Haw Par Group (SGX: H02) – A Simple Analysis

Haw Par (SGX: H02) is one of the global market leaders in healthcare products, with their flagship product “Tiger Balm” being among the world’s topical analgesics with more than 100 years of proven track record in more than 100 countries. The company operates a very extensive distribution channel located across regions such as Asia, America and Europe. Additionally, the company has a leisure division and other investments in various listed equities and properties that provide stable dividend and rental income. The company has grown over the years and I expect the trend to continue with their healthcare division leading the way.

Company Overview

Haw Par has 4 business arms, Healthcare, Leisure, Property and Investments.

Healthcare

They are the owner of the iconic brand Tiger Balm Brand. Its world renowned ointment is arguably one of the world’s leading and most versatile topical analgesic brand with a unique herbal formulation that has more than 100 years of proven success in more than 100 countries. Leveraging on the brand’s equity, the company is pursuing a strategy to expand our core healthcare business through the organic growth from new markets as well as the introduction of new products. They are also studying the opportunity to stretch the brand into the wellness space that is not centered on pain relief.

Overview of Tiger Balm Brand’s global footprint

Leisure

Haw Par currently owns and operates Underwater World Pattaya. It is located within 2 hours drive away from Bangkok and that gives the aquarium a competitive edge. It differentiates itself from their competitors by offering guests up-close animal encounters through its array of immersive and interactive aquarium displays, supported by thematic programming.

Property & Investments

The Group has substantial investments that are managed under the guidance of the Investment Committee. These strategic assets have provided the Group with a stable source of recurring dividend income and financial strength over the years

The Property division holds the Group’s investment properties and manages their leasing. The total lettable area of 45,398 square metres under the investment portfolio comprises commercial and industrial space in Singapore and Malaysia.

Their portfolio comprises 4 leasehold properties, 3 in Singapore and 1 in Malaysia.

1) Haw Par Centre – 100% occupancy

2) Haw Par Glass Tower  – 100% occupancy

3) Haw Par Technocentre – 80% occupancy

4) Menara Haw Par (Malaysia) – 70% occupancy

Financial Highlights

Recent Results

Haw Par reported a strong set of results. Group revenue at $237.8 million was 7% higher than 2017 due mainly to revenue growth from Healthcare. Operating segment profits before interest expense and tax for Healthcare grew 13% to $77.3 million while Leisure and Property segments were stable at $12.3 million. Investments increased by a whopping 75% to $105.7 million due to higher dividend income from strategic investments and higher interest income.

The Group earnings increased 46% to $179.1 million (2017: $122.5 million) and earnings per share increased to 81.2 cents (2017: 55.7 cents) due mainly to higher income from investments.

A final dividend of 15 cents per share and special dividend of 85 cents per share to commemorate the Group’s 50th Anniversary was declared. Together with the interim dividend of 15 cents paid in September 2018, the total dividend per share for the financial year ended 31 December 2018 is 115 cents per share (2017: 20 cents per share). Wonderful news for shareholders.

Their 2 main profit drivers were their healthcare and investments, contributing 39.6% and 54.1% respectively, followed by leisure and property which made up about 6.3% of profit before tax and interest expense.

Income Statement

From their income statement, revenue and net income has been steadily increasing over the past 5 years at a rate of 11.3% CAGR and 6.4% CAGR respectively.

Looking at their earnings per share vs dividend per share, the management has been consistently paying out dividends whenever they have an improved EPS that year.

Balance Sheet

Their cash hoard has been increasing every year. Furthermore, they do have any debt.

From their FY2018 annual report, the value of their cash and cash equivalent, investments & properties is $2,918,971,000, which works out to about $13.21 per share.

Cash Flow Statement

The Group has very little capital expenditure as compared to the cash flow they are generating, which is very healthy. Considering the strong balance sheet and present positioning of the company in their healthcare division, I would expect their FCF to remain consistent.

