✨ BJCORP Accounting Deep-Dive - Part 3c: Cash Flow Statement
Why BJCORP is not a business in secular decline... and how past performance is not indicative of future results
Happy New Year! This is the 3rd part of a 4-part series to BJCORP Part 3 - which I’ve made free as my New Year’s present to all of you! Click these links to read Part 3a and Part 3b.
Summary of this BJCORP Part 3c report (9,000 words):
Operating Cash Flows
BJCORP’s OCF has always been positive; however FCF has been consistently negative for most of the past decade. The main reason for their consistently negative FCFs can be traced back to poor profit margins - whether due to disappointing top-line performance or poor operating cost control. Fortunately, this is a turnaround thesis - hence their past performance isn’t necessarily indicative of future performance.
Their Cash Conversion Cycle (CCC) has actually been consistently healthy, largely owing to an above-average levels of Payable Days - which themselves were likely contributed by their BJTOTO and BJFOOD subsidiaries.
Their Cash Conversion Ratio is very volatile - however, this can be mainly attributed to their historical Net Profits being volatile (due to recurring Impairments and Gain on disposals), rather than a deviation between OCF and NP trends.
Investing Cash Flows
Growth CAPEX / Total CAPEX was fairly unsurprising - however, we saw several negative instances of this metric, which implies that they hadn’t reinvested enough maintenance CAPEX to sufficiently maintain the business’s productive capacity in those years.
Most of their material Disposal of operating assets and CAPEX activity over the past decade were related to the corporate exercises that we saw in Part 3b - and are nothing to worry about.
There is one quirky line item called Proceeds from settlement of surrendering certain assets and lease interests to related authorities, amounting to RM 218 mil in FY17. These related to some sort of mysterious corporate development called the “Amat Muhibah Tax Dispute” - luckily, the amounts involved are immaterial.
Financing Cash Flows
BJCORP has been consistently repaying large amounts of debt since 2016 - with average Net debt repayments of RM 500 mil per annum over the past 5 years. This amounts to a staggering debt redemption of 8% of Total Debt (or 5% of Total Equity) per year on average.
This observation allows us guess at what management’s objectives might have been over the past half-decade - which pulls together everything we’ve learned so far from their historical P&L, B/S and CFS of the past 5 years.
The natural inference that we could draw from these observations is that BJCORP’s management (prior to their new CEO’s entrance this year) had been mainly prioritizing debt repayment over the past half-decade - which appears to have involved downsizing, rather than trying to grow the business.
This might explain why BJCORP’s operational performance over that period was so middling - and perhaps more importantly, implies that their poor historical performance was due to an active choice by management to downsize and reduce debt; rather than due to the business being in uncontrollable secular decline.
If so, it could also provide their new CEO with an easy lever to pull in order to quickly reverse their consistently negative Net Profit performance over the past half-decade - by simply implementing a reallocation of priorities at the conglomerate, both in terms of setting incentives (i.e. KPIs) as well as optimal capital allocation (which we’ve explored in Part 1).
BJCORP has not been paying dividends to its own shareholders for the past half-decade; most of its Dividends paid occurred at the Non-controlling interest level (i.e. dividends paid by their subsidiaries to their shareholders).
Next week, we will at long last be wrapping up this month-long deep-dive analysis of BJCORP in Part 4 - and finally explore how BJCORP might be able to achieve their much-vaunted post-turnaround 3,000% upside.
In Part 1 of my BJCORP equity research report (10,000 words), I mentioned how this stock was my favorite ASEAN stock right now - having a base-case scenario with 300% upside, very little downside risk, and built-in optionality for a potential blue-sky scenario with up to 3,000% upside.
Over the past week, I’ve done a deep-dive into both BJCORP’s historical P&L Statements and Balance Sheets over the past 10 years, which you can view by reading Part 3a (4,000 words) and Part 3b (7,000 words) respectively:
Today, we’ll be covering their Cash Flow Statement in this Part 3c report. And next week, I’ll be following up with an abridged three-statement analysis of all the Berjaya listed subsidiaries relevant to this thesis in Part 4 - as well as tie up everything we’ve covered in the prior 5 reports (i.e. Part 1 to Part 3c), to explore what the investment case for their much-vaunted 3,000% upside could potentially be. If you’d like a refresher on the business operations of the respective Berjaya listed companies, please click the following link to read our Part 2 report.
