.