VS Q1 2020 Review

Brighter Performance ahead!

For the current quarter under review, the Group recorded a revenue of RM1,034.6 million, a decrease of RM38.3 million from RM1,072,931 million as compared to the previous year corresponding quarter, largely due to lower contribution from China. Profit before tax, meanwhile, increased 40.5% or RM18.4 million to RM63.7 million over the same period.

The report mentioned that, the improved earnings for the current quarter was mainly attributable to much smaller losses from the operations in China following restructuring and streamlining of operations by adopting an asset-light and lower-cost model, coupled with the absence of loss on disposal of a subsidiary amounting to RM5.4 million recognized in the preceding year corresponding quarter.

Malaysia segment posted a marginal decrease in revenue of RM4.2 million in the current quarter by comparison to previous year corresponding quarter. In tandem with the decrease in revenue, profit before tax dropped by RM1.3 million over the preceding year corresponding quarter. Profit before tax margin was relatively stable. 

Indonesia segment recorded profit before tax of RM1.1 million for the quarter under review as compared to loss before tax of RM1.3 million in the preceding year corresponding quarter mainly due to better product sales mix. 

China segment recorded a lower revenue for the current quarter as a result of lower sale orders completed. Losses narrowed significantly during the quarter under review due to lower operating expenses incurred following streamlining activities and adopting an asset light model with lower gearing structure. Additionally, there was also the absence of loss on disposal of a subsidiary amounting to RM5.4 million recognized in the preceding year corresponding quarter. 

For the current quarter under review, the Group recorded a higher profit before tax of RM63.7 million as compared to RM48.9 million in the preceding quarter, mainly attributable to the absence of impairment loss on plant and equipment of RM22.1 million provided by the operations in China as well as refund of investment cost of RM7.9 million from an associate. 

Referring to the latest asset and liabilities statement, trade and other receivables has increased 12% to RM1,116.936 million. Higher trade receivables is not good to company outlook. It will cause management to initiate impairment losses or write off on those payment that unable to collect back which further affect the financial performance. 

Loan and borrowing has slightly increased. Trade and other payables have reduced. 

Sales order has picking up lately, after the decline in sales orders from key customers in Indonesia segment during FY19, the management has bringing in more new sales orders to fill up the capacity. Hence, the better performance in Indonesia segment is mainly due to better product sales mix as mentioned earlier.  

Over china, the business is still remained challenging. Sales orders have contracted since early FY19 until now, but the losses in profit has narrowed down. 

Comment:

I forecast that FY2020 sales orders will remain stable and similar to FY19 performance as the overall consumer and business sentiments is lacklustre. However, a good point we can look forward in this financial year is the absence of impairment loss in china segment. 

PBT of FY19 is RM174.006 million. After excluding the impairment loss of RM5.4million recoginized in Q1 FY19 and RM22.1million in Q4 FY19, the overall PBT for FY19 should be RM201.506million. The EPS would be 10.07sen. Therefore, I reckon that the cumulative EPS for FY2020 would be similar to 10.07sen. Using PE of 15, the TP should be RM1.51 with curent price of RM1.32(14% upward). 

I will give a buy call for VS due to the coming quarter performance will definitely be better than Q2, 3 and 4 of FY19 with the picking up of sales orders from Indonesia segment.  

Wellcall Q4 2019 Review

Quarter Performance Within Expectation!

Q4 revenue contracted 9% from RM45.561mil to RM41.427mil due to slow down in local market and export market by 31% and 6% respectively compared to preceding year corresponding quarter. According to Inter-pacific research, the local market demand is related to construction sector activities.

We can see that for the full FY19 the sales order from export market has improved by 1.7% compared to FY18. However, Q4 has seen reduction in few regions; Middle east, Europe and Australia/NZ. With the current lackluster global economy and US China trade dispute, I might see a further contraction on future order.

Despite lower revenue earned for the current quarter ended 30 September 2019, the Group able to maintain its fairly consistent PBT of RM13.031 million as compared to PBT of RM13.237 million recorded in the corresponding quarter ended 30 September 2018 mainly due to operational efficiency arising from effective cost management and productivity.

