TheBearProwl: Yoma Strategic Holdings Limited Is Possibly Next Asian Godfather with 300% Returns

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Thebearprowl is a trading and research outfit with a focus on Global Equities, FX, Fixed Income and Commodities. We take a view with ideas generated from macroeconomic and fundamental analysis by utilising a comprehensive range of products and solutions across multiple asset classes. We also provide research reports and conduct courses based on the trading strategies we have developed.
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Any content should not be relied upon as advice or construed as providing recommendations of any kind.
Thebearprowl presents Project 2025, a series of investments for the longer term. The term “Project 2025” does not imply that this is a target for year 2025. The term merely attempts to convey the long-term vision of the investment.
The success of every long-term investment is dependent on the existence of both macroeconomic and company centric fundamentals. Such success is typically underpinned by certain initiatives put forth by the company in line with its vision.
This is fifth in the series of our hunt for multi baggers. For the others in our series, please refer to these links:

1) Genting is Undervalued: Short Term Pain, Long Term Gain
2) TheBearProwl: Why we think Temasek’s $7.35 Offer for Keppel is a Poor Price
3) TheBearProwl: Perennial Real Estate Holdings Limited is Undervalued with 400% Upside
4) Thai Beverage Public Company Limited: Dominant Regional F&B Conglomerate Poised to Benefit from ASEAN Growth
5) TheBearProwl: Dairyfarm International is Evolving

Why Asian Godfather?

The term “Asian godfather” was first coined in a book titled “Asian Godfathers – Money and Power in Hong Kong and South-East Asia” and writes about a small group of very rich men – the south-east Asian billionaires who, in the post-Second World War era, came to dominate the domestic economies of their region. The book explores how these families slid quietly into their positions of economic power, largely thanks to the colonial and then post-colonial politics of the region. The fictionalised account of some of these families are in the book “Crazy Rich Asians”.

We think Yoma could be one of few existing conglomerates that will dominate the domestic economy of Myanmar and create the next Asian Godfather.

Background

Over the last 10 years, Yoma has built a diversified portfolio of businesses in Myanmar through organic business expansions and collaborations with established international and local partners. Yoma operates in many industries, with exposure in financial services, property development, consumer goods, food & beverage, automotive, agriculture and tourism.

Yoma splits reporting of its results into the following 6 segments:

  1. Real estate development is in the business of property development and the sale of land development rights and development properties.
  2. Real estate services is in the business of providing project management, design services and estate management as well as property leasing in Myanmar. This reportable segment has been formed by aggregating the relevant operating entities, which are regarded by management to exhibit similar economic characteristics.
  3. The automotive & heavy equipment segment is in the business of supplying and selling agriculture and construction equipment, passenger and commercial vehicles and related parts, including the provision of maintenance services.
  4. The consumer(“F&B”) segment is in the business of operating restaurants, bottling and distributing beverages and developing food wholesale and logistics services.
  5. The financial services segment is in the business of providing non-bank financing (i.e. leasing of motor vehicles under both operating and finance leases and related financing options) and investing in mobile financial services.
  6. The investments segment relates to the Group’s investments in the infrastructure, tourism, power agriculture and other sectors in Myanmar

Brief review of financials

Yoma performed well in FY19, with most segments performing better than the prior year. Revenue and EBITDA was higher YoY across all but the Automotive and Investment segments, while the food segment was the only segment that recorded lower net profits. The growth across the segments were underpinned by organic growth, acquisitions and also other forms of expansion, including franchises, joint ventures, etc. Profits were also supported by valuation gains with its residential units at Star City Zone C, recording US$45.7m of valuation gains which is about a 70% gain on cost of construction.
Yoma’s dividend is based on the prerogative of the Board by assessing a few qualitative and quantitative factors. In FY19, Yoma recommended no dividends while a dividend of 0.25 cents were declared for the 2 previous financial periods.

Why Are We Investing?

The next Asian godfather

Yoma’s majority shareholder is Serge Pun who currently has vested interests in 3 listed vehicles(also affiliates of Yoma). This includes Memories Group that is listed on the Catalist board and also First Myanmar Investment which is the first stock listed on the Yangon Stock Exchange. They are also affiliated to Yoma Bank which is the 4th biggest bank in Myanmar. It is safe to say that Serge Pun has vast business and political interest in Myanmar. What this means is Yoma is part of a group with vast assets, experience and connections in Myanma.