If you’ve stumbled upon this report for the first time, I would highly recommend heading back and taking a gander at Part 3a for the background context behind this Part 3c deep-dive - where we’ll be doing a similar deep-dive analysis on BJCORP’s historical Cash Flow Statements (CFS) of the past decade. For the benefit of those who have already gone through the above reports, I won’t reinvent the wheel, and will spare you a regurgitation of the background context. Let's dive right in.
BJCORP 10-year Cash Flow Statement Model
Download my Excel financial model by clicking the link below:
Caveats:
The inputs for this financial model were entered into Excel by hand. As a result, there may be mistakes and slight inaccuracies in some of the numbers - mostly due to restatements in future reporting periods which I may have missed by using earlier annual report; but also possibly due to my own human errors. I’ve done my best to comb through the entire model to spot inconsistencies, but there will still inevitably be mistaken entries inside - as it would take me way too long to double-check every single figure for inaccuracies with a fine-toothed comb.
Thankfully, I’ve noticed that most of these errors were within 5% of the actual figures, and mostly corrected the rest. Since this investment thesis assumes a 300% upside for the base-case scenario, there should be sufficient margin of safety to absorb 99% of the mistakes made in this model. However, I would still like to apologize in advance for any gross inconsistencies remaining, and hope you can point them out in the comments section below so that I can edit them for everyone’s benefit. Many thanks.
Also, if you have any questions about any particular area, feel free to ask about them in the comments section below so that I can provide a more personalized explanation to your particular areas of concern.
If you’ve already read my Part 3a report where I cover the past 10 years of their historical P&L statements - and my Part 3b report where I do the same for their historical Balance Sheets - you would have already gained a decent appreciation for their historical business performance, as well as their capital position throughout the past decade.
As we have done in both Part 3a and Part 3b, I will be highlighting in yellow all the potential problem areas in my historical CFS financial model of BJCORP. Then, we shall expound on all of these problem areas - and attempt to unravel the black box that is BJCORP today.
Some of these points that we will be covering are key factors which could potentially make or break the investment thesis - and also lend crucial insight into why they have been performing so poorly over the past decade. They will also shed additional color on some of the points which we’ve covered before in Part 3a and Part 3b - and crystallize some of the inferences that I’ve been alluding to since then, but previously wasn’t able to explain without supplementary context from their historical CFS.
To help you visualize this report more easily, I’ve made a list of chapters in this 9,000-word report:
(The above links which jump to the relevant chapters will only work in the desktop version of Google Chrome. If you’re using a different browser, please scroll to the relevant chapters below.)
BJCORP Links:
Company’s historical financials on TIKR (free sign-up required)
BJCORP’s Listed Companies’ Information & Financials:
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CashFlow Statement Margin Analysis
Given what we’ve already covered in Part 3a and Part 3b, there should be ample background context for the content that we’re about to cover in this section below. Namely, you would have already been aware of BJCORP’s historically dismal profit performance - as well as the current and historical capital position of the group (e.g. relatively highly leveraged). This follow-up report in Part 3c won’t add too much extra signal to the overall analysis, but will tighten up the investment thesis by filling in the gaps - and providing a more comprehensive “3,000 feet view” of the conglomerate’s business operations, rather than the 30,000 feet view which we saw in Part 1.
Once again, the best way to gain meaningful interpretation over this monstrosity of a dataset (i.e. this financial model) is to start with margin analysis. As I’ve mentioned in Part 3a, doing this allows us to home in on the various areas of potential concern in the financial model, while also providing a quick snapshot of how the company’s historical performance has been like - e.g. what their working capital position was over time, how much of CAPEX represented maintenance vs growth, have they been paying out dividends from debt, etc. This then enables us to assign possible future scenarios given the context of their present business operations. By process of elimination, we can then drill down into just a handful of key factors, and focus the remainder of our efforts on analyzing those.
Free Cash Flows (FCF)
The most obvious potential problem area in this conglomerate’s historical CFS, are their consistently negative FCF over the past decade. My definition of FCF here is “OCF - depn/amtz” - as depreciation/amortization can be used as a proxy for the amount of “maintenance CAPEX” required to maintain the productive capacity of business assets. Any CAPEX in excess of maintenance CAPEX can be referred to as “growth CAPEX”, as they relate to capital investments made in order to grow the business rather than maintain it.
Obviously, having consistently negative FCF is not good for any company - much less a conglomerate like BJCORP, which is supposed to have stable and diversified cash flows. But there’s actually a method to this madness, which we can unpack by breaking down the components of FCF - i.e. OCF and depreciation.