The Group successfully sailed through the volatility of global industrial rubber hose market, recorded revenue of RM170.109 million in current financial year with slight decrease of approximately RM1.015 million (1%) as compared to previous financial year of RM171.124 million. The export and local market contributed approximately 91% and 9% respectively to the Group's annual revenue.
The overall revenue achieved remain fairly consistent with previous financial year was mainly attributable to continuous orders and market demand for industrial rubber hose.

The Group recorded a high PBT of RM49.532 million for the current financial year ended 30 September 2019 as compared to PBT of RM42.844 million recorded in preceeding financial year, representing an improvement of RM6.688 million (16%) increase. Higher PBT achieved was mainly due to constant operational efficiency arising from effective cost management, primarily resulted from productivity.

Full year EPS is within my expectation which I reckon to achieve 7.37sen. Despite the slow down in sales order, Wellcall can still present a higher gross margin after all. This has proven the capability of the management in managing their operation efficiently. Moreover, Management has issued a total of 5.65sen dividend full year which is equivalent to 5.04% DY. 

Healthy cash flow, it is actually a cash cow company. No debt no loan. Moreover, recently Wellcall has invested together with Trelleborg Holding for their JV company. 

Technical analysis

 The latest technical chart has shown that price has broken below the descending triangle trend. Meaning that it will be another wave of sell down. Overall trend is still bearish. I will just monitor at the moment without any buying action. As the new down trend is just initiated. It might partly due to the uncertainty of Wellcall future business order. Although 5% DY and price at 52 weeks low is quite attractive. I will wait for the Q1 FY2020 report to make buying decision. 

Harta Q2 FY2020 Review

Harta reported a 0.7% drop in revenue to RM 709.424 mil for the second qtr from RM 714.244 mil a year ago. Net profit however dropped by 13% to RM 103.867 mil. The reduction in sales revenue was attributed to lower average selling price and higher packaging and natural gas cost have dragged PBT to close lower.

Recall that natural gas prices were revised upwards abruptly by an average of 5.3% in July and glove makers were unable to adjust their ASPs immediately given the short notice. On top of that, the fact that the orders were locked in about three months before the delivery of goods also contributed negatively to the margins.

1.80 sen of dividend declared for 1HFY2020 compared to preceding year has reduced by 18% which is in line with 19% lower of net profit achieved for the 1HFY2020 at RM 197.930 mil compared with RM 245.09 mil for the same period a year ago. (Dividend declaration is interrelated to net profit of the group)

Lower profit before tax is due to lower ASP and higher operating cost (Higher packaging & natural gas cost)

Asset and Liabilities sheet remains healthy. Inventory has slowly picking up for this quarter compared with Q1 FY20 where inventories was amounting at RM 288.072 mil; an increase of 5.2%.

Q1 FY 2020

Q2 FY 2020

From cash flow statement, the group has started to purchase more inventories. I anticipate that Harta will have more orders during year end. Hence, the management started to procure more stocks to cope for their production.

Revenue for the quarter amounted to RM 709.4 million, increased by RM 69.3 million or 10.8%. The higher sales revenue was attributed to higher sales volume for the quarter. Sales volume increased by 12.7%.
Profit before tax for the quarter increased by RM 15.7 million or 12.9% as compared with previous quarter mainly due to increase in sales volume and lower upkeep and labour cost.

Group Prospect:

In line with growing rubber glove demand globally, Hartalega will continue with its NGC capacity expansion plans. Plant 5 of NGC facility was fully commissioned during the quarter. First line of Plant 6 is expected to begin commissioning in the 1st quarter of Year 2020 and will have an annual installed capacity of 4.7 billion pieces. Plant 7 which has commenced construction will cater to small orders focusing more on specialty product and will have an annual installed capacity of 3.4 billion pieces. With the progressive commissioning of Plant 6 and 7, Hartalega’s annual installed capacity is expected to increase from current 36.6 billion to 44.7 billion pieces by FY2022.

While market demand has picked up in the second half of 2019, business environment continues to remain challenging with rising operating cost. In line with this, Hartalega will continue to embark on cost optimization to mitigate potential margin pressure. In addition, Hartalega will also intensify investment into Industry 4.0 technologies to develop automation solutions, IoT technology & AI solutions in order to reduce dependency on manual labour and enhance operation effectiveness.

