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. 

WELLCALL (7231): Author's Review

Wellcall Holdings Berhad is the largest industrial rubber hose manufacturer in Malaysia. They have expanded their application markets into abrasion, air, automobile, chemical, food grade, marine, petroleum, fuel & oil, water, welding and miscellaneous. In other word, rubber hose is needed in any kind of industry.

Based on 2018 Annual Report, 89% of the group's revenue covering over 70 countries while the remaining 11% was contributed from domestic market. Hence, the global market sentiment will reflect on its revenue performance.

Financial Highlights

5 years revenue and PBT CAGR is about 3.2% and 2.0% respectively. Which is not considered as an aggressive growing company, the management is taking a steady and slow pace in managing its business. Gross margin for FY 2018 is around 32%, in this kind of competitive market, Wellcall can still sustain such high gross margin is worth to praise. Also, management have enough room to compete with competitors to secure the market pie. Dividend yield stands at 4.7% with the present share price of RM1.17. Book value to price is 18.5%. The current price is not attractive enough, slow and steady growth company usually will not bring up the share price value, 4.7% of annual return sounds less interesting, unless it is for long term investment. At the moment, the share price is still expensive. 

Net earning per share for FY18 has reduced by 13% compared to FY17. The main reason is due to pressure from the raw materials prices that continue to fluctuate which has resulted the group to incur higher cost of production. 

Comparing latex price for 2017 to 2018, FY18 was having lower material cost compared to FY17.  We can eliminate the risk from fluctuation in rubber price, as the group is enjoying lower material cost.  

Some hoses require synthetic rubber which produced from crude oil as raw material. We reckon that the high material cost incurred in FY18, resulting a lower PBT achieved in this financial year is partly from synthetic rubber which related to crude oil price. The crude oil price graph has shown that the price was high during FY 18 compared to FY 17.   

Market segment for Wellcall consists of export and local. The major export countries are USA/Canada contributing 28% of the export revenue, following with Europe 19%, Asia 17%, Australia/NZ 13%, Middle east 11%, South america 9% and Africa 2%. 

Hence, foreign currency plays a main role in its revenue and PBT performance. 

Strengthening of USD/RM by 10% will bring 4% increase in group's net profit. 

The latest 2nd quarter report of FY 19

EPS for 1HFY19 is 3.54sen which has increased by 25% compared to preceding year. It has achieved 55% of the FY18 result. 

If the demand for industrial rubber hoses continue to recover gradually from both emerging and developed economies, let's say we forecast a 3.2% growth for its business, the target EPS should be at 6.57sen. 

We expect 2HFY19 should hit a minimum of 3.03sen EPS. 

With the PE value at 17, the expected target price is about RM 1.12. 

Hence, current share price is slightly above the TP. Continue to observe on the price movement.

Technical Comment

We forecast that the crude oil price will trend down toward the year end. Hence, raw material cost will see reducing for Wellcall. 

Share price is still moving in a major bearish trend. 

At this moment, Wellcall share price is not worth to accumulate. We will see the trend turn upward if USD strengthen and Crude oil price drop towards the end of the year. 

Corporate news:

Wellcall charts another milestone when it inks a joint venture with Sweden’s Trelleborg Holding AB – a world leader in engineered polymer solutions provider.

This synergistic partnership will see Trelleborg transferring its technology and manufacturing know-how for the production of composite hose and fittings, enabling Wellcall to manufacture, market and distribute the hoses and expand its product offerings.

Currently, Wellcall produces extrusion, mandel, and spiral hoses in its three plants in Perak.

Industrial rubber hoses are used in construction, mining, automobile, oil and gas, marine, as well as the food and beverage industries.

Wellcall is in discussions with Trelleborg for the target production capacity and product pricing.

“Our focus this year will be to set up the composite hose manufacturing plant, targeted for commissioning by end-2019, with two production lines and auxiliary equipment.

“Composite hose is lightweight, flexible, pressure and vacuum-resistant, mainly used in the transfer of petroleum and chemical.

“It is also a cost-effective hose, as it does not require curing like rubber hoses,” says Huang.

The composite hose manufacturing plant will be built within the vicinity of Wellcall’s existing plant.

The initial issued and paid-up capital of the joint venture (JV) company, Trelleborg Wellcall Sdn Bhd, is US$2.2mil (RM9.2mil).

Trelleborg will own 51% equity in the JV company, while Wellcall the remaining 49% equity.

Both parties will be jointly liable for their respective shares of funding for the JV company.

https://www.thestar.com.my/business/business-news/2019/01/19/wellcall-gets-technology-boost-from-swedens-trelleborg/