As you might have noticed in my Part 3a report which analyzes BJCORP’s historical P&L, normalized depreciation / PPE throughout the pre-pandemic period has hovered at a relatively stable 11%-13% for most of the past decade - with only two exceptions (i.e. 15% in both FY13 and FY19). These are actually rates of depreciation on fixed assets that are well within the status quo - which means that the main culprit for their consistently negative FCFs are actually OCFs themselves, rather than overly high depreciation. Hence, let’s take a deeper look at the components of their OCF.
As we can see from the screenshot of my model above, both “Cash receipts / Revenues” and ”Payments to suppliers, etc / (COGS + OPEX)” mostly hovered around the 100% baseline - which means that there were likely no accounting shenanigans involved under OCF (i.e. accounting sales & expenses actually translated 1:1 into cash inflows & outflows over time). Nor did “Net tax paid / Tax expenses” significantly deviate from each other over time - which is significant to BJCORP since their tax expenses represented a large chunk of their bottom line results (as I covered in Part 3a).
This means that we can probably take their historical P&L performance at face value - without having to worry too much about possible accounting malfeasance. If so, you would have known from my earlier P&L analysis in Part 3a that a large bulk of their Net Operating Expenses are actually composed of the following: 1) Depreciation, 2) Impairments on Goodwill and 3) Gain on disposals of subsidiary and associate companies.
We shall dive deeper into their Impairments and Gain on disposals later, but the point I’m trying to make is that most of the above items are non-cash expenses - which means that there aren’t actually many significant recurring cash costs plaguing their consistently disappointing OCFs. Rather the problem simply appears to be poor profit margins - whether due to disappointing top-line performance or poor operating cost control:
Once again, if you’ve already read my Part 1 and Part 3a reports, you’ll automatically understand the underlying reasons for their poor historical profit margins. It’s very simple - BJCORP was incredibly badly run in the past, with subsidiary management more or less being left to their own devices as long as they didn’t come back to Head Office asking for money. For the benefit of those who’ve already these report, I won’t regurgitate everything here - but if curiosity has gotten the better of you, I’d recommend clicking the links below to give the relevant sections a read, and then returning back here:
In summary, we can boil down the reasons behind their consistently negative historical FCF to poor profit margins - which themselves were due to poorly managed operations. Fortunately, this BJCORP investment thesis is a turnaround thesis - and as we’ve seen in my Part 1 report, Jalil has already taken steps towards addressing this issue - and there is ample reason to be hopeful of their post-turnaround FCFs recovering to industry performance standards.
Growth CAPEX / Total CAPEX
The next 3 potential problem areas in this margin analysis all relate to their “Growth CAPEX / Total CAPEX” during the first half of the decade (i.e. a long time ago). As we can see above, BJCORP’s growth CAPEX represented around 70% of their Total CAPEX in FY10, FY12 and FY15 - at 77%, 72% and 67% respectively.
The underlying reasons behind this phenomenon can be found in my earlier BJCORP Part 3b report - which focuses on their historical Balance Sheets. For convenience's sake, I’ve screenshotted the relevant part from my Balance Sheet model (download it from Part 3b) of their Total Assets here:
Let’s tackle FY10’s concerning ratio first. As you can see from the table above, in FY10 there was a large transfer of approximately RM 400 mil from their Current Assets of Inventories - property development costs to Non-Current Assets of Inventories - land held for development in FY10. At the same time, there was a similar RM 400 mil increase in their Property, plant and equipment line item, as well as a nearly RM 200 mil increase in the Associated companies line item in FY10 - despite there also being an increase in Assets of disposal group/Non-current assets classified as held for sale of slightly more than RM 400 mil (i.e. removed from non-current assets) in FY10.
This implies that most of the incremental growth CAPEX invested into BJCORP during FY10 was for “normal” business expansion reasons - in contrast to from one-time “unusual” idiosyncratic reasons. Hence, we can conclude here that there isn’t much to worry about these relatively high levels of growth CAPEX in FY10 - at least on the surface.
Similarly, Growth CAPEX / Total CAPEX in FY12 was also high at 72%. This one was a little harder to trace on their Balance Sheet - as there weren’t any significant jumps in their Total Assets from FY11 to FY12, which could have represented growth CAPEX. However, they did just dispose of their Singer subsidiary in FY11 (as evidenced by the huge drop in NCA held for sale of RM 1.2 bil in FY12) - which could have been related to this development. A closer look at their CFS in FY12 shows how most of these growth CAPEX went into the acquisition of a subsidiary company - as we can see in the table below:
And as we can see in Note 10a of their FY12 annual report, these CAPEX amounts were likely related to their acquisition of DSG Holdings Limited during the year - which was by far their largest acquisition during the financial year. DSG appears to be some sort of wastewater treatment business in China, which was subsequently disposed of in 2018. Regardless, we won’t concern ourselves too much with it since it happened literally over a decade ago.