Hartalega has recently launched its antimicrobial gloves in Shanghai, China. The Company will continue to market the product in other emerging markets as well as working on securing Federal Drug Administration (FDA) approval for the US market. As the new medical product is in its introductory and educational phase, we expect AMG to contribute more significantly in the coming years.

Moving forward, Hartalega remains optimistic of the longer term prospects underpinned by growing demand for rubber gloves, ongoing NGC expansion and potential growth of AMG sales.

Comment:
The recent news that the additional 15% tariff imposed by the US on Chinese-made medical gloves that came into effect on Sept 1 will increase the average selling price, if Harta can capture the demand I reckon that the Q3 FY 20 result will be much more better. Although USD has weaken against RM starting from Oct, this effect will be cushioned by lower material cost for Nitrile glove from crude oil price.

By estimating the sales will grow similar to the increase in inventories also production utilization rate to run at more than 90%. I presume a 5% increase in Q3 FY20 EPS to achieve 3.24sen from preceding quarter and another increase of 2% in Q4 FY20, contributing by the newly commission production lines in plant 6 which will calculate for 3.30sen of EPS.

Hence, overall full year forecast EPS for FY2020 I am looking at a summation of 12.44sen (5.90sen + 3.24sen (F) + 3.30sen (F)), compared to FY 2019 EPS stands at 13.72 sen. Forecast FY20 EPS will be 9.3% lower than preceding FY19 EPS.

By taking worst case scenario P/E 38 during Q4 FY19, the target price for FY 20 full year is RM4.72. Currently, the stock price has moved to RM5.25 (13/11/19) and it is over priced. Comparing to current P/E at 43, the estimated target price is  RM5.35.

Target Price = RM4.72~RM5.35

A hold call for Harta, price is still within target price, without much gap of price improvement, however I still believe in company's prospect as AMG will soon be the next game changer in glove industry.

Homeritz Q4 2019 Review

A disappointing quarter result!

While market sentiment believe Malaysia furniture sectors will likely be benefited from US China trade tension, the group has reported a fall of 16.18% and 34.63% on its revenue and PBT for Q4 FY2019 compared with the corresponding period of the last financial year.
The management explained in qtr report that this was mainly attributed to the decrease in volume sold. The number of container shipped out decreased by 21% and 13% respectively for Q4FY2019 and FY2019.

In FY 2019, the Group achieved a slight increase in net profit of 1.7% to RM27.7 million despite a

11.26% decrease in revenue to RM147.7 million. This was mainly attributed to the strengthening

of USD and lower unit price of certain raw materials purchased compared with FY 2018. 

Homeritz business is very relying on currency earning. Although profit has been improving compared to last year, the reduction in revenue has threaten the company's future prospect. 

The Group’s revenue for the Q4FY2019 decreased by 10.4% as the result of decrease in volume sold. The number of container shipped out decreased by 15% for Q4FY2019 as compared to Q3FY2019.

The PBT for Q4FY2019 decreased by 33.34% compared with Q3FY2019. This was mainly attributed to the lower volume of products sold to customers, which resulted in lower economies of scale and the one off expenses of about RM188K in relation to the Proposed Bonus Warrants incurred in Q4FY2019. 

Gross profit margin has also reduced from 18% (Q3 FY19) to 13% (Q4 FY19), which is the lowest throughout the year. 

Recent news reported Homeritz has managed to secure 8 new sales orders from US customers. The group is planning to expand its production line to cater for those new orders in 3 to 5 years time. 

However, it will not directly reflect in the next financial year performance. Hence, the drop in sales in FY19 has revealed that actions from management team are lagging behind. New sales orders are unable to catch up with the drop/slowdown in sales from existing customers. 

I forecast that gross profit margin will remain weak in coming FY2020 with the TP at RM0.57 with a 10% discount on its EPS (6.35sen) and PE stands at 9. 

Technical Analysis: 

A weak financial report without any good future prospect can hardly maintain the uptrend momentum. Hence, we look at the first support line at RM 0.64 (MA200) and second at RM 0.60 (double bottom) for signals of bearish trend. 

