Lam Soon (Hong Kong) Limited (SEHK: 411) is a producer of consumer items such as flour, cooking oil, and home care cleaning products. One of the products it sells is Knife oil. Knife, which was launched in 1963, continues to be a leading brand in the edible oil market.
The brand’s market share in Hong Kong is around 29%. Other well-recognised products from Lam Soon include Golden Statue, AXE, and Labour.
I like Lam Soon for being a resilient consumer stock, as I earlier highlighted here. And its latest earnings results strengthens the case for its business resilience. Let’s find out more.
Latest report card
At the end of August, Lam Soon made public its earnings for the fiscal year ended 30 June 2019 (FY2019). Overall, it was a strong set of results from the company.
Revenue came in at HK$5.32 billion (US$680 million), falling 1% year-on-year, mainly hit by a lower RMB exchange rate. However, excluding the foreign exchange translation impact from RMB to Hong Kong dollars, revenue would have increased. Lam Soon has two business divisions – food segment and home care.
Revenue at its food segment fell 2% to HK$4.6 billion, but excluding the impact from foreign exchange translation, sales would have increased by 2.2%. On the other hand, home care’s segment revenue grew 5% to HK$712 million (or up 9% without the foreign exchange translation impact).
Maintaining pricing power
The home care business segment possesses a Warren Buffett-like trait, which is that of “pricing power”. The Oracle of Omaha once said:
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
In its earnings report, Lam Soon said that the division’s operating profit increased by 31% year-on-year on the back of, among others, price increases in its AXE and Labour products. That speaks volumes about the brands’ pricing powers.
In the Hong Kong dishwashing detergent market, the two brands retained their top position with a combined volume market share of 50.8%. With better cost controls, continued improvement in its product mix, and operational efficiencies, Lam Soon’s net profit also grew, up 4% year-on-year to HK$340 million.
Shareholders will be delighted to know that Lam Soon upped its total dividend for the year by 10% to HK$0.44 per share, up from HK$0.40 per share one year back. The latest dividend is also well-protected since its dividend payout ratio stood at just 31%.
Lam Soon’s net profit and dividend track record over the longer term is extremely impressive. From FY2015 to FY2019, net profit surged 31.4% annually while dividend rose by 20.3% yearly.
Lam Soon had an upbeat outlook in its FY2019 earnings report. It said:
“While the current market uncertainties and volatilities are expected to linger, the Group, with a strong balance sheet, remains steadfast in the execution of our long-term initiatives to build sustainable growth, strengthen its fundamentals and enhance its competitive advantages.
We believe the markets that the Group serves in China and Hong Kong will grow not only in size but more importantly, demand higher quality products that the Group produces. We are well placed to serve this demand and have made appropriate investments, tangible in production facilities and intangible in brands, research and development, human resource and channel infrastructure to enhance its competitive position.”
With its rock-solid balance sheet of HK$1.32 billion in cash, along with no debt, and strong consumer demand, Lam Soon is highly likely to emerge unscathed from any economic shake-ups in China and Hong Kong in the short term.
At its current share price of HK$13.40, Lam Soon has a price-to-earnings (PE) ratio of 9.3 and a dividend yield of 3.3%. Lam Soon’s PE ratio is lower than its average PE ratio of around 12 over the past five years.
Its latest dividend yield is also one of the highest it has been, if not the highest. Therefore, based on historical figures, Lam Soon’s shares certainly look attractive right now.
HK MoneyClub (www.hkmoneyclub.com)