There were also outsized levels of Growth CAPEX / Total CAPEX, amounting to 67% in FY15. These were likely attributable to their significant ramping up of Inventories - property development costs in both FY14 and FY15 (as shown in the earlier table of my Balance Sheet model above), which means that they were likely resulting from regular business expansion activity as well.
Growth CAPEX / Total CAPEX isn’t too surprising beyond these three years, hovering in between 30%-50% for most of the past decade. Notably, we can see that this relative CAPEX metric was actually negative during the years of FY18 and FY19 - which implies that BJCORP actually reinvested less than necessary in order to maintain their productive capacity. They also did the same in FY21, with growth CAPEX being just 3% of total CAPEX - although that one might simply be attributed to them going into hibernation mode to conserve cash flows amidst the pandemic-induced recession.
Others
Aside from that, there just isn’t very much to worry about in this margin analysis of their historical CFS. Nothing amidst their historical working capital ratios were particularly outstanding – their Inventory Days may seem higher than average, but that’s only because much of it represents property development assets under the BJLAND subsidiary - which are real estate in nature and tend to be high value items.
Their Payable Days have tended to hover around 125 days on average – likely attributable to their BJFOOD and REDTONE subsidiaries, both of whom have negative Cash Conversion Cycles - which is actually quite commendable especially for a conglomerate which is supposedly mostly in the Consumer and Real Estate sectors (which are known for being heavy working capital sinks). REDTONE is in the telecommunications industry, which tends to collect cash from their customers upfront while starggering their supplier payments; while BJFOOD owns Starbucks Malaysia – which is basically a quasi-bank, as their customers tend to credit their Starbucks Cards balances weeks in advance of actually making a coffee purchase.
This results in BJCORP actually having a pretty decent Cash Conversion Cycle (CCC) of about 60-90 days at the Group level, which is actually much better than the average for the broader Consumer sectors. This means they are actually quite capable of keeping themselves afloat in the short-term; and have never really faced any sort of material going concern risk despite their consistently negative FCFs.
Their Cash Conversion Ratio (CCR) on the other hand does leave a little bit to be desired – with historical CCRs jumping around all over the place, which is usually a red flag – but that can mostly be attributed to their Net Profits diverging from their OCFs mainly due to significant non-cash items, e.g. large recurring “one-time” Impairments and Gain on disposals taking place (which we’ve explored in Part 3a).
Finally, we come to the topic of dividends. As we can see in the table above, BJCORP hasn’t paid any dividends to its own shareholders since 2017. Most of its dividend payouts as reported under its consolidated CFS can be attributed to Non-controlling interests - which refers to the dividends that its subsidiaries are paying to their own shareholders (i.e. BJCORP and their other minority shareholders). It appears then that BJCORP has been subsequently reallocating these dividends within the Group, rather than paying them out to its own shareholders.
As I shall explain later below, all the things we’ve discussed above – their consistently negative historical FCF, diminishing Growth CAPEX / Total CAPEX, and absence of Dividends paid to shareholders over the past half-decade – can actually be tied to just one singular reason. Coincidentally, it is also happens to be the same reason for many of the highlights in their historical P&L and B/S that we’ve discussed before in my earlier Part 3a and Part 3b reports.
Which implies that if they can make improvements to just this one thing going forward, BJCORP’s future performance trajectory could potentially look quite different from that of their past performance. Have I got your attention yet?
Cash Flow Statement Deep-Dive Analysis
As we did in both Part 3a and Part 3b for BJCORP’s historical Profit & Loss statements and Balance Sheets, we shall also be doing a deep-dive of their historical Cash Flow Statements of the past 10 years here. The goal of this exercise is simple: point out all the potential problem areas (highlighted in yellow), so that you don’t have to waste time finding them yourself amidst this quagmire of integers. Then you can stand on my shoulders to accelerate the starting point for performing your own due diligence.
Operating Cash Flows
Let’s start with their historical Operating Cash Flows (OCF). As we can see from the above snapshot of their historical OCF, there’s nothing really murky going on here. There are three notable areas – the sudden jump in Development expenditures incurred in FY14, the large amounts of Receipt of part of the sales consideration from the disposal of development project in FY16, and the huge jump in their Other receipts in FY21. Let’s dive right in.