Poh huat Q3 2019 Review

Better financial performance achieved in this quarter!

Pohuat 3Q revenue and PBT has risen by 13.7% & 31.5% respectively compared to preceding year.

EPS rose to 5.09sen from 4.19sen which has improved by 21.5%!

Mentioned by Pohuat in report that Q3 has recorded a higher turnover of RM164.85 million compared to RM145.00 million recorded in the previous year corresponding quarter ended 31 July 2018. The 13.7% year-on-year increase in turnover was mainly driven by the increase in shipment of furniture from both Malaysia and Vietnam operations. In USD term Pohuat has recorded higher sales of USD39.19 million in the current reporting period compared to USD35.43 million in the previous reporting period.

However, other income has reduced drastically from RM1.79 mil in the previous period to RM0.235 mil, decreases by 86%. In this report, the management didn't mentioned on the status of the reduction, based on previous explanation in quarter report where other incomes are mainly contributed by forex. Hence, we can see that in Q3 pohuat is facing forex loss compared to previous quarter, the group was enjoying higher other income.

The group has also mentioned that malaysia operations continued to receive sustained orders for panel-based bedroom sets from customers in the US. During the quarter, Pohuat also received substantial increase in orders from one of major office furniture customers.

Vietnam operation has recorded double digit sales growth of 11.5%, driven mainly by orders from US customers who are diverting more of their orders away from China to other countries in the South East Asia. Orders now comprise a wider range of products to accommodate these US consumers.

In line with the higher turnover, our Malaysia operations recorded higher gross profits of RM16.17 million in the current reporting period compared to RM12.93 million in the previous’ year corresponding period. Gross profit margin also rose from 19.4% to 20.9% due mainly to better absorption of overheads from increased production and shipment of panel-based bedroom sets. Selling and administrative expenses, as a percentage of sales, were broadly similar for the 2 periods under review.

Higher shipment of furniture from our Vietnam plants have similarly resulted in higher gross profits of RM12.20 million in the current period under review compared to RM8.87 million in the previous year corresponding reporting period. During the reporting period under review, we enjoyed better plant utilisation rate and improved labour efficiency. The increase in gross profit margin has resulted in higher profit before tax of RM5.94 million compared to RM3.57 million in the previous year corresponding period

Compared with preceding quarter,

In Malaysia, turnover increased moderately from RM73.50 million in the preceding reporting period to RM77.43 million in the current reporting period. Despite the higher turnover, gross profits drop marginally from RM16.71 million in the preceding reporting period to RM16.17 million. Gross profit margin dropped from 22.7% to 20.9% due mainly to higher material costs, namely particle boards, furniture parts and hardware. Direct labour as a percentage of sales was slightly lower to 8.5% from 9.2% while factory overheads were broadly the same at 10.6%. The lower gross margin, coupled with higher administration expenses during the current reporting period under review have resulted in a lower profit before tax of RM8.43 million for the current reporting period.

In Vietnam, we recorded higher sales of RM87.42 million against RM73.51 million in the preceding quarter. Gross profit increased from RM8.64 million in preceding reporting period to RM12.20 million in the current reporting period. Our Vietnam operations enjoyed better labour efficiency and absorption of factory overheads which have resulted in higher gross profit margin of 14.0% from 11.7%. Raw material costs increased marginally from 58.2% of sales in the preceding reporting period to 59.4% of sales during the current reporting period due to continued escalation of raw material costs. Our Vietnam operations however recorded lower selling and administration expenses during the reporting period under review. Given the improved operational and administrative performance, profit before tax of our Vietnam operations increased significantly from RM1.87 million in the preceding reporting period to RM5.95 million in the current reporting period.

Company Prospect:

The protracted trade war has resulted in the shift in the global supply chain and bought about some positive surprises to several countries in the South East Asia region. For the global furniture trade, Vietnam is expected to benefit the most, with furniture exports increasing by 30% this year, followed by Malaysia as orders shift to these South East Asia exporters. There are now clear indications of permanent structural changes in the supply chain as more and more manufacturers relocate out of China to this region.

