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Sunday, July 30, 2017

Classic high dividend yield play; strong cash flow and low capital expenditure (Insider Asia report)

Author: kcyeo | Publish date: Sun, 30 Jul 2017, 04:13 PM

Classic Scenic Berhad

Classic Scenic’s earnings results for 1Q2017 were broadly in line with our expectations. Revenue increased 0.7% y-y to RM15.5 million. This was mainly due to higher export sales to Asia and the US, which was partially offset by lower domestic sales.

On the other hand, net profit was up 5.2%, excluding forex gains/losses and fair value gain from hedging contracts. Earnings would have been better if not for the change in product mix – more orders for lower-margin products – for the quarter. Net cash stands at RM26.4 million or 21.9 sen per share at end-March, up from RM23.9 million in 2016.

We remain sanguine on Classic Scenic’s prospects going forward. We expect the company to maintain its growth momentum in 2017, underpinned by rising demand for its products on the back of the improving US economy and stronger housing market.

Low-profile Classic Scenic is one of the world’s largest manufacturers and exporters of high-end wooden picture frame mouldings. The company produces over 5,000 products, ranging from stained wood and matt color to gloss lacquer and laminated veneer. Every year, its R&D team introduces 100-150 new designs with better profit margins.

Classic Scenic is a beneficiary of the stronger US dollar with over 90% of its sales derived from export markets, mainly to the US. Its biggest clients are Michaels Stores Inc, Hobby Lobby Inc and Larson-Juhl Inc, with business relationships built over 12-20 years.

In 2016, net profit surged 15.6% to RM13.3 million on the back of a 6.3% growth in revenue to RM57.4 million. This was mainly due to higher sales volume to the US and the stronger US dollar.

More importantly, free cash flow came in strongly at RM17 million (14.1 sen per share) in 2016, due to strong operating cash flow and low capital expenditure (capex).

The picture frame maker has set aside RM3.5 million for capex this year, mainly to increase automation and improve process flow. In addition, it has started sourcing timber logs (instead of sawn timber) since April last year. This will result in cost savings of 15-20%, which will offset the 2-5% increase in timber prices. Due to its high inventory level, the impact of cost savings is expected to be felt only starting 2H2017.

Classic Scenic has one of the highest sustainable yields in the market. It has paid dividends totalling 11 sen per share for 2016, up from 10 sen per share a year ago. We estimate total dividends of 13-14 sen per share for 2017, giving an above-market average yield of 7.2-7.7%.

Source: Absolutely Stocks website

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