The jump in Development expenditures incurred in FY14 was explained in my Part 3b report (as well as in the growth CAPEX section above), being mainly attributable to an increase in regular business expansion activity relating to their property development segment. The jump in the latter FY16 amounts are also quite straightforward.
The bulk of the increases in their Other Income in FY21 were due to rental income and government grants received during the year - as we can see in the screenshots of their FY21 annual report below:
And that’s it for their historical Operating Cash Flows. As BJCORP presents their OCF using the direct method, it’s relatively easy to reconcile their operating cash flows with their operating profits - where we can see in the screenshots below that there aren’t any red flags (i.e. cash flow / accounting equivalents hovering around 100% over time). We’ve already discussed the factors behind their operating profits in my Part 3a report - so if you’re still in the dark over these cash flows, please click the link below and give it a read:
Investing Cash Flows
As you can see from my financial model above, BJCORP has a lot of Investing Cash Flow line items - but we can basically group them into just a few headline line items. These are highlighted in grey in the model, and listed below:
Disposal of operating assets
Disposal of financial assets
CAPEX
Purchases of financial assets
Interest received
Dividends received
Others
We shall go through the potential problem areas highlighted in yellow one by one. While I won’t be touching on every single one of them (as not all of them are material), I will cover their Investing Cash Flows as a whole comprehensively enough to enable you to be able to see the bigger picture.
Disposal of operating assets
While at first glance it may appear as though there are many potential areas of concern in this section, most of them can be attributable to factors that we have already discussed in my Part 3b report - where I analyzed BJCORP’s historical balance sheets. Many of these were just the cash flow equivalents of their significant balance sheet movements – e.g. the large movements of Sales of investments in subsidiary companies in FY10, FY12, FY15 and FY21 were attributable to the disposals of their DSG, Singer, BAUTO and PGMC subsidiaries respectively – all of which have been extensively covered in my earlier Part 3b report. If you wish, you may read more about them by clicking the link below:
However, a few of these highlighted items do still warrant a deeper look. For instance, I wasn’t really able to trace their outsized FY20 cash outflows of nearly RM 2 bil from Sales of Property, plant and equipment back to their disposals of PPE. As we can see in the corresponding notes of their FY20 annual report below, disposals of PPE in FY20 only amounted to RM 917 mil - just under half of the aforementioned FY20 Sales of Property, plant and equipment of RM 2 bil reported in their CFS:
To be clear, this is definitely a red flag to me, and I fully intend to solve it later. However, because I wasn’t able to dig further into this matter at this point in time, we shall simply leave this loose end untied for now and move on. I’ll probably leave an update below if I find out more about it later.
Another point which I think could also use some clarification are their outsized FY16 cash outflows of slightly above RM 1 bil from Sales of investment properties and other non-current assets. As you can see from Note 6 Investment Properties of their FY16 annual report below, you’ll notice that no large disposals of Investment Properties took place during either FY15 or FY16 - which could have explained this Investing cash outflow of RM 1 bil:
However, I have a feeling that this missing amount is very likely attributable to the reduction in their BAUTO stake - which took place in FY15 and was mostly recognized in FY16 (as we discussed in my Part 3b report). We can somewhat trace this back to the significant increase in their Non-current assets classified as held for sale in FY16 - which subsequently evaporated in FY17, as we can see in the screenshot of the B/S below:
Aside from the above two, the other highlighted areas of concern in this section are relatively straightforward. Let’s move on to the next section.
Disposal of Financial Assets
As we can see from my financial model, there were no yellow highlights in this section, as they mostly composed of negligible amounts of periodic Sales of other investments.
CAPEX
Once again, the materially large cash outflows under the CAPEX section can be very straightforwardly attributed to the acquisitions which took place in those financial years, as I’ve explained in Part 3b. Only the three highlighted amounts in FY15 and FY16 represented new information that we haven’t seen before in my earlier reports – these were mainly related to their Acquisition of property, plant and equipment and Acquisition of investments in subsidiary companies, the notes of which we can see below:
For their Acquisition of property, plant and equipment, we can see above that these were mostly related to additions to their Capital work-in-progress and additions to Plant and equipment resulting from acquisition of subsidiaries. The latter amounts are likely related to their consolidation of REDTONE as a subsidiary of BJCORP in FY15.