As part of the global supply chain, we have registered increased orders for both our Malaysian and Vietnamese operations. We have adapted our production activities to accommodate a wider range of products for our US customers. We are beginning to see improved operational results, particularly from Vietnam where we have enjoyed smoother production runs following the adjustment period. As before, we will continue to strive for better manufacturing efficiency and work with our customers to mitigate increases in raw material prices and labour costs.

Comment:

The increase in sales performance for Pohuat is mainly thanks to Trade War. Previously, the better profit margin was credited to cheaper raw material cost. However, starting Q3 with higher sales volumes have shifted from China to SEA region, demand has pushed raw material cost to escalate. The future profit margin will depend on operation management of the group to reduce overhead and man power cost. 

Vietnam operation is still facing keener price competition, although sales volume has increased. It has to make sure having higher sales order to maintain profitable. Also, Vietnam operation is also facing higher raw material cost. Hence, the profit shall be determined by the effectiveness of the operation/sales process. 

Next quarter should have higher sales volume based on pass history where Pohuat business is in cyclical nature. However, it can foresee that forex will remain in loss due to the fluctuation of USD/RM during coming quarter period. But the supply chain trend has shifted to SEA region, hence, it is expected that the Q4 result will remain robust. Therefore, I give a buy call on this counter.

The reason I buy in Pohuat:

From technical spec of view, the price has reached its resistance line for the major bearish trend before the quarter report was released. Price has break through MA200 and stayed above it for 3 trading days. Hence, it can assume that, for more conservative player, Pohuat is in bullish trend already. Positive crossing for short term trending, mid term trending such as MA30 and MA50 has started to trend up. However, the biggest threat is CCI has shown the slow down in upward momentum which the stock price has been bullish for a week continuously and increased as much as 12%. 

I reckon that on the next trading week the price will most probably break though the major bearish trend and move in minor uptrend or sideway.

TP remain: RM1.90 with the forecast EPS for FY19 to be 23.89sen and PE maintain as 7.96.

Wellcall Q3 2019 Review

The latest Qtr report Q3, 2019 has reported a steady growth performance on EPS despite a slightly drop on its revenue. 9 months cumulative EPS for FY19 has achieved 82% of my forecast EPS (6.57sen).

   

Despite this current quarter revenue has reduced by 3% compated to same quarter preceding year, the group has recorded a better PBT mainly due to lower cost of production resulted from cost optimization of raw materials costs.

The export market and local market contributed approximately 90% and 10% respectively to the Group's revenue. The slight decrease in revenue mainly due to the volatility of global economic
sentiment which had affected the demand for industrial rubber hose market.

Overall, revenue has slightly increased which contributed from overseas businesses that has cushioned the decrease in rubber hose demand in the local market. The improvement in revenue were mainly fairly benefited from the increase in selling price and volume for some hoses.

Compare to previous quarter, the revenue remains stable. While PBT has improved by 16% which I believe that the contribution from lower crude oil price recorded during this quarter.

  Crude oil price has reduced by 20% from one year earlier, I reckon that the group raw material costs should have been reduced as they are mainly affected the price. If we cross check with its quarter report performance, the PBT is in line with the finding.  

The coming quarter Q4 FY19, I will see an improvement in the group's gross margin and PBT performance as it is still enjoying with low material costs amid the uncertainty of global economy and the conflict between two main economic bodies. 

Assuming that the coming Q4 business will be remained stable as Q3 FY19 and Q4 FY18, I reckon a fair value of 1.94sen EPS and a cumulative EPS of 7.37sen could be achieved. 

With the PE of 17, the expected target price of RM1.25 is given, a potential gain of 6.8% for the current market price.  

Technical analysis:

Although the price has recently break through the major bearish trend, the upward momentum has faded away and remained in side way trend. The price is still below MA 50 and 200 trend which can be acted as the stock resistance trend. Dividend will be paid out soon, price will be readjusted. No buying sign at the moment. 

Annjoo Q2 2019 Review

Annjoo reported its new Q2 result with a net loss of RM37.75mil on the back of higher revenue of RM574.32mil. This result is definitely shying shareholders away. Sadly, no dividend was issued in this quarter, understanding that the group is having a challenging business condition.

Higher revenue in the second quarter of 2019 (“2Q2019”) and first half of 2019 (“1H2019”) was
mainly due to higher export tonnage sold. International and domestic selling prices remained
depressed, and domestic demand continued to be weak. The revenue has increased 12% (YoY) and 6% (QoQ).

