Saturday, November 7, 2009

TSM Global -- A Big Cash Generator Machine

TSM Global is a very low profile company but they have very respectable clients.

What a pity that Proton is not buying from them? A-hem! If the Japanese can buy and recognized their outstanding quality, delivery and service, why Proton is not buying from them, again may I ask?

Don't get cynical too fast, they invested RM 30 mln last year to expand their Tapah operations, which is very close to Proton City Tanjong Malim -- breaking into Proton finally??

TSM Global basically invested in several companies that are in wiring harness business for automotive industry. Their subsidiaries are J.K Wire Harness(60%) and J.K Sumi Wire Harness(60%) and a rather odd fit wholly owned TSM Wellness, basically a fitness company operating in Klang area. They invested about 15% interest in a company in China way back in 1993 -- Fujian J.K. Wiring Systems. They have got a very credible partner, Sumitomo, of which is a big Japanese multinational. This joint venture relationship has been forged since 1983.

It has a market capitalization of about RM 105 mln (54 mln shares @ $ 1.95 quoted price).

Their margins have been very stable despite of crazy Japanese Yen in the last year. Gross margin has been hanging around 23%, is okay for a manufacturing company. Though serving their customers in heavy industry, the company is not really in a capital intensive business, depreciation/revenue around 4% only. The issue with this company is they already own a substantial market share. I was not sure whether they are doing any business with Proton which has about 26% market share, top line growth is a concern here. It will be a stretch for revenue to go up to about 370 mln(from present 230-250 mln). Beyond that they must go for regional expansion.

Assuming they did grow to about 370 mln revenue, EPS is roughly about $ 0.53 (370 * 13% Net income * 60% goes to equity holders of parent)/54 mln shares. Typical PE multiple for manufacturing is about 6 - 7 times, so I will value the company between $ 3.18 to $ 3.71 / share.

From discounted cash flow perspective, if we discount the cash flow of RM 250 mln at 10% discount based on 5% growth model for the next 10 years and 3% terminal growth, the company worth $ 4.81/share.

Assuming the company takes about 4 - 5 years to achieve our target, the company has a potential market capitalization growth from $ 100 mln to $ 170 mln - 260 mln. So it has a potential appreciation of 15-20% p.a. over the next few years.

Credit Suisse has a 5% stake in this company. They increased their stake from 2.6 mln shares in 2008 to 2.8 mln shares 2009 is a vote of confidence that they really like the company when most foreign investors winding down their stake during the period of deleveraging. Other notable shareholders.

One of the things that they should do better is to have better capital management. They declare 5 sen dividend which translate to dividend yield of 2.5% only. Not sure why they want to keep almost 110 mln cash, returning half of it to shareholders in the form of special dividend will translate to $ 1/share. 60-70% annual payout as dividend, they definitely can afford $ 0.27/share or dividend yield of 13%. What is troubling me, like most Asian SMEs, they might piss away shareholders money by going into unrelated business like fitness center(WTH is that??!!**). They deploy 24 mln into short term investment, I hope they invest conservatively. Their investment in Fujian is quite good, putting 12 mln to work but booking almost 2 mln/year profit.

To sum up thing, this business has tremendous power to generate cash. I will swallow the whole company if I'm Warren Buffett. I hope their major shareholders will force them to return cash to them if they can't find good idea to invest. On balance, I quite like the company.

Financial results highlight

Disclosure : no position yet.


Boon2008 said...

You have done very good homework on TSM, what a company having net cash more than market price.
I guess you are right, only if the shareholder can force management to pay more dividend, market will appreciate its share price.
I have a question and would like to have your opinion, how can we ensure that its main shareholders such as Credit Suisse, Cantal Capital, Emmel, Renfield Investment, etc are actually institutional holders?
Also, how can we ensure that these nominees shares are not actually belongs to Lim family or their related paties?

invest said...

The stock is not very liquid and as such might remain "unattractive"....unless management is serious about increasing liquidity, this gem might remain undiscovered....

ronnie said...

The major shareholder is/was a close associate of Tajuddin Ramli. Is TR involved in TSM Global ?

Turtleinvestor said...

Boon/Ronnie, I'm not sure as my write up is purely based on what I read in Annual Reports and company website.

Eddy Gan said...


Pls be more patience. The CEO of TSM will announce the dividen policy next year Q1'2010. If >60% of profit for dividen, this will push the share price up to RM 3.00.

Eddy Gan said...

TSM share price had reached RM2.50 today. Target should go further to RM3.80 within 2 months. Let's wait and see...