Latest / Investor Exchange / The FY2025 Profit Puzzle At Envictus International Revealed

Transcript

The FY2025 Profit Puzzle At Envictus International Revealed · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:07
  Welcome back to the Deep Dive. Today, we are digging into a really interesting one.
• 0:13
  Invictus International Holdings Limited, that's EIHL, and their full year 2025 results.
• 0:20
  And this one really needs a deep dive, because if you just glance at the numbers,
• 0:23
  they tell two completely different, almost opposite stories.
• 0:26
  That's our mission today, to solve that contradiction. So here's the hook,
• 0:29
  the number that just jumps off the page.
• 0:32
  EIHL had really robust top-line growth.
• 0:35
  I mean, revenue shot up 8.4% to almost 745 million ringgit. Yeah, RM 744.6 million.
• 0:44
  And for an F&B operator of their size, that's a very healthy number.
• 0:48
  It shows the core business is working. Exactly. But then you scroll down and
• 0:51
  the net attributable profit just plummeted down a staggering 40.3%.
• 0:56
  Down to RM 30.2 million. It's corporate whiplash.
• 1:00
  How do you sell more stuff but make almost half as much profit?
• 1:03
  That usually screams operational failure. Or, and this is the case here,
• 1:06
  it signals that there's a lot of noise in the numbers.
• 1:08
  EIHL is a big player. You know, they've got three main parts to their business.
• 1:11
  There's food services, which is Texas chicken and San Francisco coffee.
• 1:15
  The ones people know. Right. Then dairies.
• 1:18
  With brands like Sujohan and their trading and frozen food arm,
• 1:22
  Pock Brothers, our job is to separate that noise from the real signal of business health.
• 1:28
  So, okay, let's unpack this. All right, let's start with the good news then. The operations.
• 1:32
  That 8.4% revenue growth was called broad-based. So where did that momentum
• 1:37
  actually come from? It was really a success story across the board.
• 1:40
  The biggest piece of the pie, food services, it delivered a really strong 7.8% increase.
• 1:47
  Okay, so they're the heavyweight. For sure. They brought in RM460.1 million,
• 1:52
  but the fastest growing part, percentage-wise.
• 1:54
  Yeah, where's the real acceleration coming from? That would be their dairies
• 1:57
  division. They posted a fantastic 12.0% jump in revenue.
• 2:02
  Wow, 12%. Yeah, up to RM144.7 million.
• 2:05
  And even the trading and frozen division, POC Brothers, they saw a respectable
• 2:08
  growth, too, up 6.9%. So, you know, it wasn't just one lucky break.
• 2:13
  Okay, so the top line is solid.
• 2:15
  But what about margins? In a year of crazy inflation, do they have to slash
• 2:20
  prices to get those sales?
• 2:21
  That is the critical question. And this is where management really looks good.
• 2:25
  Their gross profit margin held up. It stayed healthy at 45.1 percent,
• 2:30
  actually ticked up a tiny bit.
• 2:32
  So they managed to pass on their costs or find efficiencies?
• 2:35
  Exactly. They navigated all of it. Higher ingredient costs, wage hikes,
• 2:40
  new taxes, without killing their fundamental profitability. That's impressive.
• 2:45
  So if the gross margin is fine, let's look at a cleaner metric.
• 2:48
  Yeah. What does the adjusted EBITDA tell us?
• 2:51
  Now, here's where it gets really interesting. If you look at adjusted EBITDA,
• 2:55
  so that's earnings before all the accounting noise and crucially,
• 2:57
  excluding those big one off gains from last year, it actually rose.
• 3:01
  It went up. It did. Up 4.1 percent to RM104.4 million.
• 3:06
  So the core day to day business was actually getting more profitable.
• 3:10
  Wait, I have to challenge that a little.
• 3:11
  EBITDA is up 4.1%, but we know Texas Chicken opened, what, six new restaurants?
• 3:17
  How much of that is just new stores selling more chicken versus the existing
• 3:20
  stores actually getting better?
• 3:21
  That's a fair question, a really critical one, and the analysis suggests it's a mix of both.
• 3:27
  Management specifically called out healthy comparable store sales.
• 3:31
  You don't hold your gross margin at 45% while costs are rising unless your existing
• 3:35
  operations are getting more efficient.
• 3:37
  So yes, new outlets add volume, but that margin stability proves the underlying
• 3:41
  business got stronger too.
• 3:43
  All right, that makes sense. The foundation seems solid, so now we have to solve the big puzzle.