Financial Ratios

Haw Par Group uses ROA to evaluate their performance. So far it has been satisfactory with ROA at single digits.

Their dividend yield is not as attractive as I thought it would, given their strong cash flow generation. However, they did recently announce a S$0.85 special dividend to reward shareholders. Hence dividend yield for FY2018 is an impressive 8.6%.

Growth Drivers

#1 Healthcare Revenue to Continue to Grow

Over the past five years, Haw Par’s healthcare segment has grown at a pace of 12.1% CAGR from S$122mil in 2014 to S$217mil in 2018. Their growth is mainly due to investing in new products such as the neck and shoulder rub and the Tiger Balm Plaster. Building on effective partnerships and networks with various local business partners, they have made successful forays into new retail channels, increased store penetration and enhanced shelf visibility. Moving forward, I expect the company’s healthcare segment to further drive topline-growth accompanied by improved net earnings as they move towards exploring automation of their production facilities while continuing working with their proven strategies. 

#2 Stable Dividend Income

For FY2018 the company earned dividend income of approximately S$97.8mil which contributes to about 50% to the group’s consolidated Profit before Interest and Tax. The company has been consistently receiving dividends from its invested listed entities. Furthermore, they have been increasing over time. This provides the company with and alternative source of income which diversifies their cash flow generation. Furthermore, the management has been prudent and elected to receive a portion of their dividend as script shares in lieu of cash. This also enables them to enlarge their share base and dividends over time.

#3 Strong Management

Haw Par has a strong management lineup which boasts of senior officials with more than 30 years of industry experience ( Please refer to the management details below). I believe that this management is equipped with the professional expertise and hands-on industry experience to help drive the company to greater heights and expand their position in the global healthcare industry.

 Business Risks

#1 Competitive Nature in Industry

Haw Par Group faces strong competition from both local and international parties with their healthcare products. However, given their strong performance over the past few years, I believe that Haw Par is able to beat the competition if they continue with their proven strategy and maintain their product quality. 

#2 Rising Input Costs

Any increase in input cost will have a direct impact on the margins of Haw Par. Raw materials cost might increase due to trade tensions between USA and China, slowing economy in China and Brexit.

Therefore, one of the key focus is to have more automation as stated in their Fy 2018 Annual Report. I view this as a good move to reduce rising labour costs.

#3 Deterioration in Leisure Segment Performance

The revenue from the leisure segment has been falling over the past 5 years. Currently in their financial statements the leisure and property segments have been grouped together. If we compare it with FY2014’s results, the combined profit of Leisure and Property in FY2014 was S$14,890,000 whereas it is now at S$12,322,000. I hope that tourist sentiment will pick up in the coming years and we will see a turnaround in their leisure segment.

Management

Board of Director’s Profile

Dr Wee Cho Yaw, 90, was appointed Chairman of the Company since 1978. A banker with more than 60 years’ experience, Dr Wee is a veteran in the banking, insurance, real estate and hospitality industries. He received many accolades for his business achievements and support of education, community welfare and the business community.

Mr Wee Ee-chao, 64, is the Deputy Chairman of the Company. Mr Wee is the Chairman and Managing Director of UOBKay Hian Holdings Limited and also manages Kheng Leong Company (Private) Limited which is involved in real estate development and investments.

Mr Wee Ee Lim, 57, is the President & CEO of the Company. He is closely involved in the management and growth of Haw Par group of companies for more than 30 years.

Mr Sat Pal Khattar, 76, is a Non-Executive and Independent Director of the Company. He was first appointed as Director on 1 January 1977. He is also othe Chairman and Director of Khattar Holdings Pte Ltd group of companies which is principally engaged in investments.

Mr Hwang Soo Jin, 83, is a Non-Executive and Independent Director of the Company. First appointed as director on 28 Oct 1986, he is a veteran insurer, with more than 50 years of experience in the industry. He was a Director of a number of other public listed companies such as UOI and UIC previously.

