PSC Corporation: Defensive Growth Stock?

Hi all, KOPL here. I wanted to share with you guys some fundamental analysis I did of a stock I find rather promising, PSC Corporation.

Indeed, the average consumer/investor has recently faced a horrifying trifecta of high inflation, interest rates, coupled with the threat of a looming economic recession. Consequently, I sought to find a well-priced stock that would benefit, or at least suffer minimal headwinds due to the above conditions. Hence, It is only natural that I would quickly find companies operating in the consumer staples industry listed on SGX. Sure, I could invest in Sheng Siong, a popular SGX stock that operates a massive chain of supermarkets, but I found it fully valued due to a reason that could be easily surmised:

                   

You're telling me that Sheng Siong can blow past its COVID-19 highs during an economic recession, with spending greater than that of the mass panic buying experienced during that time? I find it hard to believe. 

With that in mind, I scoured through the unending list of public Singapore companies, searching for the next potential multi-bagger. Enter PSC Corporation.

Cash on hand greatly exceeding that of its debts to minimise the effects of high interest rates? Check.

Operating in the defensive consumer staples industry that benefits from inflation and economic recession? Check.

Priced at attractive valuations? Check. (Maybe)

Okay then, sounds good. Let's dive deeper, shall we?

"PSC Corporation is a leading provider of consumer essentials. We manufacture, distribute and market a diverse range of safe and quality consumer products.

Our objective is clear – to cater to the daily essential needs of our customers through the provision of quality consumer products at the best value. Placing customers’ needs and interests at the heart of our business, PSC constantly innovates to bring new and better products to the market. " - PSC Corporation Limited website

They distribute household brand names such as Beautex, Nature's Wonders, Gold Roast Coffee, and Royal Umbrella Rice, just to name a few. I don't know about you, but I find PSC owning brands that I am personally familiar with is definitely a plus point. Not to mention they also own several subsidiaries such as Tat Seng Packaging (another SGX-listed company), SOCMA, and TIPEX. Additionally, their operations are rather geographically diversified, conducting business in a total of 12 countries, focused mainly on South East Asian (SEA) countries. 

A brief overview of PSC Corporation's financials:

 PSC Corporation's 5-Year Financials

Okay, I'm quite sure your first reaction to the table above is "What happened in 2019!?". I get it. The reason for the subpar performance was due to the fact that the company had realised a heavy monetary loss via the divestment of certain assets, alongside the significantly lower revenue attributed to heavy current depreciation from its China arm, high levels of competition, and one of its major facilities not being fully operational yet. Additionally, it seems that there was a right issue in FY2019 that diluted shareholders, negatively impacting the diluted EPS. 

In terms of debt profile, it currently has approximately $102 million in total liabilities compared to $203 million in cash equivalents. Seems like it's in pretty good standing to withstand any further interest rate hikes.

Barring FY2019, it seems like PSC Corporation's financial results are rather variable. However, the overarching trend I can see is that its EPS has been slowly increasing whereas its payout ratio has experienced a slight decrease. I know it's easy to attribute FY2021's strong performance to COVID-19, but I don't think the business benefited all that much from it. I mean, think about it, I don't think I heard about people panic buying kitchen oil, snacks, or rice... 

Overall, it seems like EPS, total revenue, and NAVPS have been inching up over the years, whereas gross margin has remained roughly the same. I think this is rather in line with industry peers as the consumer staples industry is usually a rather boring one. There's only so much you can do to cut costs.  

Moving on, it's time to review PSC Corporation's current management.

There has been a recent streak of management changes which I don't like, similar to that of Fu Yu corporation as I highlighted in my previous post. Granted, this is an industry that requires relatively less technical expertise, so I'm willing to stay and see what the new team can do. To add on, in terms of alignment of shareholder interest, the company seems to not really undergo any major dilutive exercises, a good sign. The only real gripe I have with this stock is that its current dividend yield of 2.272% is rather low, especially given the opportunity cost of not investing in Singapore bonds which are currently offering a juicy 4% risk-free yield. However, I understand that this is due to the fact that the company has a very low payout ratio. 

That isn't to say providing a low dividend yield is necessarily bad, though. This brings me to my next point, which is that I really like the fact that the company is on the lookout for some major acquisitions that could significantly boost its revenue. For example, in FY2022, it acquired CKH Food Trading and 123 Mart, further diversifying its repertoire of subsidiaries. Furthermore, efforts have been made to streamline business operations to run the company more cost-efficiently. Basic math dictates that when revenue goes up and costs go down, profits go up (and are hopefully rewarded to shareholders).

Overall, the management seems to be decent, and not just laying on their laurels. 

Just before I get to the valuation side of things, there are indeed some headwinds I would like to discuss.

I'm sure by now, most of you guys have become aware of a brand named "Meadows". It's a house brand which offers grocery retailers higher profit margins, and from anecdotes and personal experiences, it tastes pretty damn good too. The reason this worries me is that if the trend of phasing out external products while creating house brands continues, PSC Corporation's products may very well be outcompeted. It makes sense too, why wouldn't retailers want higher margins? 

Additionally, inflation is a double edged sword for consumer staples businesses. Sure, it gives an opportunity to raise product prices, but just about everyone's doing that. Including raw material suppliers. Whether PSC's brands have enough power to raise prices faster than costs is a question I don't have an answer to.

Now, let's compare PSC Corporation's valuation to similar peers listed on the SGX Exchange.

I'll be comparing it to the likes of Sheng Siong and Dairy Farm International Retail Group, which I believe are similar enough.

                                      

 Comparison of the companies' FY2021 metrics

I won't lie, I had absolutely no idea that DFIRG, which owns Giant, was valued at such a premium. These figures were pulled from SGX, so I think they're rather accurate. But as you can see, the above companies operate in the consumer staples industry and trade at significantly differing valuations from one another. It's clear to me that PSC Corporation seems to be the most "value" of the bunch.

Sadly, there isn't really enough information readily available for me to compare PSC Corporation's past PE ratio valuations to determine if it's considered undervalued, so I've resorted to looking at its price chart:

I think in terms of price appreciation, it does have some upside, especially since it hasn't touched its COVID-19 highs like Sheng Siong. Personally, I am assigning it a fair value of 13 Forward PE, which would price it in the 50 to 55 cents range. Anything below 40 cents is a good enough buy I reckon.

To conclude, here are my parting thoughts.

I really like this company. I find it seriously undervalued and am probably going to take a long-term position right after I have enough to acquire some Fu Yu corporation shares. It is poised for growth during these uncertain times when a recession could take effect at any moment. That said, I am still not confident that the management will one day up the dividend payout ratio, which disappoints me to a certain extent since at the end of the day, I am a dividend investor. 

Disclaimer: Please take everything published within this blog with a pinch of salt. Nothing I say here should be misconstrued as any form of financial advice whatsoever. In fact, I am probably the absolute last person you should approach for any sort of advice. All self-computed figures are calculated to the best of my ability, but I cannot guarantee they are 100% accurate.

Thank you for reading my blog, and I hope you have learnt something, no matter how seemingly minuscule. I would greatly appreciate it if you subscribe as such posts take a decent chunk of time to dish out, ciao!