Please ensure Javascript is enabled for purposes of website accessibility

Why You Should Buy Lam Soon Shares Right Now

By Motley Fool Staff - Oct 10, 2019 at 11:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Lam Soon's shares certainly look attractive amid the market volatility in Hong Kong.

Lam Soon (Hong Kong) Limited (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-recognized products from Lam Soon include Golden Statue, AXE, and Labor.

Woman and child meal prepping.

Image Source: Getty Images.

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 Labor products. That speaks volumes about the brands' pricing powers.

In the Hong Kong dish washing 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.

Looking ahead

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.

Undervalued gem

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.

A version of this article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lam Soon (Hong Kong) Limited Stock Quote
Lam Soon (Hong Kong) Limited
411

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
394%
 
S&P 500 Returns
127%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.