CC Asia Focus On TK Group, BAT Malaysia

Posted on By offpisteblog

Coupland Cardiff’s Asia Focus Fund recently released their letter for March, which you can access via their website. The fund is managed by Charlie Erith and is focused on small and mid cap listed equities in the Asia ex Japan market. The March update includes commentary on a number of their portfolio holdings including TK Group, Venture Corp and International Container Terminals Services. They also discussed their new position in BAT Malaysia. Some highlights below:

TK Group:

  • Total revenue for 2016 came in slightly below their expectations (it was flat year on year).
    • Revenue for their mold fabrication segment grew but revenue for their plastic components manufacturing business decreased slightly. The current revenue split is ~39% mold fabrication and ~61% plastic components and manufacturing.
  • Gross margin increased by 2 percentage points year on year, increasing from 26.1% to 28.1%.
  • Dividend payout was also increased to 54% from 45% the previous year.
  • Recent acquisitions have broadened the company’s customer base and improved their technical capabilities in the mold fabrication segment (slowly shifting the overall tilt of the business away from plastic components and manufacturing). They expect this to improve overall profitability over time because molds are higher margin than plastic components.
  • Value Partners also has a stake in TK Group. You can find more information and previous coverage of the company here and here.

BAT Malaysia:

  • The fund reported a new stake in BAT Malaysia. The company was formed as a result of a 1999 merger between Rothmans of Pall Mall (Malaysia) and Malaysian Tobacco Company Berhad. It is a subsidiary of British American Tobacco. The company is the largest cigarette manufacturer in Malaysia, with a domestic market share of >50%.
  • According to CC’s commentary, the cigarette sector in Malaysia has been under pressure over the last two years following the introduction of a new taxation regime to drive prices higher and reduce smoking. As a result of the tax, the formal sector (which includes BAT Malaysia) has seen an overall reduction in volumes.
  • The real problem has been the subsequent and large increase in the import of illicit cigarettes, which has actually led to a fall in government revenues from cigarette taxation. The whole situation has basically turned into a case study of the unintended consequences that can result from well intentioned but poorly thought-out government policy.
  • Anyway, the government is now focused on curbing the illegal contraband. Shares offer a ~4.3% dividend which offer downside protection. Any recovery in volumes would likely result in “meaningful upside” for the share price. See this article for more.