This article first appeared in The Edge Malaysia Weekly, on February 1 - 7, 2016.

THE low commodity prices in the past year has been a boon for bakery and confectionery companies, especially those that have secured better prices for raw materials, thanks to bulk buying.

Not only that, the export-oriented nature of their business has allowed them to benefit from the stronger US dollar, which appreciated 23% against the ringgit in 2015.

However, while most confectioners are enjoying strong profit growth and margin expansion, home-grown cake and snack food producer London Biscuits Bhd appears to be one of the few laggards in the sector.

Oriental Food Industries Holdings Bhd and Cocoaland Holdings Bhd saw their share prices jump 196% and 100% respectively from a year ago (see table). Shares of Apollo Food Holdings Bhd and Khee San Bhd gained 35% and 54% respectively.

However, London Biscuits’ went up only 19%. The stock is currently trading at a price-earnings ratio (PER) of almost 10 times, compared with Apollo, Oriental Food Industries and Cocoaland, which are trading between 13 times and 16 times.

It is worth noting that London Biscuits holds a 22% stake in Khee San. In the last 12 months, the earnings of the two companies had been stagnant while their peers reported stronger results. Their net margins remained low at below 4% compared with their peers’ double-digit figures.

London Biscuits is the country’s largest domestic manufacturer of cake, candy, wafers and snacks with 11 production plants in Johor’s Ulu Tiram and Pasir Gudang, as well as Selangor’s Seri Kembangan and Telok Panglima Garang. More than 40% of its products are exported to at least 40 countries.

In the financial year ended June 30, 2015 (FY2015), London Biscuits’ revenue grew 12% to RM402 million from RM360 million a year ago. Its net profit remained relatively stagnant at RM14 million.

The company explains that the cost of raw materials — mainly sugar, flour and packaging materials — remains high, while the weakening of the ringgit had also increased its production cost.

But its peers do not seem to be troubled by these factors. In fact, Apollo has delivered its best-ever financial results in the first half ended Oct 31, 2015 (1HFY2016) and according to some analysts, it may see a year of record profits. Despite flattish revenue growth, the group’s net profit nearly doubled to RM20.8 million in 1HFY2016, thanks to a better gross profit margin on the back of lower raw material prices and the favourable exchange rate.

Meanwhile, Cocoaland’s earnings before interest and tax margin expanded to 16% in the nine months ended Sept 30, 2015 (9MFY2015), compared with less than 10% a year ago. The jump was mainly attributed to favourable raw material prices as well as the rally in the US dollar.

An analyst says London Biscuits has yet to shine due to the lack of coverage by investment analysts. Besides, some investors are not comfortable with the fact that the company seems to be run by family members, with six of them sitting on the nine-member board.

London Biscuits is 24%-controlled by the Liew family, with Datuk Seri Liew Yew Chung being group managing director and CEO of both London Biscuits and Khee San. His older sister Liew Yet Mei, younger brother Datuk Liew Yew Cheng and younger sister Datuk Liew Yet Lee are non-executive directors. Their parents, Datuk Seri Liew Kuek Hin and Datin Seri Lim Yook Lan, also sit on the board.

A corporate observer who keeps track of the company says it is highly geared and does not offer attractive dividend yields. “The lack of excitement about its dividend payout explains why London Biscuits’ PER is lower than its peers. Normally, food companies are valued at a PER of 15 times to 20 times,” he notes.

London Biscuits declared a dividend per share of barely one sen in FY2014 and FY2013 and none in FY2015.

As at Sept 30, 2015, its net gearing stood at 0.52 time. The group has total borrowings of RM248.2 million, RM218.8 million of which are short-term debt.

For the first quarter ended Sept 30, 2015 (1QFY2016), London Biscuits saw 2.6% growth in earnings to RM5.2 million while turnover grew 3.4% to RM90.6 million.

In a Nov 30 financial report, the group said its results were within management’s expectations, but expects FY2016 to be another challenging year. “Cost of raw materials remains high but stable, while fluctuations in currencies are mitigated by the company setting prices based on a conservative exchange rate valuation,” it said.

The company stressed that the prospects of all product segments — namely confectionery, snacks and sweets and candy — remain good with a stable order book and strong demand.

In the snacks segment, turnover almost doubled in 1QFY2016, supported by new selections including potato chips. In contrast, revenue from the sweets and candy segment shrank 8%.

In a report dated Dec 1, PublicInvest Research says the potato chips segment, which only accounts for less than 5% of sales currently, will be the next growth phase for London Biscuits. The segment is expected to increase its contribution to turnover by about 30% every year.

PublicInvest Research, however, has lowered its earnings estimates to RM15.8 million and RM16.9 million for FY2016 and FY2017 respectively. The research house retains its “outperform” call with a lower target price of 91 sen, based on 10 times earnings per share for FY2017.

When contacted, a PublicInvest Research analyst says the main concern for investors now is London Biscuits’ finance costs, which would remain high for a while, as the company focuses on clearing its term loans and hire-purchase credits.

She says the company is still facing challenges such as the high cost of raw materials and rising production cost due to the weakening ringgit.

“Certain raw materials are directly imported, which implies a direct impact on the company. Other raw materials that are purchased locally and in ringgit are also affected by foreign exchange as suppliers still need to import the materials,” she explains.

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