Which tissue paper you use?

Again, I will talk about another company which sells products you use everyday. Recognize the above tissue paper box? Do you think that it's popular amongst the Malaysians? This tissue product is manufactured by NTPM Holdings Bhd, a local company listed on Bursa Malaysia. It is principally engaged in the manufacture and trading of paper products such as toilet rolls, tissues, serviettes and personal care products such as sanitary products, baby diapers, facial cotton and adult diapers.

As you might have noticed, I usually prefer to understand what is the business model of a company first before spending my time analyzing further. NTPM has a simple business model which many of us are capable of understanding. Also, it is involved in a stable industry with foreseable demands for its products. What I particularly like about NTPM is its low product lifespan. If you take a closer look, all of its products are necessities and being used up pretty fast! Let's have a look at its product portfolio and brands.

Again, NTPM's products haven't had any significant changes thus far, especially its PREMIER®. I find its paper and sanitary products are competitively priced. You may take a look at large hypermarts, convenience stores and traditional grocery stores to prove it yourself.

Furthermore, when the economic climate turns harsher, consumers may reduce their spending but definitely not on toilet rolls and diapers. This is why I would think NTPM's earnings to be very resilient in nature.

Let's take a look at how did NTPM perform over the last 5 years.

Revenue has been surging continuously for 5 years but net profit has been flat. As a result, the management has felt the difficulty in maintaining its net profit margin. Operating cash flows have stayed positive in the last 5 years, not running away too much from net profits. This implies NTPM is a cash-generating business which doesn't need to worry too much about its receivables.

Uptrend in shareholders' equity shows that the company's net worth is increasing, which is good for the shareholders. However, due to its high equity growth, the management has found it hard to maintain its return on equity and return on capital employed. This means lower efficiency in deploying its capital. Maybe the management should increase its dividend payouts or executive share buybacks? Also, its debt levels have been kept at manageable levels over the years.

NTPM has done a good job in its financials over the years. However, there are a few concerns an investor needs to be aware of. This industry has an extremely thin margin. If a player wants to survive and thrive in such an industry, it has to manage its operating costs in the most effective ways possible.

Not only that, NTPM faces stiff competitions especially from Kimberly Clark. Brand loyalty can't really be seen and most of us choose from the lowest price possible. It seems to me that NTPM doesn't have a wide economic moat which differentiates and protect itself from other competitors. One needs to be very careful on this when considering NTPM as an investment.

Despite so, NTPM has a competitive advantage which Kimberley Clark doesn't have in Malaysia. According to the management, to sustain its profit margin, they insist on sticking to the traditional business model, which is to eliminate the middle man in the distribution channel. NTPM uses its own trucks so as to gain personal touch on its business. On the other hand, Kimberley Clark has many local distributors as agencies which will push up its costs. It can only rely on larger economies of scale worldwide to sustain its profit margins.

Mr. Lee See Jin, NTPM's managing director, has an ownership of approximately 28% in the company. He is very likely to share a common vision as the shareholders and work as hard as possible to grow the value of his stake as much as the shareholders. Of course there are many other ways of evaluating a management without even meeting them in person but I will not talk about them here.

Source: Bloomberg

Note: This value pyramid only shows what I think about a company’s valuation as at the time of writing this particular article. Do bear in mind that when a stock is undervalued, it doesn’t mean it can’t go any lower and vice versa. Please exercise your own judgment and do not treat this as a recommendation to buy or sell.

If you wish to learn, in a more detailed manner, how do I analyze a company using my 5R Model and how do I calculate the intrinsic value of a company, please click here.

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