Introduction

Disclaimer: All investment decisions are ones which you are solely responsible for. None of the opinions in this article are a form of a buy or sell call, or represent FLY: Malaysia or any other institutions. 

With the booming popularity of the Malaysian e-commerce industry, there will always be better deals in the market than the discounts the 2 big players, Shopee and Lazada try to push on you via their never ending sales and notifications. Instead of your usual consumer goods, why not buy Sea Limited shares, Shopee’s holding company? ? Had you bought the shares in June, you would’ve netted a yield close to 100% if you had sold it on the 9th of December 2020. 

Investing in the stock market has never been easier, with online brokers such as Rakuten Trade offering low brokerage fees, lowering the barrier of entry for retail investors. As we head into 2021, and the global recovery is hopefully underway, there are two stocks I would like to highlight. These stocks were both affected by the pandemic as they are consumer-based. One has strong financials, with possible opportunities for growth. The other is dependent on the future of the film exhibition industry.

 

Carlsberg

Disruption to everyday norms and lockdown measures led to a fall in consumer sentiment. The Malaysian Institute of Economic Research’s Consumer Sentiment Index, fell to a 32-year low of 51.1 in the first quarter (Khuen, 2020)

Investors were fearful of the uncertainties that lay ahead. The fall in consumer-related businesses such as Carlsberg can be reflected in the company’s share price. At its peak in 2020, Carlsberg was trading at RM39.26 per share, but during the March crash it fell to as low as RM17.38 per share.

With the rollout of the vaccine underway, and with hope that businesses will return to normal, an investment opportunity can be found in the stock market by going through their fundamentals (profits, cash flow etc).

When investing in a company, you have a vested interest and ideally would like to see a return on your investment, which may come in several forms. For businesses, this may mean expansion, product development etc. but the easiest metric to measure growth is their growth in profits.

 

The graph below illustrates Carlsberg’s profit growth throughout the years. As illustrated, they have grown slowly throughout the years, with profits increasing from 2016 onwards:

(Source : KLSE SCREENER )

 

Another way to obtain further insight about the company is to analyse their annual report. It is important to note that an annual report is produced to boost investor confidence. As such, it should not be taken at face value. That being said, there are two notable facts that can be obtained from their annual report.

You may be under the impression that alcoholic beverages that can be found in Malaysia such as Asahi, Somersby and Blanc are each produced by different companies but in fact, they are all produced by Carlsberg.  Having a wide range of products available means being able to cater to different customer segments, which should translate into a significant share in the beverage market.

Another notable fact is its aim to move and focus on their direct-to-consumer (DTC) business models, such as improving their Shopee stores. A direct-to-consumer model allows the business to sell directly to consumers, which could translate into better margins, as the middleman (the retailer) is effectively removed from the supply chain. Lululemon, an athletic clothing label is a success story of the DTC model. Forbes has highlighted that the DTC model has contributed to more than 25% of Lululemon’s revenue, and growth in that segment has outpaced total revenue growth. (Team, 2020)

Investors who are interested in holding stocks for its dividends also make Carlsberg’s an attractive buy as  their policy for a “target payout of 100% of the Group’s annual consolidated net profit” is in the shareholders interest.

In comparison, Heineken, Carlsberg’s competitor, is similar to the group as they own various labels (Tiger Beer, Apple Fox), and their financials reflect that. Its revenue and PE ratios are similar. Their PE ratios are 36.8 and 36.5 respectively. However, Carlsberg has a higher return on equity ratio than Heineken.

 

A brief description on what the ROE ratio is:

It is a ratio that indicates how much profit is generated based on its equity (invested money). If a company’s ROE is 1, that means for every one dollar invested, it generates a profit of 1 dollar.

 

Heineken’s ROE % is 64.58 whereas Carlsberg’s ROE is 137.39. That means, for every RM1, Heineken generates RM0.64 in profit, while Carlsberg generates RM1.37 in profit. This may suggest that Carlserg is operating more efficiently, as they are able to generate more profits from the same amount of equity.

Overall, with it’s diversity of products and movement towards a DTC model makes them well-positioned for the future. Their steady growth in revenue pre-corona and ability to generate a profit and pay out dividends even during a pandemic indicate good management. 

 

IMAX 

For cinema-goers, this year was a seismic shift in the landscape of the industry. With cinemas closed, then reopened, and then closed again with the outbreak of another Covid-19 wave. 

HBO Max has also announced that they will release their 2021 slate of films on their streaming service and cinemas simultaneously. This spells anything but good news for movie theatres and perhaps a sign of the death of the movie theatres as streaming platforms such as Netflix, Disney Plus, and HBO Max grow in popularity. 

In my view, IMAX and other premium film formats are well positioned for the future. For the best experience, audiences would want to watch the latest blockbusters on the biggest screens with the best sound systems. Select films in IMAX show 26% more of the movie (because of the expanded aspect ratio) than a normal cinema. An analysis of the Chinese Market proves that the IMAX format is more popular amongst consumers.

(Source: IMAX’s Twitter page – @TGVCinemas)

 

The Chinese market highlights that there will always be a place for cinemas. The Motion Picture Association of America has claimed that 90% of movies sold in China are pirated copies (The cost of movie piracy, 2014). Even with streaming services which make movies and shows more prone to piracy, the Chinese cinema industry is still growing healthily. The film, The Eight Hundred was released this year after China lifted lockdown. It grossed $460million and IMAX showings accounted for 6.6% of the film’s revenue as of 26 August 2020 (“The Eight Hundred Drives IMAX’s Top Box Office Day, 2020). 

There are approximately 60,000 screens in China (China reports world’s largest number of film screens – Xinhua | English.news.cn, 2020) and it is estimated that there are 700 IMAX cinemas in China (Imax China Warns of $36 Million Half Year Loss – Variety, 2020). This means there are less than 1% of IMAX theatres in China, but they account for 6.6% of overall shows. IMAX is set to grow in China, having just inked a deal to build more theatres.

Fears over how long the recovery will take can be abated as IMAX has sufficient working capital (meaning expenses in the short term can be covered). From their Q3 quarterly report, they’ve mentioned their well-positioned to power through the continued recovery of the global film industry as they hold a significant amount of cash ($305 million). 

Pre-Covid, the future of cinema never seemed brighter. In 2019 alone, a record 9 films joined the “billion-dollar club”. Films such as Avengers: Endgame, The Lion King and Star Wars Episode 9, are best experienced on the largest screen possible to appreciate the spectacle of exhilarating action sequences. 

This makes IMAX well positioned for the future, as it is not just a Cinema company, but a technology company as well. They license their technology to exhibitors and also sell them in home entertainment systems. IMAX will be a beneficiary of the return to normal as audiences head to the cinemas to watch the latest blockbusters. 

 

Conclusion

On a more personal note, this quote from the economist, John Maynard Keynes seems pertinent: 

 

“Markets can remain irrational longer than you can remain solvent”

 

A trade can go wrong, no matter how sound your analysis and research may seem. The single most important lesson I’ve learned after participating in the stock market for under a year is to always follow your parameters. A primer on what parameters are:he set numbers as you enter a trade on your point to cut loss and take price. Stocks don’t appreciate forever, and holding a stock forever at a loss may be futile as there is always an opportunity cost as to where to place your capital. If you do choose to invest, always remember to protect your capital and be disciplined. There will be tuition fees along the way (a colloquial way to say losses), but the reward of financial independence from a healthy portfolio could be worth all the trouble.

 


Researcher: Muhammad Bahari

Reviewer: Millen Lau

Editor: Hui Zhen

Download the article here: Discount-Hunting-for-stocks.pdf