Saturday, 12 December 2015

Thong Guan (5) - Vomiting Profit

Author: Icon8888   |   Publish date: Thu, 19 Nov 2015, 09:25 PM

1. Fantastic Results

Thong Guan released its September 2015 quarterly report this evening. The result is excellent.

The group reported net profit of RM11.3 mil despite net forex losses of RM3.0 mil and provision for doubtful debts amounting to RM2.1 mil.

Based on 158 mil shares (upon full conversion of ICULS), fully diluted EPS is 7.1 sen.

(Note : Even though Thong Guan's ICULS are only convertible by year 2, I factor them in when come to calculating EPS. This is because the ICULS are not redeemable. Irregardless of what price Thong Guan shares will be trading, all of the ICULS will be mandatorily converted upon maturity.
As for Warrants, I don't take them into consideration when calculating fully diluted EPS. This is because it is not 100% certain that the Warrants will be exercised on expiry (must be in the money in order to induce shareholders to exercise). I believe this is consistent with how public documents are drafted)

The strong results is a pleasant surprise, but not unanticipated. Thong Guan's Managing Director has long been telling the investing public that the group is a beneficiary of weak Ringgit. 

As can be seen in table above, pretax margin (without forex and other exceptional items) experienced significant expansion. In the previous two quarters, PBT margin was approximately 5%. In this latest quarter, it has increased to 9.8%. This is the main reason for the strong earnings growth.

2. Balance Sheets Remained Healthy

As at 30 September 2015, the group has loans of RM63.8 mil and cash of RM85.1 mil. As such, net cash is RM21.3 mil. Net assets is RM378 mil.

Its US Dollar denominated loan remained low at RM32 mil (previous quarter RM33 mil). 

3. Target Price ?

As mentioned above, the group reported net profit of RM11.3 mil in the latest quarter.
Based on annualised net profit of RM45.2 mil and 158 mil shares, EPS could potentially be 28.4 sen.
Based on PER of 10 times, fair value would be RM2.84.

However, the latest quarter included doubtful debts of RM2.1 mil. If this item is absent in the future, net profit could potentially go up to RM13.4 mil per quarter.
Based on annualized net profit of RM53.6 mil and 158 mil shares, EPS could potentially be 33.9 sen.
Based on PER of 10 times, fair value would be RM3.39.

(please note : to be conservative, I have assumed that the net forex loss of RM3 mil will continue in the subsequent quarters)

This is not the end of the story. The latest quarter result has not factored in contribution from the group's new 33-layer-nanotech stretch film production lines, which is expected to be commissioned by end of 2015. In addition, the group is still in the midst of installing more cling wrap lines (the capex programme will go all the way into 2016). These additional productions, when come onstream, can easily add another few million Ringgit of net profit to the group.

Will we be lucky enough to see net profit of RM56.6 mil by end 2016 ? (plese refer table below)

Based on potential EPS of 35.8 sen and PER of 10 times, can the company's share price reach RM3.58 by end 2016 ? Only time can tell. 

The following is the company's comments on its prospects :-

4. Concluding Remarks

I first bought Thong Guan in March 2015 (please refer below). 

After I bought the stock, the company reported another two quarters of lousy results and share price drifted lower and lower....

After waiting until my beard is long, the company finally came up with a decent set of result.

Am I going to take profit tomorrow ? No no no. I will follow what our respected blogger said, let the profit run...

No RM3.50 no sell !!! 

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