Economic growth of Myanmar

The economic outlook for Myanmar continues to be positive. The Asian Development Bank predicts Myanmar’s economy to enjoy GDP growth of 6.6% in fiscal year 2019 and 6.8% in fiscal year 2020. These are some of the highest growth forecasts anywhere in the world. This strong growth is expected to be driven by an increase in foreign direct investment (“FDI”) resulting from the pro-business reforms being implemented by the Government.


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Myanmar has a lot to gain from China’s Belt and Road Initiative. Substantial investment is needed to build the country’s infrastructure, develop the economy, generate jobs and raise the living standards. Myanmar’s strategic location between China and the Indian Ocean makes the country an extremely important partner for the Belt and Road Initiative.

Other pro-business reforms include current discussions for an Industrial Zone Law, which will provide a more attractive framework for FDI and aid the development of supply chain opportunities for local companies, and a Real Estate Services Law, which will help to create a more efficient real estate market, providing stability to land prices and protecting buyers and agents.

Myanmar’s positive economic outlook is still susceptible to macro pressures relating to the heightened trade tensions between the US and China. Whilst this scenario could destabilise many other countries, it may have a lesser impact on Myanmar given that we are not yet fully plugged into the global economy. There also may be an impetus for foreign investment to divert from places like China to Myanmar as the next investment frontier.

Segment Growth – Organic & Acquisition

Taking a look at Yoma’s Group structure in the snapshot above, we note that they have grown the business from a property developer to what it is today. This has been carried out by leveraging on opportunities with new investment partners and also via its capital market structure. As a listed company, developing capital management capabilities is of exceptional importance so as to drive a certain level of ROE to shareholders. Where leverage is utilised, there is also a need to minimise a risk of mismatch of the asset/liability duration. To this note, Yoma has demonstrated an ability to secured continued funding, managing liquidity and maintaining flexibility.

Yoma Land

Market Opportunities

  • Rapid urbanisation and recent economic reforms underpin the long-term prospects for Myanmar’s real estate industry. This is underlined by ADB forecasting overall economic growth to reach 6.6% in FY2019 and 6.8% in FY2020.
  • Demand for homes in the affordable market segment is expected to gain more traction in the long term supported by Myanmar’s growing middle class. There remains a widely untapped demand for smaller but competitively priced units in Yangon.
  • Demand for expatriate and corporate housing is expected to grow in line with the expected increase in activities by foreign companies

Next Phase of Growth

  • Targets to open approximately 90 restaurants by the end of FY2020, own more than six total restaurant concepts, and operate 125+ stores nationwide, including 70+ KFCs by FY2023.
  • Widen the logistic business service offering to include other categories of logistics solutions, transport services and cross-border deliveries.

Yoma F&B

Key Opportunities

  • The restaurant sector is expected to expand due to the rising discretionary disposable income of Myanmar’s growing middle class who are seeking new F&B concepts and experiences.
  • With the growth of FMCG and other sectors in Myanmar and the increase in cross-border trade, especially with China, as economic ties between the two countries deepen with both governments working to create ‘economic cooperation zones’ along the Myanmar-China border, the need for reliable logistics is expected to increase.

Next Phase of Growth

  • Targets to open approximately 90 restaurants by the end of FY2020, own more than six total restaurant concepts, and operate 125+ stores nationwide, including 70+ KFCs by FY2023.
  • Widen the logistic business service offering to include other categories of logistics solutions, transport services and cross-border deliveries.

Yoma Financial Services

Key Opportunities

  • Myanmar’s rapid penetration of smartphone usage has prompted a shift in focus towards mobile financial services.
  • Total mobile penetration is at 105% with smartphones representing 80% of the mobile phones sold in the country, creating significant growth opportunities for products such as mobile money transfers.
  • Myanmar has an estimated population of 53 million but financial inclusion remains low, with over 80% of the population currently unbanked. A largely cash-based economy with limited bank lending outside of the key cities creates opportunities for non-bank financial players to provide consumers and companies with a much needed source of credit.

Next Phase of Growth

Wave Money is set to continue to grow and maintain the profitability of its money transfer business and expand its footprint into the mobile wallet ecosystem

Yoma Motors

Key Opportunities

  • Supported by the continuing digitisation and mechanisation of the agriculture industry, Myanmar’s tractor market is expected to grow to between 7,000 and 11,000 of tractor sales per year in the next few years.
  • Under its National Transport Master Plan, the Myanmar Government is planning to allocate US$21.4 billion to rail, road, port and aviation projects by 2030. A number of large-scale infrastructure projects are currently in the pipeline or in progress which will create a healthy demand for construction equipment.
  • Supported by a low vehicle penetration rate in Myanmar at 10 units per 1,000 people and new government policies to help raise number of new cars on the road including control measures on imports of used righthand drive vehicles, which now dominate the market, the demand for vehicles is expected to increase.