With regards to the former large Capital work-in-progress amounts which took place in both FY15 and FY16, I’m wasn’t particularly able to trace the source of these amounts - as there isn’t any additional disclosure around them. However, there was a notable deduction from Capital work-in-progress in FY16 of RM 578 mil attributable to Reclassification to disposal groups.
Since these amounts appeared to be subsequently disposed off in large sums, they could have been related to PPE used in property development activities - e.g. CAPEX involved in expansion work incurred under the China GMOC asset, immediately prior to its disposal in FY16 and reclassification to NCA held for sale (which you can read more about in my Part 3b report).
To be clear, I’m not 100% sure that these amounts were related to the China GMOC asset - but that’s where my head immediately went while trying to reconcile these Capital work-in-progress amounts between their Balance Sheet and Cash Flow Statement. Anyway, you can read more about the enterprise surrounding the China GMOC asset in my Part 3b report if you’d like more detail on it.
Purchases of financial assets, Interest received, & Dividends received
There isn’t anything particular outstanding in either of these 3 sections under BJCORP’s historical Investing Cash Flows. There were a few materially large amounts involving the acquisition of treasury shares and business operations, but these could easily be traced back to the corporate exercises we discussed earlier.
Both Interest received and Dividends received by BJCORP over the past half-decade mostly invovled negligible amounts, so we’ll just leave it at that.
Others
Once again, there also isn’t much to discuss regarding this Others section under their historical Investing Cash Flows. There was one notable large Net repayment from joint ventures in FY19, and another large Other receipts/(payments) arising from investments in FY17 - but there’s also not much to discuss here. These were just regular redemptions of investments which were made in earlier years.
The one outstanding item in this Others section was the Proceeds from settlement of surrendering certain assets and lease interests to related authorities of RM 218 mil in FY17. For the longest time, there was very little disclosure over this super-suspicious item in their annual reports - and to be frank, the description of the line item itself sounds ultra-sketchy.
Luckily, we were finally given a detailed explanation concerning this matter in their latest FY21 annual reports - as we can see in the screenshots of its notes below:
I wasn’t able to find out too much about this “Amat Muhibah Tax Dispute” from 3rd party sources (i.e. Google) - which apparently involved a disagreement over the tax treatment of some asset that was seized by the authorities for some reason. Regardless, the actual financial impact from this development was negligible, so we can afford to not dig too deeply into this.
Financing Cash Flows
Remember how I was going on and on throughout the entirety of my Part 3a, Part 3b and Part 3c reports about how there was some sort of mysterious enigma hidden amidst BJCORP’s historical CFS - which would singlehandedly explain why their historical profit and cash flow performance over the past half-decade has been so weak? Well, you can stop holding your breath now - as we’ve finally reached this part of the analysis.
Just to recap, we saw in Part 3a how BJCORP’s historical P&L performance since 2014 had been significantly impacted by recurring “one-time” Impairments of Goodwill and Gain on Disposals of subsidiaries and associate companies. Subsequently, we also saw in Part 3b how BJCORP held consistently outsized levels of Assets of disposal group/Non-current assets classified as held for sale on their Balance Sheet since 2015. You can review these figures in their respective reports, by clicking the links below:
Finally, this Part 3c report reveals the final piece of the puzzle which aggregates the entirety of their business activity over the past half-decade - and provides insight into what BJCORP’s objectives over the past half-decade has been. This one reason ties together everything that we’ve learned so far from BJCORP’s historical P&L, BS and CFS over the past 5 years into just one conclusion - which implies that fixing this one matter could potentially provide the antidote to all of BJCORP’s performance woes over the past 10 years; and is perhaps already being addressed by BJCORP’s new CEO even as we speak, given its potency to future profits.
Excited yet? Alright, let’s close the curtains on this 10-year three statement analysis of BJCORP with a bang.
Net Debt Service
As you’ll observe from the table above, BJCORP has been going on a debt repayment spree since 2016 - redeeming an average of ~8% of their debt stock annually. This is in stark contrast to the first half-decade of the 2010’s - where their debt stock increased by an average of +14% annually. Keep in mind that there hasn’t been much new share issuance throughout the past 10 years - which means that most of their Financing cash flows over that period could be attributable to debt.
There were two main highlights in the above tables - namely the massive levels of net debt repayments exceeding RM 800 mil in both FY17 (-12%) and FY20 (-18%). These net reductions in debt coincided with the large reduction in the stakes of their BAUTO and PCMG subsidiaries respectively - so it’s likely that these were just repayments of debt attributed to their earlier acquisitions of these subsidiaries.