Dr Lee Suan Yew, 85, is a Non-Executive and Independent Director of the Company since 18 Dec 1995. He is a medical practitioner with over 50 years’ experience. Dr Lee was appointed Justice of the Peace from 1998- 2008 and President of the Singapore Medical Council for 4 years (2000-2004). He was also Chairman of the Singapore National Medical Ethics Committee (2007 and 2008).

Dr Chew Kia Ngee, 73, is a Non-Executive and Independent Director of the Company. He is a Chartered Accountant with about 40 years’ experience in the public accounting profession.

Mr Peter Sim Swee Yam, 63, is a Non-Executive and Independent Director of the Company. He is a practising lawyer and Director of Sim Law Practice LLC and has more than 30 years of legal practice.

Mr Gn Hiang Meng, 70, is a Non-Executive and Independent Director of the Company. Mr Gn has more than 30 years of investment banking and hospitality industry experience. He was a senior banker with the United Overseas Bank Group for 28 years and was the Deputy President of UOL Group prior to his retirement in 2007.

Mr Chew Choon Soo, 61, is a Non-Executive and Independent Director of the Company. He has more than 23 years of senior executive search experience and has served in various senior management and committee roles. He is currently engaged in human capital advisory, focusing mainly on the healthcare industry in China.

Mr Han Ah Kuan, 70, is an Executive Director of the Company. He joined the Group in 1991 as the General Manager of Haw Par Healthcare Limited.

Comments on Management

Most of the senior management have been with the company for a very long time and they have assumed many senior roles in the group itself. This means that they are well versed in the group’s business dealings.

Remuneration

Total remuneration of the board is about S$3.46mil, which is about 2% of net profit attributable to shareholders of the company, which is fair in my opinion.

The total of the top 5 paying key executives, turn out to be around S$2.1 million (Considering that they draw the maximum of the band), if you add it up with the board fees of S$3.46 million, we would get about S$5.56 million in remuneration. This is 2.8% of the net profit attributable to the shareholders, which I feel that it is a comfortable range of remuneration compensation.

Valuation

Huge Margin of Safety

As stated in the previous post, the mark to market value of their cash, properties and investments is worth about $13.21 per share. What this means is that investors are getting the healthcare business for “free”. This provides a very comfortable margin of safety for investors. Their healthcare business, which accounts for about 90% of total revenue, continues to grow at a healthy rate (12% CAGR over the past 5 years) and I expect them to maintain this stellar performance.

Strong Balance Sheet, FCF, Dividend

For FY2018, Haw Par had net cash on its balance sheet amounting to about 18% of its current market cap. Till date, it remains a debt free company, having not raised any debt for the past 5 years. The company’s CAPEX remains low when compared to its cash generated from operations. This is also due to their substantial investments in various securities that are actively managed by their investment committee. These strategic investments allowed the group to a stable source of recurring income over the years. It has consistently return a portion of the profit to shareholders by maintaining a payout of about 35%, resulting in a dividend yield of over 2%.

PE Ratio & SOTP Valuation

The company has an impressive track record growth of 8% EPS CAGR over the past 5 years. Healthcare segment continues to grow at mid teens digits and I expect it to maintain their momentum over the next couple of years. The stock has performed very well with 12% CAGR over the past 5 years but I still feel that it remained undervalued.

PE ratio is healthy at 16x. Adjusted for ex-cash, the PE ratio is about 13.3x. The 5 year average PE ratio is about 15.3x.

Using a Sum of the parts analysis, their cash, investment and properties is worth S$13.21, Assigning a conservative PE for their healthcare business at 15x, I arrive at a valuation of $4.65. Hence, the SOTP valuation I derive is $17.86, about 33% discount to current price of S$13.40.

Conclusion

Given the points from the analysis above and in the previous post, I feel that it is a good investment opportunity. The company is supported by their consistent growth, driven by their healthcare segment and huge dividend income from their investments as well as capital appreciation. 

I am currently vested with an average price of $10.90.