Is After Death Care Service as Good as the Gurus Said They Are?

More than once (probably twice) had I heard from gurus if there is a listed funeral stock, it is a must buy. I have look at such companies. Listed in Australia Invocare own Singapore Casket and Simplicity Casket in Singapore, Service Corporation International in US, San Holdings Inc in Japan and HKEX listed Fu Shou Yuan in China.

Their business grow like a turtle. sure, like what the gurus said, when your loves are dead. The service provider is almost a must and unlikely to haggle. The service provider is impossible to DIY and is up to the business to price an expensive price tag for their services. Surprising the margin wasn't so great across different region, maybe a  Chinese funeral is more costly?

However, for their business to grow, either they need to keep increasing prices, grow through M&A or pray more deaths every year. The latter seem impossible, depending in demography of the country, hence can only rely on inorganic growth. even so growth is limited on the amount of deaths. Stable undying trade no doubt but don't expect nice growth numbers.

Asia ageing population may tell a different story with an ageing population. This will aid in the the top line of these companies, Although I do not know how long will the majority of the seniors died off, which will end the boom cycle.  

Out of the 4 listed above, the best and only growing business will be Fu Shou Yuan, the growth is double digit, owning to inorganic growth and of cos china has a huge population and the population is starting to age as well thanks to the one child policy.

Of course, Fu Shou Yuan will be in my watchlist (Took a glace at their AR only) but in general, after death service isn't as great a business as it said/looks to be.

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Perfect Shape Medical

Listed in 2012, Perfect Shape Medical started out as a beauty and slimming services in Hong Kong. The business has hence expanded into non-invasive medical beauty services and ventured into the China & Macau market. It also open up all in one mega centers as well as concept stores. However, the main operation is still in Hong Kong, contributing 60% of the company's revenue. Perfect Shape Medical is family owned, having 67.4% stake in the company.

Before the rise of technology gadgets and online space which men likes, the retail sectors is basically cater to the ladies, fashion, accessories and beauty services. The ladies like to have sets of clothes and accessories to have numerous kinds of combination for dressing up. I know friends/relatives who own X pairs of shoes/perfumes/makeup kit. Some go beyond that to make themselves pretty, and that is how the service from Perfect Shape Medical come into play.

The cost of goods of the business is very low, the gross margin is almost 100%! The business however require a lot expenes such as labour, rental and marketing.

Growth Factor
Revenue grow at an astounding 14% CAGR. The Hong Kong business continue its strong grow as the business expands, the China & Macau market is just 40% of the total revenue. Looking at it geographically, China business should grow much bigger in the long term. The management is competent in managing the business. One example is that the number of service centers has been reduce from 50 to 33 in China yet the revenue is still growing.

Cash Flow Machine
Perfect Shape Medical has been paying out 100% of its earnings since 2013. How is that possible? I have to look at the cash flow. As we can see from the chart, 2013 and 2014, dividends is payout of earnings + cash in balance sheet. From 2015, the payout is lesser than the Adjusted FCF. From 2017, dividend payout is lesser than FCF.  We know that is true as the cash in balance sheet is increasing year after year from the cash flow. Perfect Shape Medical has zero debts/borrowings. Hence the 100% payout dividend is substainable with cash left over for business operation and expansion.

Free Cash Flow (FCF) = Operating Cashflow - CAPEX 
Adjusted FCF = Net Profit + Non-Cash items + Borrowings - CAPEX

Potential Spin Off
Perfect Shape Medical has file for spin off for approval for its China & Macau business to be listed in China. Perfect Shape Medical will remain the controlling shareholder of the spin off entity. HKEX has approved but the management has not decided whether to proceed with it. As non China Citizens cannot acquire shares of the new entity through a spin off.  Perfect Shape Medical may compensate its shareholder in other ways, else it is still a great business to own.

Digital Platform & Big Data
An intelligent team is set up to analyst customer's behavior by leveraging on their own membership database of their members. Research & reviewing latest trend around the world. Drive sales through online-to-offline. I am not so sure about this, i think it's buying the service through web or app and then use the service at the physical store. This also provide engagement between the company and the client.

Business Risk
The business is greatly affected by the economy. 2016-2017 period had weight down on the business. Perfect Shape Medical provide non-invasive beauty medical service, however if any incident occur and may cause damage to its branding, is a risk may or may not happen.

