Saturday, June 17, 2017

98 - The effect of price war

98 - The effect
of price war

The recent 1st Qtr reporting session for the majority of listed stocks on Bursa Malaysia has rather been a poor one, from my very personal frank observation point of view.

Although I couldn't get the official figures of how many reported growth in profits or more reported negative growth or even worse more suffered losses, I noticed most were not able to report improved results.

When we have such a broad base of companies reporting less profits and many more actually suffering negatively, we can only understand how tough the whole business environment has been for business.

As consumers started to become picky for value buys if possible and cut down on major ticket items, manufacturers and retailers need to replan their business and pricing especially to attract market share.

And one of the common strategies is to maintain or reduce prices through promotion to stay competitive enough. But it is common knowledge that most businesses are too, competing closely the same especially in terms of pricing.

As long as they can garner market share at the expenses of competitors (but at the same time at the expense of profits), it is considered to be ok than having declining market share which will result in losses and unsold products eventually find its way back to the seller and manufacturers.

Such price compression war situation actually hurt the bottom line of those companies involved, but what choices do they have if their pricing is more expensive than the rival's?

An ongoing classic case it the keenly fought battle for pizza market share is the current RM5 a piece  promotion that has been going back since two or three years ago.

I think Domino Pizza started the RM5 a piece promotion first and it became an instant hit among pizza lovers. Who could imagine just for a RM5, one could get a bite or two on different types of pizza with different toppings. It became so popular that its main bigger rival Pizza Hut also joined in the RM5 promotion war and it is still on today.

My friend's spouse who is an expert in baking pastry remarked that it is almost impossible to make any profit for this type of pizza for just RM5 only. With the prices of ingredients on the rise always, it is cheaper to buy one at RM5 than to make your own self.

So what is the point if both sides are incurring losses in this RM5 promotion? I think the answer beneath is as long as one buys my pizza, one will get used to my types and tastes of Pizza and would eventually preferred other kind of non-promotion type of pizza as well.

Even hypermarket are joining in the war if one goes and have a look at Giant and Tesco hypermarkets. Besides the pizza war, there are other types of wars going on as well. Another example is also the healthy yogurt drink war. Nestle, Dutch Lady, Marigold and others brands are competing too fiercely for market share.

While all these price reduction war is good for consumers, it is not so good for manufacturers and retailers and for those listed companies too. Hence this is one key reason many companies were not able to report better results.

Apollo's 4th Qtr results
and its anticipated dividends
to be announced this month

Snack confectionary maker Apollo Food Holdings Berhad is due to announce its 4th Qtr results sometime this June for its Financial Year ended April 2017.

This 4th Qtr results will be keenly followed by its majority of long term stable dividends shareholders because a good result will have a strong bearing on its once in a year final dividends payout.

How much the dividends will be this time? To roughly have a conservative estimation, based on its up to date 3rd Qtr (Jan 2017) of its earnings per share of 18.92 sen and assuming another 6 sen for its 4th Qtr bringing total dividends to 25 sen, the likely dividend will be 20 sen per share.

But as Apollo is a cash rich stock with more than RM 127 million in its kitty (translating into RM1.59 per share) and zero debts and has a steady track record of dividends, it is in a strong position to even payout all its earning of 25 sen as dividends.

This is just all my guess only and one should even be prepared for the unexpected such as a poor 4th Qtr results which could affect its dividends payout ratio and its share price as well which is currently hovering around the RM5 range.

One should note that Apollo just not have a specific dividend payout ratio policy and has never raised a single sen for any right issue exercise from its shareholders all these years. Also it has never declare any bonus issue as well.

Buying 3,000 shares of
CB Industrial Products Holdings
on May 29, 2017 at RM2.10

CB Industrial Products Holdings is also another well diversified company that is a leading manufacturing and engineering based company specialising in the construction of palm oil mills, manufacturing of palm oil mill equipment, machinery and related parts.

It's other main business segments in the Group include retrofitting of special purpose vehicles and development of palm oil plantation and milling. CBIP aims to be the preferred provider of innovative engineering products and solutions to the global oil palm industry and related sectors.

CBIP has a healthy balance sheet of cash hoard of around RM120 million which should provide opportunity for it to  explore into any future business opportunities.

Besides CBIP is one stocks that pays regular dividends twice a year. Such kind of stock fits nicely into my criteria of Basket of Defensive Stocks for a mid to longer term time period. If you happen to think that CBIP is one stock that will give you quick short term return, I will not agree with you on this, seriously.

I like to take this opportunity to wish all Muslims friend a very Happy Selamat Hari Raya Aidil Fitri.

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