• 3:47
  That 40.3% drop in net profit, what were the specific things that made last
• 3:52
  year, FY 2024, look so good on paper?
• 3:56
  There were two seismic events, both tied to FY 2024's results.
• 4:00
  The first one is a massive drop in what's called other operating income.
• 4:04
  It fell by, get this, 74.4%. Whoa, from what to what? From RM28.5 million down to just RM7.3 million.
• 4:14
  That's a huge hole in the balance sheet. What was that income last year that just vanished?
• 4:18
  Think of it like this. In FY 2024, the company found an old valuable painting
• 4:22
  in the attic and sold it. A huge one-time cash injection.
• 4:25
  Specifically, they had a one-off net gain of about RM13.9 million from selling off some assets.
• 4:32
  The Pulau Inda facility and its subsidiary...
• 4:35
  That profit goes straight to the bottom line. But you can only sell that painting once.
• 4:39
  So FY 2024 was artificially inflated by selling off some of the family silver? Pretty much.
• 4:44
  And on top of that, they also had a nice foreign currency gain of RM 6.5 million in 2024.
• 4:51
  You take away nearly 20 million in one-off income, and of course the next year's
• 4:56
  profit is going to look a lot lower.
• 4:58
  Okay, so that explains the bad comparison. But what was the second major headwind?
• 5:03
  The one that actually hurt this year's results?
• 5:05
  This is the big one for the future. It was a huge increase in their income tax expense.
• 5:09
  This is where the success of Texas Chicken actually came back to bite them.
• 5:13
  How so? Their tax bill more than triple.
• 5:15
  It jumped 2.6 times, from RM 4.6 million all the way up to RM 17.0 million.
• 5:21
  17 million. Why such a massive jump? It's what you might call a good problem to have with bad optics.
• 5:27
  Texas Chicken, their profit engine, had been using up past tax losses and capital
• 5:32
  allowances to lower its tax bill.
• 5:34
  Well, in FY 2024, they used up the very last of them.
• 5:37
  So in FY 2025, boom, that super profitable division suddenly had to pay a full
• 5:43
  standard corporate tax rate.
• 5:44
  So this is a sign of financial maturity, really. Texas Chicken has graduated.
• 5:49
  It proves the business is structurally
• 5:50
  profitable, even if it hammers the net profit line for a year.
• 5:54
  That's exactly it. And remember, they did all this higher revenue,
• 5:57
  higher adjusted Edita, while juggling all those other cost pressures as the
• 6:02
  CEO mentioned, the SST tax expansion, minimum wage hikes, new electricity tariffs.
• 6:07
  The fact that core operational profits still went up shows some really sharp
• 6:11
  management. OK, so the big picture is clear now. Let's zoom in a bit.
• 6:14
  Did that resilience show up everywhere? We know food services is the main driver,
• 6:18
  but it's got two very different brands inside it.
• 6:21
  It really does. It's a tale of two very different stories.
• 6:23
  On one hand, you have Texas Chicken, the engine.
• 6:26
  Its revenue was up 10.0%, hitting RM429.5 million.
• 6:31
  They added six more restaurants. It is, without a doubt, the star of the show.
• 6:35
  And the other story, San Francisco Coffee.
• 6:38
  The numbers there look pretty bleak. They did.
• 6:40
  SF Coffee is facing a really tough environment.
• 6:44
  Its revenue dropped almost 16% down to RM 30.5 million.
• 6:49
  The reason they gave was intense competition. From who?
• 6:53
  Basically, a flood of new players in the mass market, all offering super low price drinks.
• 6:58
  It's a classic price war. And SFC is trying to be a premium brand in the middle of it.
• 7:04
  That's a tough spot. So how do they plan to fight back?
• 7:07
  They're changing their whole model. They're planning aggressive outlet openings.
• 7:11
  But, and this is the key part, using a new asset light model. Asset light.
• 7:16
  So less capital tied up in each new store. Exactly.
• 7:19
  Less risk. If you're going into a price war, you don't want to have a ton of
• 7:23
  your own money sunk into expensive real estate and equipment for a store that
• 7:26
  might not be very profitable.
• 7:27
  It's a defensive move to make their pricing more competitive. Makes sense.
• 7:31
  Let's move over to Dairy's. That was the division with that amazing 12% revenue growth.
• 7:35
  Dairy's is the other big success story this year. Their profit before TechStir,
• 7:39
  just the profit from that segment, it doubled.