However, operating expenses for this quarter has badly hurt the company profit. In the report the group has mentioned that:
Losses in 2Q2019 and 1H2019 were mainly attributable to:
i) Lower selling price coupled with rising raw material and fuel costs;
ii) Higher-than-usual production cost in 2Q2019 due to the scheduled Blast Furnace (“BF”)
shutdown; and
iii) Other costs in 2Q2019 including allowance for inventories written down of RM22.54 million
and overhead cost for plant temporary shutdown on the BF relining exercise and plant
upgrading activities amounted to RM4.98 million.

We can see that moving forward, the expenses will reduce significantly in coming quarters. So far, those expenses were just one off maintenance process. 

Looking back on FY 2015 where steel sector was in the down trend as steel market was flooded with china imported stocks, Annjoo had written down inventories. History happens again. We can observe that, when inventories start stacking up, it is no good to the company and it means the market is going to slow down.

  

Looking on the group cash flows performance, net cash flows from operating activities have slightly improved from -RM46.6mil to -RM1.9mil comparing to Q1 FY19. It might be the net change in current assets that cushion the loss in operating activities.

The group's prospects continues to depend on the outlook of the international and domestic demands. The management has forecast that the third quarter of 2019 is expected to be remain challenging due to the uncertainty of global economic and lacklustre in construction market locally. The group is still in talk government to resolve the issue facing by the steel industry due to competition with foreign owned local steel makers.

Comment:
It is definitely not a good time to invest in steel industry stocks. However, I believe the market has bottomed out, price would not go low any further. The recent decline in key raw material prices, particularly iron ore and coking coal, will drive lower production cost going forward. The news of the revival of mega infrastructure projects and government action to resolve the current challenges would be catalysts for the stock price.

Technical Analysis

 The stock price is moving in a bearish trend. No signal of rebound. Next support line will be around RM1.16

L&G Quarter 1 FY2020 Review

The latest announced 1st Qtr report for FY2020 has recorded a revenue of RM44.41million (1Q2019:
RM22.07million) and a pre-tax profit of RM8.415million (1Q2019: RM2.961million) compared to the corresponding quarter of the preceding year with an increase of 101% and 184% respectively.

Comparing the financial performance to the preceding year quarter, where the group was soft launched its Seresta project which is located at Sri Damansara, and Sena Parc project which is located at Senawang. During the period, the performance was merely relying on Astoria project. In the latest quarter, the performance were contributed from the progress billings from all three projects as mentioned above.

The quarter’s performance were attributed mainly to the property division and the share of results from its jointly controlled entity, Hidden Valley Australia Pty Ltd, supported by the steady contribution from the education division.
(Hidden Valley Australia Pty Ltd has been disappearing from news report after 2017, while it was mentioning the Melbourne project was going to complete soon)

Property division
The property division registered a revenue of RM38.81million (1Q2019: RM15.45million) and an
operating profit of RM8.22million (1Q2019: RM2.04million) compared to the corresponding quarter of the preceding year. The on-going construction progress on its existing projects namely Astoria, Sena Parc and Seresta and the progress billings therefrom contributed to the division’s quarterly revenue and operating profit.
(Astoria project should be completed and handover by first quarter of next year, hence, in the coming Qtr (2,3,4) reports can still maintain its profit level)

Education division
The education division recorded a revenue of RM4.33million (1Q2019: RM3.76million) and an operating profit of RM1.54million (1Q2019: RM1.05million) compared to the corresponding quarter of the preceding year arising from fee increase and the increase in students enrollment for both private and international schools.

Other division
Other divisions recorded an operating loss of RM1.03million (1Q2019: an operating profit of
RM2.04million) on the back of a revenue of RM1.28million (1Q2019: RM3.01million) compared to the corresponding quarter of the preceding year. The lower performance for the current quarter arose mainly from the change in the recognition policy for advance to associates. Advance to associates previously recognized as loans, have now been treated as investment cost as they have similar exposure as investment in ordinary shares.
(The loss making from investment division might be due to the failure in converting the investment into return, it can shows that the management is taking high risk investment. Although this division consists of small portion in the revenue, it is a threat to investors where it might reduce the group profit.)

