KUALA LUMPUR: Putrajaya’s recent move to remove subsidies for palm-based cooking oil has been seen as a catalyst for Yee Lee Corp Bhd, which produces the “Red Eagle” brand of cooking oil, as the move also removes production quota on existing manufacturers, while giving rise to “more reasonable profit margin”.
The development, while seen as favourable to the group, is not without risks. Yee Lee knows it has to step up efforts to fight for a larger share of the market now, or possibly risk losing its piece of the pie to competitors if it continues to stay quiet.
“This [subsidy removal] gives us opportunities to increase our market share in the cooking oil segment we are in. Previously, there was a quota on how much we could produce, so it didn’t make a huge difference to our market share whether we were aggressive or not,” group chief executive officer Lim Ee Young told The Edge Financial Daily in a recent interview.
The subsidy removal kicked in on Nov 1 — except for the 1kg polybags. The government had said the move was necessary, after observing that the price of average cooking oil shot up some RM600 per tonne in less than a year to nearly RM3,000 per tonne in November, from between RM2,300 and RM2,600 per tonne last year.
“We will have to fight for it (a bigger market share) now,” said Lim, adding that he expects to see more promotional and marketing campaigns from cooking oil companies next year.
“We have been quiet for some time. What we will be gaining [from the improved margin] will be reinvested in advertising and marketing,” Lim said. However, he declined to reveal the quantum of improved margin the group is expected to enjoy.
Besides Yee Lee’s Red Eagle, some other main brands of blended cooking oil in the country — usually palm oil blended with groundnut and sesame oil — are Singapore-based Lam Soon Group’s Knife and PPB Group Bhd’s Neptune. Such blended cooking oil has a unique peanut aroma and is popular among the Chinese, said Lim.
Knife is the No 1 top-selling cooking oil brand in both Malaysia and Singapore, while Red Eagle, a brand that is over 40 years old, has been No 2 for some years in Malaysia due to the production quota and the price restriction.
“[Now] we have the chance to overtake [Knife]. At the same time, if we are not vigilant, we may be overtaken,” said Lim. The group’s cooking oil business is parked under its manufacturing division where it also produces aerosol cans and bulk oils and palm kernel.
UOB Kay Hian analyst Yeoh Bit Kun, who tracks the company, viewed the rationalisation plan on cooking oil subsidies as a positive development for Yee Lee.
“Based on Yee Lee’s self-determined retail selling price, which sees its product prices increase by 47% to 61%, we assess that there could be a meaningful earnings increase in 2017 as the quantum of increment is more than sufficient to cover the subsidy amount provided by the government previously,” he wrote in a note dated Nov 25.
“Moving into 2017, we assess that the floating cooking oil prices since early this month (November) will have a positive earnings impact on Yee Lee,” Yeoh added.
The analyst said Yee Lee’s mill and refinery division, which was not profitable in the past as the subsidy scheme had not been revised since its implementation in 1997, would also benefit.
“Yee Lee had to absorb the increase in production and packaging cost over the years. The mill and refinery division incurred losses in four out of six years in 2010 to 2015, with 2014/2015 recording losses of RM700,000/RM1.4 million, respectively,” he noted.
Firm plans to expand warehouse, distribution network
As for the group’s trading and distribution business, Lim said Yee Lee will be building a central warehouse and expanding its network in East Malaysia.
This came after Yee Lee secured the distribution rights of Japanese soft drink brand Suntory beverage for three years in Peninsular Malaysia in September, under which it will distribute Ribena and Lucozade beverages, a year after it took over Red Bull’s exclusive distributorship here from Fraser & Neave Holdings Bhd last year.
“It (the warehouse and network expansion plan) is still at a preliminary stage. We have yet to identify the location for the central warehouse,” Lim said, but didn’t elaborate on the capital expenditure.
Yee Lee, which is also present in East Malaysia, is also looking to upgrade and automate its warehouse there.
Although distribution margins are said to be “razor-thin”, building and expanding Yee Lee’s distribution network will benefit its manufacturing business, as well as Spritzer Bhd’s bottled water business, in which the Ipoh-based group has a 31.33% stake. Naturally, Yee Lee also distributes Spritzer and Cactus brands of bottled water.
In 2015, local research house InsiderAsia pointed out that the company derived about 70% of sales from trading and the remaining 30% from manufacturing. However, manufacturing contributed about two-thirds of operating profit while the lower-margin trading arm accounted for the remaining 34%.
In a note dated Dec 5, the research house noted that Red Bull helped boost Yee Lee’s trading pre-tax margin from 1.3% in the third quarter ended Sept 30, 2015 (3QFY15) to 1.9% in 4QFY15 and 2.6%, on average, for the nine months ended Sept 30, 2016 while trading revenue grew an outsized 49% year-on-year.
It was previously reported that Yee Lee will continue to enhance its sales channel and logistics performance, as it plans to bring in more beverage distributorship after bringing Red Bull and Suntory beverages on board.
But Lim downplayed the group’s ambitions. “Our hands are quite full for the moment. Our main focus now is to make sure we do a good job,” Lim said when asked if Yee Lee was eyeing more distributorships.
Under the current contract, it will exclusively distribute Red Bull for five years from Aug 1, 2015, which will be automatically renewed for a period of two years thereafter, unless terminated by either party.
Yet to be recognised as a quality growth stock
Meanwhile, some analysts have opined that it is not easy to give a fair valuation to the company, as it has two core businesses, trading and manufacturing, besides its stake in Spritzer. At its closing price of RM2.45 last Friday, Spritzer has a market capitalisation of RM439.6 million.
InsiderAsia also pointed out that the complexity of Yee Lee’s business model and low-profile management make it difficult for investors and analysts to value its shares.
Lim, who is also the son of major shareholder cum executive chairman Datuk Lim Kok Cheong, said restructuring Yee Lee’s businesses is not on the cards right now, though he does not rule out the possibility.
“We don’t rule out the possibility, when opportunity arises and we need to raise funds or unlock value, but not at the moment,” he said.
The low-profile stock has been trading at a single-digit price-earnings ratio (PER) for most of the past 10 years. As of its closing price of RM2.33 last Friday, it is trading at a trailing PER of just 9.9 times.
“Although its share price has surged 70% in the past two years, we believe the market has yet to fully recognise Yee Lee as a quality growth stock,” the research house noted.
Yee Lee’s market capitalisation now stands at RM439.5 million.
InsiderAsia has a “buy” call on the stock as it opined its current valuations are “unjustified against the positive growth prospects — underpinned by more distributorships of fast-moving consumer products, a turnaround in its palm oil refinery and mill, and maiden contribution from its recently planted palm oil land by 2018/2019”.