Most investors are not familiar with Samurai 2K Aerosol (Samurai 2K). Though carrying a name that embodies the spirit of the ancient Japanese warrior, Samurai 2K is actually a Malaysia-based aerosol coating company which focuses on coating solutions for the automotive refinishing and refurbishing industry.

Their operations can be divided into three segments namely “Paint-Standard”, “Paint Premium”, and “Maintenance and Others”. Some of the brands, which car enthusiasts maybe familiar with, include “Samurai”, “Kurobushi”, “Khameleon”, “Canbrush”, “Ninjutsu”, “Geigi”, “CanArt”, and “Bushido”.

Stock Price Performance

Samurai 2K debut on a roaring initial public offering (IPO). The counter listed in the Catalist board of the Singapore Exchange at an IPO price of $0.20 in January 2017. By November 2017, the stock hit $1.12, representing a return of 460 percent gain, just within a year of listing.

The upsurge in Samurai 2K’s stock price was partly driven by the fourfold growth in earnings to RM6.4 million from a year ago and a 101.6 percent increase in revenue to RM34.5 million.

Whilst most would have thought the stock had reached the peak, the counter continued to rise. By end of May 2018, carried by the broader market’s exuberance, Samurai 2K’s stock rose to a high of $1.81 before finally peaking out.  Since then, the stock has been under heavy correction, which saw the stock price fall to a 52-week low of $0.72 in February 2019, representing a peak-to-trough decline of 60.2 percent. Fortunately, the stock managed to recover some losses. As of 30 April 2019, Samurai 2K closed at $0.935.

samurai price

Source: Shares Investment (30 April 2019)

Financial Performance

  FY14 FY15 FY16 FY17 FY18 1H19 1H18
Total Revenue (RM’m) 16.0 19.1 30.6 39.4 90.0 38.9 34.5
Operating Margin 12.7% 13.7% 23.0% 12.1% 17.9% 26.7% 22.7%
Net Margin 8.4% 10.2% 17.7% 5.6% 13.0% 21.7% 18.7%

Source: SGX StockFacts, Company’s Financials

In terms of top line performance, Samurai 2K’s overall total revenue has been increasing unabated since FY14. In the latest FY18, the company’s total revenue further jumped 128.7 percent to RM90.0 million compared to a year ago.

Meanwhile, net income in FY18 stood at RM11.7 million, up by 427 percent from FY17. Operating margins and net margins also returned back to healthier levels. As of FY18, operating margin was 17.9 percent compared to 12.1 percent a year ago, while net income margin (excluding extraordinary items) rose to 13 percent in FY18 from 5.6 percent in FY17.

In the latest 1H19, Samurai 2K posted revenue of RM38.9 million and net profit of RM10.4 million. Operating and net margin were even better for the period, registering 26.7 percent and 21.7 percent respectively.

Balance Sheet And Cash Flow

  FY14 FY15 FY16 FY 17 FY18 1H19
Total Cash and Short-Term Investments (RM’m) 2.5 3.5 10.2 19.9 39.3 31.4
Total Interest-Bearing Debt/Assets 26.8% 28.4% 19.8% 23.0% 8.3% 7.9%
Total Interest-Bearing Debt/ Shareholder Equity 66.3% 57.8% 47.1% 39.5% 11.9% 10.9%
Operating Income/Total Interest Expense 12.7 11.9 26.0 9.8 33.6 49.9

Source: SGX StockFacts, Company’s Financials

Samurai 2K has been accumulating its cash pile. In the latest 1H19, total cash and short-term investments rose to RM31.4 million compared to RM2.5 million in FY14 and RM19.9 million as of FY17 (right after IPO).

The overall debt level has also been declining gradually. In FY14, Samurai 2K’s total interest-bearing debt to assets stood at 26.8 percent while total interest-bearing debt to shareholder equity was 66.3 percent. By 1H19, the company has significantly pared down its debt to more manageable levels of 7.9 percent total interest-bearing debt to assets and 10.9 percent total interest-bearing debt to shareholder equity.

In terms of the company’s interest coverage, the ability to repay its interest obligation has also improved as operating income-to-interest expense jumped from 12.7 times in FY14  to 49.9 times in 1H19.

However, while overall cash balances and debt/interest ratios have improved dramatically over the years, we noted that the Samurai 2K’s generated a negative cash flow from operations (CFO) of RM1.4 million in FY18 and negative cash flow of RM2.1 million in 1H19.

How Does Samurai 2K’s Valuations Compare To Peers?

Samurai 2K Aerosol Dynamic Colours
Price/Book Value 4.6 0.80
Price/Sales 3.3 0.64
Dividend Yield (%) 0.64 2.9%
Dividend Yield (%) 5-year average N/A 6.2%
Price/Cash Flow 20.5 9.6
Price/Earnings 22.5 18.9

Source: SGX StockFacts, Company’s Financials

Samurai 2K does not have any similar public-listed comparables on the Singapore Exchange. Dynamic Colours appears to be the closest peer, which is principally engaged in the business of colour compounding and modified compounding of resins. The products of Dynamic Colours are used in the manufacturing of external casings or component parts of electrical appliances and electronic devices.

Based on the valuation comparisons shown in the table above, Dynamic Colours Limited’s ratios appear to be much less demanding as compared to Samurai 2K. Moreover, based on the comparison with Samurai 2K’s dividend yield, Dynamic Colours offer more attractive yield as well.

How Should Investors Approach Samurai 2K?

Although Samurai 2K has been showing strong growth in its top and bottom line over the last few financial years, its price multiples appear to be far higher than its nearest peer and the industry as a whole. Moreover, despite improvement in its balance sheet, cash flow from operations still came in negative for the last financial year and as well as the latest half-yearly result.

In addition, although the stock price has fallen significantly since peaking out in May 2018, investors should not feel that they have chanced upon a potential gem given the stock’s low trading volume of less than 1.0 million shares each day over the last three months.

Instead, retail investors should stay patient and possibly wait for price multiples to improve. This would also help to minimise the risk of paying too high of a premium for the profit the company generates.

Related Article:

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