 The Group’s revenue and pre-tax profit stood at RM44.41million (4Q2019: RM47.54million) and
RM8.42million (4Q2019: RM34.58million).
The material changes in pre-tax profit for the preceding quarter of the previous year were mainly due to the following:-

• the writeback of impairment losses on carpark of RM7.42million and the writeback of accrued costs of RM8.37million from property division, and
• the partial writeback of provision for financial obligation of RM20.80million which was offset by the additional provision for the closure of its club operation of RM2.94million from other divisions
• Reversal of finance cost of RM1.15million following the revision of the Group’s policy to include financial instruments which provides similar exposure as equity

Prospects

The Home Ownership Campaign 2019 (“HOC 2019”) continues to impact positively on the property

market with increases in home ownerships among Malaysians. The campaign has benefited not just the affordable / mass market housing but also the medium to high end residential segment, which is the segment the L&G Group competes in. With HOC 2019 being extended to 31 December 2019 and the revision of Overnight Policy Rate downwards by 25 basis points in May this year, these are expected to provide continuing tractions in the housing market.

The Group expects sales to improve for its on-going projects namely Astoria @Ampang, Sena Parc in

Senawang and Damansara Seresta at Sri Damansara in the coming quarters.

On the education front, the Group is pleased to announce that its new Sri Bestari International School

(“SBIS”) buildings and facilities are ready for the coming academic year 2019/2020. With the completion of the buildings, the Group also expects a steady increase in student enrolments for both SBIS and Sri Bestari Private School.

(From the prospect given in Q1, HOC 2019 helps to boost up local property market and L&G has benefited from this campaign. Moreover, interest rate cut has also stabilized the housing market demand. The new school building might able to increase the revenue and profit for education division. If the new SBIS is based on the current international school capacity, we would see an increase of 11% on the education division profit.) 

Comment:

I reckon that the property division performance will maintain the similar earning margin as reported in Q1 FY2020 (EPS = 0.11sen) for the following qtr periods. Hence, the expected EPS throughout FY2020 would be 0.44 without considering any one off gain. 

FY19 during Q3 and Q4, there were some additional profits from associated company and write back. 

The NTA as per now standing at RM0.40, L&G is currently under valued. 

Taking PE as 10 for FY2020. The target price should be RM0.05

L&G group financial performance is very depending on the one off gain or contribution from associated companies. Unless the property division can handover more units to improve the profit.
 

UCHITEC (7100): Author's Review

As a primarily Original Design Manufacturer (ODM), Uchi Technologies Berhad specialises in the design, research, development and manufacturing of electronic control systems, including software development, hardware design and system construction.

It is an one-stop solutions provider offering an entire spectrum of services and solutions – ranging from research & development, tool design and set-up to engineering support and the production of finished electronic control systems.

There are three operating sites which fully owned by UCHITEC:

1. UOM – the main operating plant located in Malaysia, principally involved in design, research & development and manufacturing of electronic control modules
2. UEM – the assembly counterpart for UOM
3. UCHI Dongguan – also the assembly arm of UOM located in Dongguan City, GuangDong Province of China Asthe main subsidiary

Both UOM and Uchi Dongguan are ISO9001, ISO14001 and OHSAS 18001 certified.

UCHITEC exports more than 94% of their products to European market, with the rest being sold in US, Japan, China and India.
Switzerland remains as the biggest customer to UCHITEC with a contribution of 44% revenue during the year of 2018 (2017: 46%), followed by Portugal at 37% and Germany at 13%.

The Group’s revenue is denominated in USD, with an approximate 30% of it being allocated for payables in USD-natural hedge.
The balance 70% is exposed to currency fluctuation and is managed via a Forward Contract Management Policy.

Financial Highlights

Over the past 5 years, the profits before tax are in-line with the revenues. 