• 7:41
  Jumped from RM 2.4 million to RM 4.6 million. Doubled. Okay,
• 7:45
  what drove that? Two things.
• 7:47
  First, they just got into more places.
• 7:49
  They gained traction in East Malaysia and, very impressively,
• 7:53
  got their products listed in 677 new retail outlets in West Malaysia.
• 8:00
  It was mainly through a major DIY chain. Think about that. Getting your condensed
• 8:04
  milk into a huge hardware and home goods store.
• 8:07
  That's a massive increase in visibility and volume overnight.
• 8:11
  And what about costs? I imagine dairies is really sensitive to global commodity
• 8:16
  prices. Oh, absolutely.
• 8:17
  And they caught a break. The price of one of their key ingredients,
• 8:20
  sugar, softened globally, that gave their margins a really nice tailwind.
• 8:24
  And they needed it because the cost of milk powder, their other main input, stayed high. Got it.
• 8:29
  And to round it out, the trading and frozen division, Pock Brothers.
• 8:32
  Their 6.9% growth was mostly tied to the hospitality sector's recovery.
• 8:37
  As tourism came back, so did sales to hotels and restaurants.
• 8:40
  They also kept things fresh with new products, like premium Indian beef.
• 8:44
  So the group seems to have a good handle on things.
• 8:47
  Looking ahead to FY2026, what are the concrete plans, especially now that they're
• 8:52
  facing that full tax bill?
• 8:53
  They're basically doubling down on what works.
• 8:56
  For Texas Chicken, it's all about expansion.
• 8:58
  They're planning 17 new restaurants, including their very first outlets in Saba.
• 9:03
  They need that volume growth to offset the higher tax. And the high-risk plan
• 9:07
  for San Francisco coffee. For SFC, it's about survival and trying to regain share.
• 9:13
  So more product innovation, better digital marketing. And as we said,
• 9:17
  pushing that asset light model for new openings, it's their main weapon against
• 9:21
  the low cost competition.
• 9:23
  What about external factors?
• 9:25
  Anything that could give them a boost, especially for that trading division
• 9:28
  that's so reliant on imports? Yes.
• 9:30
  And this is a really interesting strategic point. Polk Brothers is perfectly
• 9:34
  positioned to benefit from the new Johor Singapore special economic zone, the SEZ.
• 9:40
  If that SEZ does what it's supposed to, move out trade and logistics between
• 9:45
  Malaysia and Singapore, it could be a huge help for them in managing those high
• 9:49
  import and shipping costs.
• 9:51
  It's a potential tailwind. If we connect this to the bigger picture,
• 9:54
  it sounds like they'll need all the help they can get. The macroeconomic pressures aren't going away.
• 9:58
  No, they're not. They're still facing inflation, higher labor and utility costs,
• 10:03
  the full effect of the SST.
• 10:05
  Those are persistent headwinds. Is there any potential relief on the horizon?
• 10:09
  The one thing they're hoping for is a stronger ringgit. If the Malaysian currency
• 10:14
  strengthens, especially against the U.S.
• 10:16
  Dollar, that would immediately lower the cost of their imported raw materials.
• 10:21
  Things like milk powder and beef, that would provide some very welcome margin relief.
• 10:25
  So let's bring it all back home for you, the listener.
• 10:28
  The core takeaway here is that EIHL's actual business, the day-to-day operation,
• 10:33
  is growing and resilient.
• 10:35
  We saw that in the revenue numbers and that 4.1% jump in adjusted EBITDA.
• 10:39
  Right. The huge 40% drop in net profit was really just a financial reporting issue.
• 10:43
  It came from two things, not repeating those big asset sales from last year,
• 10:47
  and second, their star performer, Texas Chicken, finally starting to pay its full share of taxes.
• 10:53
  It's a perfect example of why you have to look beyond the headline number.
• 10:56
  The underlying business is strong, which is what you really want to see,
• 11:00
  even if the net profit figure looks, well, temporarily ugly.
• 11:03
  Exactly. You have to focus on those adjusted operational metrics to see the
• 11:08
  true health of the company.
• 11:09
  A really compelling story. So here's a final thought for you to mull over.
• 11:11
  The group is clearly betting on external economic drivers,
• 11:15
  things like the tourism recovery and the strategic boost from that new Johor
• 11:19
  Singapore SEZ to help offset the persistent rise in their internal costs like labor and utilities.
• 11:25
  So the question is, which force will win out in FY2026, their strategic expansion
• 11:31
  or the unavoidable squeeze of rising domestic costs?