Next Phase of Growth

  • In the heavy equipment business, the Group targets to sell more than 1,800 New Holland tractors and 300 units of JCB construction equipment annually by FY2023.
  • In the passenger and commercial vehicle business, the Group targets to sell more than 500 Volkswagen and 1,000 Mitsubishi vehicles annually by FY2023.

Yoma Investments

Yoma also has a diversified list of investments, including its stake in Memories Group and edotco. Yoma also has stakes in Micro Power and Agriculture land designated for producing coffee beans

Import and domestic consumption today, Export tomorrow?

Today, Yoma is focused on domestic consumption as consumer spending is expected to grow significantly, underpinned by favourable age demographics. Myanmar main exports are natural gas, wood products, gems and agriculture. With Ayala as a significant shareholder, one can only envision the opportunities abound.

What Is The Risk?

(i) Conglomerate risk – segmental underperformance

With this many segments and products, there is a risk that Yoma may not be able to deliver a respectable performance on all its segments. This risk is exceptionally pertinent to Yoma as it is safe to say that all of Yoma’s segment are in the growth stage. A Group-wide underperformance may have significant flow on effect on its balance sheet.

(ii) Macroeconomic headwinds impacting consumer spending

With the slowing macroeconomic conditions, Yoma may be forced to delay organic growth, via new products or acquisitions and expansions due to either company centric or macroeconomic factors.

(iii) Political headwinds, fundamental change or delays in government policies and infrastructure planning

Myanmar is currently run by the Junta and the politics is in a state of fragile peace and equilibrium. The upcoming Myanmar general election in 2020 is important in terms of stabilising Myanmar’s nascent democracy. A stable and smooth election will ensure continued, or an even faster pace, of reform. However, as the country moves forward in its economic development, it still faces numerous challenges in terms of infrastructure investment, human capital and basic services gaps.

(iv) Debt profile, funding risks and risk of depreciation of currency

Yoma has about US$345.3m in borrowings and its financial gearing ratio (pre-Ayala investment) stands at about 30%, which remains below the Group’s maximum targeted gearing ratio of 40.0%. The Ayala investment will bring the gearing ratio down to about 26%. We note that US$106m of borrowings is due in less than 1 year and this risk has been effectively extinguished by the equity investment.

Yoma previously issued a ฿2.2b baht-denominated five-year fixed rate bond priced at 3.38% and converted the proceeds into US$70m for its operations in Myanmar. We note that Yoma has not hedged this bond. As at 30/9/19, Yoma had about US$30m in cash, so the additional investment by Ayala of US$155m will go a long way in mitigating its repayment risks. While there is no doubt that Yoma has demonstrated the continued ability to refinance and also to secure equity investment, this is contingent on a few key factors including availability of funding in weakening macroeconomic conditions. Yoma’s set of accounts are denominated in US$, as it is the main functional currency in Myanmar. a strengthening of the USD will be beneficial for the share price as the listing currency is in SGD.

The Myanmar Kyat(MMK) has continuously weakened since its float due to a weak central bank. As we do not expect the MMK to stabilise, there could be negative impact profits as a sizeable portion of its assets, revenue and cost base is in MMK. While Yoma tries to maintain the USD equivalent prices for its revenue, it may prove challenging for certain segments if the MMK weakens significantly.

(vi) Risks with other stakeholders

Yoma operates in a range of structures including sole distributorships, joint ventures, franchises and fully owned subsidiaries in a country with ambiguous, complex and ever changing rules and regulations. There is a risk of a multitude of issues with its JV partners ranging from disputes to cash flow issues.

How Much Do We Value Yoma At?

Yoma is currently trading at S$0.36, which translates into a market cap of $800m. This represents a P/E of 19. The 52 week trading range is S$0.30 to S$0.42 while the 5 year high is S$0.63.

Post-placement, Yoma has a net asset position of US$0.303 and a net tangible asset position of US$0.288. Yoma is currently trading at S$0.36 (US$0.26) which represents a P/NAV of 0.87.

We think the current ROE underperformance thus far is partially attributable to the establishment costs of its various segments and expect ROE performance to tick up. We derive our target by applying a growth model assuming 10% ROE. It is important we point out here that the inflation rate has been at an average of 5%, therefore the inflation-adjusted performance is a lot lower. This also does not account for a risk adjusted ROE operating in a country with a complex and varied environment such as Myanmar.

Entry price: S$0.33
Project 2025’s intrinsic value: S$1.00 providing 300% returns

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