Author: Icon8888 | Publish date: Fri, 18 Dec 2015, 03:12 PM
(a) Comintel is principally involved in contract manufacturing services, specializing in Radio Frequency engineering products.
(b) Its manufacturing division accounted for 96% of group revenue. According to annual report, entire 100% of its revenue is denominated in US Dollar.
(c) Yesterday, Comintel announced its October 2015 quarterly result. EPS came in at 3.47 sen.Based on latest share price of 52 sen and annualised EPS of 14 sen, PER is only 3.7 times.
(d) Earnings explosion was due to profit margin expansion caused by strong US Dollars. In my opinion, USD will remain strong over an extended period of time. The group's strong earning should be sustainable.
(e) By applying a PER of 10 times, fair value should be RM1.40, a further upside of 170%.
1. Background Information
Comintel is listed on the Main Market of Bursa Malaysia. It has 4 major divisions. However, the manufacturing division dominates both revenue (96%) and net profit (100%).
Comintel is a contract manufacturer, just like VS Industry. It specializes in manufacturing of Radio Frequency engineering products.
It is a pure exporter with 100% of its manufacturing revenue denominated in US Dollars (please refer below).
2. Historical Profitability
The table below sets out Comintel's past few quarters P&L :
Key observations :-
(a) The group has not been performing well in the past. For example, in October 2014 quarter, the Group reported net profit of RM0.5 mil only. In that quarter, USD : RM exchange rate was 3.222.
(b) However, things improved dramatically in calender year 2015. In April 2015 quarter, net profit ballooned to RM1.9 mil despite flattish revenue. During that quarter, USD : RM exchange rate was 3.637.
(c) In the latest October 2015 quarter, net profit literally exploded. Backed by strong USD : RM exchange rate of 4.206, the group reported an astounding net profit of RM4.9 mil.
Y-o-y, revenue in US Dollar term has not grown at all (USD26.1 mil in October 2015 quarter vs USD26 mil in October 2014 quarter). However, the strengtheing of USD from 3.222 to 4.206 caused net profit to grow from RM0.5 mil to RM4.9 mil.
These are pure operating profit, not caused by Forex gain or any other exceptional items. As a matter of fact, the group incurred forex loss of RM1.4 mil in latest quarter.
The company is positive about its prospects going forward :-
3. Balance Sheets
The group has net assets of RM105 mil, loans of RM96.2 mil and cash of RM42.4 mil. Net gearing is 0.51 times.
I am totally not concerned about the Group's gearing. Some of the loans were drawn down to finance its new green energy division and they are backed by TNB offtake. Others are for working capital purposes.
The group's earnings are strong and capex requirement is low. They shouldn't have problem servicing their financial obligations.
4. Concluding Remarks
(a) The group has other divisons such as green energy, ICT and defense maintenance. However, they accounted for very small portion of the group's revenue and profitability.
The Group is essentially a contract manufacturer, same as VS Industry.
(b) This stock is UNDERVALUED BEYOND DOUBT. If you do not have the courage and the wisdom to take position at current price of 52 sen, you probably shouldn't be in the market.