If you’ve been observant, this consistent pattern of net debt repayment throughout the past half-decade has also coincided with three major developments - which as we’ve covered in our earlier reports, can be observed from their historical P&L, B/S and CFS respectively below:
large Impairments of Goodwill & Gains on Disposals on subsidiary and associate companies since 2015 (Part 3a);
consistently high levels of Assets of disposal group/Non-current assets classified as held for sale since 2015 (Part 3b);
no dividends paid to BJCORP’s own shareholders since 2017 (Part 3c).
This actually ties together everything we’ve seen in their three statements over the past 5 years into a neat little bow. The reason behind their large and recurring Impairments of Goodwill and Gains on disposals of subsidiary and associate companies since 2015 likely resulted from their regular Disposals of subsidiary and associate companies over that same period; while the lack of Dividends paid to BJCORP’s own shareholders could have been due to them reallocating those cash flows to the significant Net debt repayments attributable to those disposals.
In one fell swoop, we’ve managed to reduce the entirety of the past 10 years of BJCORP’s financial statements into one single conclusion - the reason why their profits over the past half-decade haven’t been performing, is simply because they have been focused on downsizing and paring down debt rather than growing the business.
As we can infer from observing this interlocking pattern of accounting double entries between their P&L, B/S and CFS over the past half-decade, BJCORP has likely been spending most of the past 5 years focused on disposing its businesses (i.e. downsizing) - rather than focused on growing its business operations. As ordinary as such reverse roll-up activity might be for a conglomerate, it is still shocking to see the staggering amounts of Assets of disposal group/Non-current assets classified as held for sale since 2015. These are consistently mammoth numbers - an average of over RM 500 mil of disposals per year, which translates to disposals equivalent to ~5% of their Total Equity per annum.
This expedited disposal behavior might also shed some light behind their super-disappointing profit margin and OCF performance over the past 5 years (which we’ve explored in Part 3a). On top of not giving their subsidiary managers good KPIs (which we’ve discussed in Part 1), could it also be possible that BJCORP’s management - prior to the recent entrance of their new CEO Jalil - simply wasn’t prioritizing the improvement of operational performance? If so, it might be an easy lever for Jalil to pull in order to right the ship in the context of improving BJCORP’s future profitability.
As hard as I tried though, I couldn’t really figure out what their possible motivations for downsizing the conglomerate and subsequently paring down debt in such a swift fashion could be. There wasn’t really any particular financial inflection point around the FY15 period which might have necessitated a rapid disposal of Assets; nor was there any catalyst which might have required a rapid reduction in their Liabilities. Sure, the Gross D/E ratio at the time was high at 70% - but it’s not like they were facing some sort of existential crisis in 2015.
Edit: a kind reader shared this old news article about BJCORP from 2018 <click>, which alludes to the same conclusion that I arrived at above - that BJCORP had been focused on restructuring as early as 2018, involving the sale of assets and the privatization of two of their Berjaya listed companies (i.e. SEM and BJLAND).
Nor were there any significant corporate developments around that time period which might have informed a shift in the corporate ethos - e.g. an upheaval in the composition of their management, board or shareholders. And neither have they taken any action since then with respect to their improved leveraged situation (ex-Lease Liabilities) - so it’s unlikely that their downsizing was part of some grand master plan either. It’s like management just woke up one day in 2015 and said yep, it’s a good day to start paying down our debt.
Regardless of their motivations, the fact remains that once we understand the aforementioned possible cause behind BJCORP’s consistent Net Losses over the past half-decade, it starts to look like a much easier problem to fix. In contrast to the popular notion that BJCORP is a business conglomerate in secular decline, it seems like all it needs in order to recover to baseline industry standard performance is a reallocation of priorities. This can be done in terms of setting the right incentives (i.e. KPIs) and optimal capital allocation - which as I’ve described in Part 3a, resembles less of a “turnaround” and more of a “spring cleaning”.
If their new CEO Jalil can do that - which I feel extremely comfortable that he can (as these aren’t exactly tall orders) - I have ample confidence that BJCORP’s post-turnaround profit performance can recover to average baseline levels… and that its share price performance should soon follow in lockstep.
Others
As with some of the earlier sections, there’s just not much to discuss about the Others section under their historical Financing Cash Flows. Some of them might be relatively large amounts, but they’re all pretty straightforward stuff and don’t raise any red flags.