Business Moat
As a pioneer in the industry, and branding power and the high start up cost is believe to be a moat by the management. Perfect Shape Medical focus to be always provide service that exceed customer's expectation has help to propel its business at such amazing growth. 

In a customer prospective, if the service and product works well on me. I would stick to them long term and possible referral to friends and families. Human is a creature of habits, a change to different provider will cause frustration of things don't go well as expected or worst than the current one that is working fine as it is.

Conclusion
One most important aspect of Perfect Shape Medical is that it recquire very little CAPEX to run the business, hence the great cash flow. I believe Perfect Shape Medical has potential to grow in Hong Kong as well as China which is a much larger market. With dividend payout at 100% of earnings and huge cash flow, total dividend for FY2019 may be at 0.242,current share price of 2.42 give 10% yield. The share price jumped 18% last Friday before I got the chance to make an analysis. I hope anchoring will not stop me from buying.

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Wai Kee Holdings

Founded in 1970, the Hong Kong based Wai Kee Holdings (WKH) Limited has a well-established presence in the construction and infrastructure industries.Wai Kee Group has operations in the following areas: 
- Toll Road
- Property development 
- Construction
- Construction Materials 
- Quarrying

90% of WKH revenue comes from Road King and 90+% of Road King revenue comes from property development. Hence WKH is actually a property counter. WKH current share price is $4.40, trading at about 0.5x NAV. Does that consider undervalue? We know that most Singapore property developer or construction counters are trading below book too.

Undervalue
From the latest interim Report, WKH owns 41.94% of Road King and 56.33% of Build King.
Looking at sum of parts, WKH is worth at least $6.96. That is a further 52% gain with a current yield of 6.8%

 

In terms of PE ratio, it is range between 3.7x to 4.7x, the median is 4.3x. At the current 3.1x, there is potential for 50% upside.

Performance

Business is doing well, revenue increasing every year at 11% CAGR, although 90% of the revenue came from Road King. Quick ratio is above 1, WKH will be relatively safe and tie through any down turn.

Dividend payout is at 23% - 24% for the last few years. TTM EPS is $1.43, at 23% payout, dividend per share is 32.89 cents which give a forward yield of 7.48% at a share price of $4.40.

Free Cash Flow (FCF) = Net Profit - CAPEX 
Adjusted FCF = Net Profit + Non-Cash items + Borrowings - CAPEX

Conclusion

With the stock price worth lesser than the entities WKH is holding in its books, I just have to buy hold and wait for the price to correct to its intrinsic value. While waiting, I will be enjoying the nice dividend and the further growth of the business.

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How did REITs fare against rising interest rates?

In 2016, Fed Chairman Janet Yellen started to increase interest rates. Doomsayers said that REITs will be affect by the rising borrowing cost. Some even said that REITs will tank a further 20% by 2020 while most REITs are trading at/near 52wk low in 2018. Well what do you know, Powell had signaled a slow down in rising rates. This further shows that you can't predict or time the market. Hence REITs has been pushing towards new highs in January 2019.

Between Dec 2015 to Dec 2018, the Fed had increased interest rate by 2%. Did the cost of borrowings affected the REITs as most had feared that led to the sell down in 2015? I decided to take a look at the REITs that I own as well as the more popular ones.

It seem that those that have a huge jump in cost of borrowings are those that are aggressively executing M&A despite the rising rates., especially the Mapletree family. If memory serve me right, CCT, Areit, MLT and MINT did some aggressive M&A during these period. Although the increase looks big in terms of percentage, the cost is still manageable (e.g 48 basis points increase for MCT) and most are still below 3%, More importantly, their interest cover is healthy.

Will you still invest it those REITs with increased finance cost? even if they are overvalued like MINT,CCT and Areit? Or it is okay as long as the higher finance cost resulted in higher DPU? From the table below we can see that Mapletree's REITs, with their higher finance cost, they manage to grow their DPU over the pass 3 years compare to the rest, even better than Areit.

* Base on Last 12 Months

From this exercise, Mapletree really impress me with their growth. MLT might be a better choice than FLT and MINT compare to Areit. Most Reits' borrowing cost has actually came down instead of flying northwards.

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