SIGN - Selling Fast. Last Call?

Latest Market Development

SIGN has been under heavy selling by its ex-substantial shareholder, HSC Healthcare SB (HSC), especially throughout April. However, I view this a test to see the true strength of the share and market interest and the result is that SIGN's share price is still resilient with slight upward-bias throughout the month. HSC has on 14 APR cased to be a substantial shareholder after selling 3.5m shares on the same day. I believe the trend will go on where HSC will continue to sell the remaining 4m + share in the coming week riding on the high buying interest as witnessed from the resilient share price and high volume. It is high possible that HSC may eventually sell all the remaining shares before end of next week. After that, supply of SIGN share will become limited and this could possibly start driving the share price if the demand is sustainable.

Hence, I reiterate my Buy rating on SIGN based on 1) current cheap forward valuation at 6.3x FY16's EPS based on optimistic earning growth projection 2) expected end of HSC's selling 3) CIMB Investment Bank's recent regional promotion on Small Cap Counters


Diminishing Market Supply

Chart from ChartNexus software

 Share price is still resilient even though heavy selling by substantial shareholders.

HSC may finally dispose all their shareholding soon. 

HSC's disposal has been the major supply of share in the market for the past 1 week. Yet share price still surged at 2.7% indicating strong market demand. If this trend persist, supply from HSC should be ended by next week. 

Rising Demand due to

Cheap forward valuation and strong growth ahead 

As per my previous recommendation

CIMB IB's Promotion of Small Cap Counter

In a Strategy Flash Note publised on 13 Apr 2015, Nigel Foo, analyst of CIMB IB mentioned that they have been marketing smallcap stocks in Singapore, HK and KL since early of Apr. They have met 74 fund managers (FM) from 32 institutions. The note mentioned that interest in smallcaps was strong in Singapore and KL. As SIGN is one of their highlights at the promotional activities, together with other stocks like OWG, IFCAMSC and others, I believe this effort have created awareness and possibly interest among FMs, though how it has generated the actual buying is not known.   

Valuation

My TP remain at RM3.70 based on 10x FY16 EPS, which have not include SIGN's investment properties and their factory in Kota Damansara. CIMB IB has estimated the KD land alone is worth RM95m (RM0.79/share) based on RM300psf. Besides the KD factory, Together with their investment properties with Book Value of RM31m (as per 2014 Annual Report), this could increase SIGN's total value by RM1.05 per share. 

Risk

HSC's disposal is based on pessimistic outlook or possessing of insider knowledge 

However, HSC is only a shareholder but not involved in the day to day operation. Thus possibility of possession of insider knowledge is not high. The exit looks more like a earlier-planned action as Dr Lim Yin Chow, an ex-Non-Independent Non-Executive Director of SIGN who also has shareholding in HSC has resigned on 10 Jan 2014, much earlier than HSC's disposal. In conclusion, that is no material evidence supporting this risk, this make it a mere speculative concern. 

Other Business Operation Risk 

As per my previous post

Signature International Bhd (SIGN) - At the sweet spot of booming housing completion

1.0 Investment Summary

Signature International Bhd, a branded distributor, manufacturer and retailer of modular kitchen system under the brand name of Signature Kitchen, is at the sweet spot of booming number of service apartment/condominium (SA/Condo) completion in 2015-2017.

Housing starts for SA/Condo in Malaysia has plateuaed in year 2013-2014 while completion data is still below half-of-2008's peak. As historically, completion lagged starts 3 years, number of SA/Condo completion is set to boom beginning from year 2015 and is projected to overtake 2008's peak in 2016-2017. While this is a bad news for the property market, SIGN will be the clear winner from this development as 70% of SIGN's FY2014 sales is derived from Project Sales, where SIGN partners with Property Developers to provide kitchen systems to SA/Condo projects-near-completion.

I give a Buy rating on SIGN with TP of RM3.70 (64% upside) based on 10x FY16 earning, which is generally in line with forward PE given to furniture/particleboard and FBMSmallCap stocks. The Buy rating is based on:

i. SIGN's PAT is projected to double in FY15 and grow at 2-Years-CAGR of 24% for FY16-17 as a) strong sales growth in FY15-17 (CAGR 22%) riding on the booming number of SA/Condo-to-be-completed b) margin improvement from greater economic of scale (Q2FY15 EBIT Margin at 24.7% vs FY14 at 15.6%)

Source: NAPIC

ii. Average trading volume recently surged to 5 years high. SIGN's stock used to have low liquidity.. The improved market interest will provides better trading liquidity and will support better valuation.

Source: Yahoo Finance

iii. SIGN's stock is still undervalued. Though gaining 190% in 2 years time, with TTM PAT have grown 785% for the same period, valuation is still at 3-years-low at trailing TTM PE of 8.4x and FY16 PE of 6.1x. The current valuation is unreasonable given FY15 will be a record-breaking year for SIGN for its sales, profit and margin. SIGN is an undervalued growth stock.

Source: Yahoo Finance, Company

2.0 Business Description

The brand name of Signature Kitchen under SIGN is the largest and, in my view, most-well-known kitchen system provider in Malaysia. With over 20 retail showrooms in Malaysia as well as various marketing and branding activities, SIGN has built-up its name toward Malaysians. SIGN is also in the affordable kitchen market under brand "Kubiq" launched in 2009. Pricing of Kitchen set for Signature Kitchen starts from RM20,000 while Kubiq's starts from around RM5,000.

As in FY14, 70% of SIGN's sales derived from Project Sales where SIGN secures projects from developers to provide kitchen to SA/Condo units as part of the developers' promotional strategy to attract buyers. While there are others premium kitchen brands available in the market, the brand Signature Kitchen has a competitive edge over other competitors due to better branding and popularity. In the past, Project sales have been cyclical following housing market cycle. This is explainable as SIGN only come in to provide kitchen for a project near its completion stage. Hence, SIGN's project sales generally correlate with SA/Condo's completion volume as SIGN provide kitchen to SA/Condo projects.

The remaining 30% of sales contributed from retail business generated via its retail outlets. SIGN's key strength is its branding. As it adopt pull-marketing strategy, retail customers are generally walk-in customers. Hence, headcount in retail outlets can be minimized since sales activities are minimal for retail segment. This also provides better operational efficiency. Unlike project sales, retail sales are non-cyclical and have been stable at the range of RM40m-50m annually even during Global Financial Crisis in 2008-2009.

Over 95% of SIGN sales are from local market. Besides providing kitchen system, SIGN also provide kitchen white goods (appliances) to its customer under third-party brands as well as interior design services. These are mostly value-add service. Kitchen business is still the core income generator.

Based on Initiation report done by CIMB Research in Oct 2013, 75% of SIGN's production cost comes from raw materials, while the rest are subcontractor fees (14%) and kitchen white goods (11%). The major raw materials used are wood-based like chipboard and medium-density fibreboards (MDF), comprises of 40% of raw material cost. At the same report, also mentioned is that SIGN is able to adjust its production capacity quickly as most of the high-volume raw-materials (like MDF) are outsourced. Only the low-volume-high-value-added products are handled by own factory. SIGN is using sub-contractors for the kitchen installation.

2.1 SWOT Analysis

3.0 Financial

4.0 Projection & Valuation

5.0 Risks

Project delay 
SIGN come into a property development project at its final stage. Any delay in project completion will defer SIGN's sales.

Material cost hike
As time from securing projects to work start for project sales can be long, any increase of material cost during this period may not be transferable to the customers.