Summary
With that, we’ve finally brought this bottomless pit of BJCORP’s three statement analysis over the past 10 years to a close. Let’s summarize everything we’ve learned so far in this Part 3c report:
Operating Cash Flows
BJCORP’s OCF has always been positive; however FCF has been consistently negative for most of the past decade. The main reason for their consistently negative FCFs can be traced back to poor profit margins - whether due to disappointing top-line performance or poor operating cost control. Fortunately, this is a turnaround thesis - hence their past performance isn’t necessarily indicative of future performance.
Their Cash Conversion Cycle (CCC) has actually been consistently healthy, largely owing to an above-average levels of Payable Days - which themselves were likely contributed by their BJTOTO and BJFOOD subsidiaries.
Their Cash Conversion Ratio is very volatile - however, this can be mainly attributed to their historical Net Profits being volatile (due to recurring Impairments and Gain on disposals), rather than a deviation between OCF and NP trends.
Investing Cash Flows
Growth CAPEX / Total CAPEX was fairly unsurprising - however, we saw several negative instances of this metric, which implies that they hadn’t reinvested enough maintenance CAPEX to sufficiently maintain the business’s productive capacity in those years.
Most of their material Disposal of operating assets and CAPEX activity over the past decade were related to the corporate exercises that we saw in Part 3b - and are nothing to worry about.
There is one quirky line item called Proceeds from settlement of surrendering certain assets and lease interests to related authorities, amounting to RM 218 mil in FY17. These related to some sort of mysterious corporate development called the “Amat Muhibah Tax Dispute” - luckily, the amounts involved are immaterial.
Financing Cash Flows
BJCORP has been consistently repaying large amounts of debt since 2016 - with average Net debt repayments of RM 500 mil per annum over the past 5 years. This amounts to a staggering debt redemption of 8% of Total Debt (or 5% of Total Equity) per year on average.
This observation allows us guess at what management’s objectives might have been over the past half-decade - which pulls together everything we’ve learned so far from their historical P&L, B/S and CFS of the past 5 years, namely:
high levels of Impairments of Goodwill and Gains on Disposals on subsidiary and associate companies since 2015;
consistently large amounts of Assets of disposal group/Non-current assets classified as held for sale since 2015;
the occasional lack of reinvestment to maintain productive capacity (i.e. Growth CAPEX as % of Total CAPEX);
no Dividends paid to its own shareholders since 2017.
The natural inference that we could draw from these observations is that BJCORP’s management (prior to their new CEO’s entrance this year) had been mainly prioritizing debt repayment over the past half-decade - which appears to have involved downsizing, rather than trying to grow the business.
This might explain why BJCORP’s operational performance over that period was so middling - and perhaps more importantly, implies that their poor historical performance was due to an active choice by management to downsize and reduce debt; rather than due to the business being in uncontrollable secular decline.
If so, it could also provide their new CEO with an easy lever to pull in order to quickly reverse their consistently negative Net Profit performance over the past half-decade - by simply implementing a reallocation of priorities at the conglomerate, both in terms of setting incentives (i.e. KPIs) as well as optimal capital allocation (which we’ve explored in Part 1).
BJCORP has not been paying dividends to its own shareholders for the past half-decade; most of its Dividends paid occurred at the Non-controlling interest level (i.e. dividends paid by their subsidiaries to their shareholders).
Next week, we will at long last be wrapping up this month-long deep-dive analysis of BJCORP in Part 4 - and finally explore how BJCORP might be able to achieve their much-vaunted post-turnaround 3,000% upside.
Now that we have comprehensively explored BJCORP’s financial past, we’re ready to look towards the future - and try to identify what kind of exciting new adventures might await them. In my upcoming Part 4 report, we will do a similar but abridged version of the three statement analysis for all of BJCORP’s relevant Berjaya listed subsidiaries - which together with Part 2, will provide operational context for what their current business capabilities are today; and how they can best reorganize their business assets to exploit the opportunities lying dormant in the Wild West of the post-pandemic Digital New World.
By this time next week, we will at long last gather the entire comprehensive point-of-view that we’ve developed on BJCORP over the past few weeks, transmute that knowledge, and try and synthesize a realistic investment thesis where BJCORP could potentially yield its mythical 3,000% upside (that we’ve discussed in Part 1).
Get ready… because it’s Value Investing Time!
Refresh your memory by reading our earlier BJCORP research reports!
BJCORP Links:
Company’s historical financials on TIKR (free sign-up required)
BJCORP’s Listed Companies’ Information & Financials:
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