There are three product groups categorised under UCHITEC's business:

• The art-of-living product group, comprising electronic control systems for household appliances as well as professional appliances for office and office services sector
• The biotech products, including electronic control systems for high precision weighing scales, centrifuges, pipettes and deep freezers
• Others i.e. new innovations

Generally, there were no significant changes to the revenue analysis by product group in 2018 compared to the prior year, with the contribution rate from the art-of-living product group, continuing to take the largest slice of the pie at 81% (2017: 84%).
Consequently, there was a slight increase in the percentage of contribution from Biotech products at 18% (2017: 16%).
Meanwhile products in the Others category made up the balance of 1%.

UCHITEC has continuously achieved profit margins of more than 40%.
The Group once hit the 50% profit margin in year 2017.
When it came to year 2018, UCHITEC still able to maintain a net profit margin of nearly 50%.
Besides, the management has reported that the Group achieved a 0.12% customer reject rate in 2018, which surpassing the initial target of 0.15%.
This has marked the sixth consecutive year that the Group has recorded a customer reject rate of below 0.20%.
Anyhow, the Group remains their target for year 2019 at 0.15%.

There was only a slight increase in material cost (2018: RM44.2 million; 2017: RM43.5 million) despite the 9% increase in USD revenue.
This can be attributed to the strengthening of the USD against the RM, which resulted in lower
material cost in RM.

However, a trade war between US and China has caused a global shortage of multi-layer ceramic capacitor (MLCC) components and labour shortages.
This has impacted the Group in on-time shipment performance, which deteriorated to 53.51% (2017:
88.81%).

Meanwhile, the Group has successfully mitigated RM463,048 electricity costs with Grid-Connected Photovoltaic Power System, which was installed since 2016.
This Solar System continues to fulfil commitment to reducing carbon dioxide emission by an estimated 451 tons in year 2018.

Ever since the Group's listing in year 2000, the Group has recorded an average Operating Profit Margin of 45%, despite going through challenging economic scenarios that include the global economic downturn, foreign currency fluctuations and technical challenges.

A cornerstone of the Group’s operations is research & development.
The Group has allocated a budget of 7% of their revenue in research & development activities.
In 2018, RM4.3 million was spent for this purpose (2017: RM4.1 million).

UCHITEC has completed a capital repayment of RM89.7 million to their shareholders in 2018.
The Group intended to return excess cash to their shareholders as a reward for their continuous support through the years.
Other than resulted in reducing of shareholder's equity, there is no change in its financial standing, including cash and cash equivalents, reserves and zero gearing, future financial obligations and operational requirements.

Future Outlook

1. As most of the manufacturing plants facing, manpower shortage is an issue for UCHITEC. The Group plans to address this issue by outsourcing production processes or engaging contract manufacturing services.
2. Although the MLCC component shortage has been moderated, the Group anticipates that the effects of the shortage, together with the US-China trade tension, will continue to reverberate in years to come, potentially causing further material price fluctuations and global shortages of other components. In view of this, The Group is taking several preventive measures, including the implementation of a Safety Buffer Stocks System, for long lead time components in order to facilitate the operations.
3. The Group opts to review the timing, trade terms and country of origin provision in their contracts, while also expanding our supplier base to include South East Asian countries. 
4. The Group also aims to evaluate the demand forecast and enhance visibility to their suppliers.
5. Besides, the Group shoring up the supply chain by seeking alternative supply sources and consistently performing contingency and scenario planning.

Author's Perception

1. It has been the Group’s Dividend Policy to allocate at least 70% of their net profit as dividend since 2003. Total dividend declared for 2018 is 14 sen (2017: 25sen), which is equivalent to a payout ratio of 91%. Thus, it is expected good dividends when the Group's business grows.
2. In terms of business nature of the Group, households and office appliances, as well as biotech products are generally always a demand in market. As a manufacturer of electronic control system of these products, it is no doubt that the Group able to achieve continuous growth as long as the consumers' ability to spend remain strong.
3. The revenue of the Group is 100% in USD, while material cost is nominated in RM. The business will see benefited when USD goes strong.
4. UCHITEC is a debt-free company without a single borrowing. It is a cash rich company. 
5. The top thirty shareholders occupied the market shares in 55.76%. Technical trend is generally significant for this stock.

Technical Comment

The current share price has moved into correction waves.
The resistance line is at RM2.90 (Red Line).
As long as the price is still moving above the support line (Blue Line), this stock is still in a bullish trend.