Several years ago, I studied Cypark Resources Bhd (Cypark), a renewable energy and waste management company listed on Bursa Malaysia. I recalled that it had always been trading at RM 1.00 – RM 2.00 a share for the longest time. That has been the case until recently in June 2022. Cypark has dropped by almost 80% in stock price to 33 sen. Its P/E Ratio, as I write, is below 3.
Source: Google Finance
The question is, ‘Could investors have avoided an investment into Cypark, when it was trading at RM 1.00 – RM 2.00 throughout the period of 2011-2019?’
Let’s examine.
Back in 2011-2019
Cypark has been successful in securing solar PV and waste-to-energy projects in Malaysia and they enabled the company to record consistent growth in its sales and profits in the 10-year period of 2010-2019. Its revenues had increased from RM 177.6 million in 2010 to RM 376.7 million in 2019. This had contributed to a growth in its earnings from RM 20.1 million in 2010 to RM 91.3 million in 2019.
Source: Cypark’s Annual Reports 2010-2019
In addition to its financial results, investors could be aware of its various growth initiatives in 2019. They include its on-going progression of two large scale solar (LSS) projects, the commencement of its LSS1 plant and the commissioning of a waste-to-energy plant in 2020.
How about its valuation?
Interestingly, Cypark’s valuation seems to be increasingly attractive to investors. Its P/E Ratio fell steadily from 20+ before 2014 to 10+ in 2015-2019. Meanwhile for its P/B Ratio, it fell from 5+ in 2011 to 1+ in 2019. Cypark’s dividend yields at that time was less a consideration as it was offering below 2% per annum and it is possible for investors to focus on ‘Growth’ and not so much on ‘Dividends’.
Hence, for a growth-based investor, it is possible for him to invest in Cypark due to its growth prospects in the renewable energy sector, track record of earnings growth and as well as attractive valuation especially in 2018-2019 when both of its valuation ratios namely, P/E Ratio and P/B Ratio are their lowest since 2010.
One Lack of Consideration
For most investors, it is common to focus on ‘earnings’ but not on ‘cash flows’.
Personally, I view ‘cash flows’ as of great importance. This is because without it, the stock could not pay dividends and invest into growth initiatives consistently. Hence, cash flows are of preeminence and it is still important to assess the cash flow movement of a company even though your focus is on capital appreciation when investing in stocks.
How about Cypark?
What does its cash flow statement look like?
Based on my findings, Cypark’s generation of operating cash flows in 2010-2019 was inconsistent. But overall, Cypark brought in positive operating cash flows of RM 193.8 million. Of which, it had incurred RM 832.4 million in net acquisitions of property, plant & equipment (PPE) and intangible assets in that period.
Source: Cypark’s Annual Reports 2010-2019
So, the question is, ‘How did Cypark finance its shortfall?’
The answer lies in raising both equity and borrowings.
In the 10-year period, Cypark had raised RM 296.2 million in equities via private placements and ESOS schemes. Also, Cypark had raised a net borrowings of RM 994.6 million. This worked out to be RM 1.29 billion in equity and borrowings in 2010-2019. They were mostly utilised to cover the shortfall in its acquisitions of its PPE and intangible assets during the period.
As most of the funds raised are debt, Cypark’s net debt figures had ballooned in 10 years, up from RM 35.5 million in 2010 to RM 649.8 million in 2019. Thus, its gearing ratio had increased from 40.6% in 2010 to 85.8% in 2019.
Source: Cypark’s Annual Reports 2010-2019
Note:
Gearing Ratio = (Net Debt / Shareholders’ Equity) x 100%
From its cash flow statements, I learned that:
1. Cypark’s operating cash flows had declined in 2013-2019 despite a consistent rise in earnings during the period. So, it was profits up, cash flow down.
2. Cypark’s net debt had increased and as such, causing its gearing ratio to be at above 50% levels since 2012.
These are red flags. Investors who are into cash flows would easily avoid buying Cypark at any time above RM 1.00, especially at times closer to 2019.
Aftermath: 2020 to June 2022
Then came the COVID-19 pandemic.
In 2020-2021, Cypark maintained its revenues at RM 300+ million levels. Cypark had reported RM 60+ million in earnings after distributions to Sukuk Holders. In this case, Cypark’s earnings had fallen by 25%-30% from 2019 levels.
In the 2-year period, Cypark has incurred operating cash outflows, raised equity and borrowed even more money. Cypark’s net debt increased tremendously, up from RM 649.8 million in 2019 to RM 1.06 billion in 2021. This raised its gearing ratio from 85.8% in 2019 to 107.9% in 2021.
In essence, Cypark had ‘profit down’, ‘negative cash flows’, and ‘increased debt’ over the last 2 years.
Source: Cypark’s Annual Reports 2010-2021
They could be factors to a fall in its stock price to 33 sen in June 2022.
Conclusion:
Personally, I believe investors would have avoided buying Cypark at above RM 1 in 2011-2019 if they appreciate the importance of ‘cash flows’. While consistent growth in earnings is to be pursued, but, investors should take one more step in backing these earnings figures with its operating cash flows in the long run.
After all, what good is profits without operating cash flows?
Here, if you wish to learn more on the art of stock investing, here’s a free training you can attend:
Link: How to Build a Stock Portfolio that Pays Increasing Dividends?
