Saturday, 12 December 2015

Ajinomoto (2)

How Did They End Up With So Much Cash ?

Publish date: Fri, 4 Dec 2015, 12:34 PM 

1. Introduction

As mentioned in Part 1, Ajinomoto has net assets of RM290 mil and RM145 mil of them is cash (50% of net assets). How did they manage to build up such a huge cash pile ?

The question is actually very easy to answer. All we need to do is to study the group's cashflow over past few years.

2. Historical Cashflow

The table below sets out Ajinomoto's cashflow over past 6 years.

The table is actually very easy to understand. There is not much that I need to add on.

Basically, the group generated operating cash flow of approximately RM36 mil per annum.

Very little is tied down on working capital (only approximately RM2 mil per annum on average). This is actually a very important and strong point. It indicates that the group is well established and has certain bargaining power when come to dealing with suppliers and customers.

The group spent approximately RM13 mil per annum on plant and machineries. As depreciation is more or less the same at RM12 mil (average), the capex is very likely for wear and tear replacement purpose. This is consistent with the business model of a matured company, which does not need to invest huge amount of capital to generate growth.

After meeting capex requirement, the group generated net cashflow of approximately RM23.5 mil per annum, out of which RM10.2 mil was paid out to shareholders as dividend. Payout ratio is therefore approximately 40%.

The remaining 60% of free cashflow of approximately RM13 mil per annum was kept by the company. Over the years, this consistent cash inflow balloon the company's cash holding from approximately RM50 mil to more than RM145 mil.

The cash build up is likely to accelerate going forward as the group seemed to be entering a golden era whereby its revenue and profit margin is expanding at unprecedented rate (due to a whole host of favorable factors. Please refer to Part 1 for more details).

Due to improvement in fundamentals, there is a strong likelihood of higher dividend payout in the immediate future.

We will just have to wait and see.

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