FPI Q3 FY20 Review

Q3 financial rebounded with superb performance!

FPI reported a higher revenue of RM281mil, an increase of 7.8% from the previous corresponding period last financial year. Thanks to higher sales volume recorded which was aligned with the comments from the board during AGM. 

The group mentioned that the higher sales volume has resulted in higher earnings before interest, tax, depreciation and amortization (EBITA) of RM36.8mil for the current quarter compared to RM24mil in the previous year's corresponding quarter. 

The management has done a better cost control under Q3 to reduce the distribution costs, administrative expenses and other expenses. 

Gross margin has achieved a greater improvement from 11% in previous corresponding period last year to 15%.  

Referring to the latest balance sheet, total assets and liabilities have increased compared to last financial year. The increase was primarily contributed from higher trades, other receivables and other payables which showing us FPI is making more sales transactions. It would possible to carry forward to next quarters and realize in sales revenue.

Cash flows from operating activities has turned into positive in Q3 FY20 compared to previous two quarters were recorded with negative cash flow and it recorded a higher net cash compared to last year. 

Hence, I expect management will pay higher dividend for FY20. 
 

Financial year-to-date ended 30 September 2020 

For the 9-month period ended 30 September 2020, the Group recorded 13.1% lower sales at RM513.2 million compared to RM590.9 million in the previous year’s corresponding period as the Group shut down its operations from 18 March 2020 in compliance with the Movement Control Order (“MCO”) imposed by the Government of Malaysia in an effort to contain the outbreak of COVID-19 pandemic. The Group resumed its operations at end of April 2020. Nevertheless, the Group recorded higher EBITDA of RM60.0 million for the 9- month period ended 30 September 2020 compared to RM51.6 million in the previous year’s corresponding period mainly due to change in sales mix. 

The Group recorded significantly higher sales of RM281.0 million or an increase of 161.2% in the current quarter compared to RM107.6 million in the immediate preceding quarter mainly due to higher sales volume. As such, coupled with better economies of scale, this has resulted in higher EBITDA of RM36.8 million as compared RM13.9 million in the immediate preceding quarter. 

Comments:

- The management has made its promises during AGM that sales order will return during Q3 as normally FPI has its peak season during this quarter with slightly lower profit margin due to 3 new products introduced. Moreover, under this pandemic situation, such financial performance is beyond my expectation as I only anticipated that FPI might able to sustain the profit margin similar to last year. Well, this is a good management and be very cautious with their business.

- Operating costs did come down, as management did explained that implementing automation and machinery to their new products. 

- In earlier post, I reckon that FY20 EPS to be 14.7sen. Q3 FY20 performance has already exceeded my prediction. Hence, I would expect a higher EPS to be achieved in FY20 at 18.58sen. 

FY20 EPS = 2.2sen + 1.98sen + 10.4sen + 4.0sen (Forecast) 

By taking PE = 12, Target price = RM2.23

Assuming that 65% dividend payout rate, FY20 I am looking at a 12sen DPS.

After dividend adjustment, expected TP = RM2.11. with 6.5% DY at current price of RM1.85 (19/11/2020)

Technical Analysis    

Currently stock price is moving in a bullish trend, as hot money has returned to this stock. Next support line would be RM2.04 and resistance line at RM1.78. 

By comparing the uptrend of stock price since last quarter until now was just about 35%, but profit has increased 205% from RM8.5mil in Q2 FY20 to RM25.8mil in Q3 FY20. The uptrend is yet to consider overpriced as compared to the trending from glove sectors. Hence, I believe the stock price will able to meet the 2.618 fibo line at RM2.04. 

FPI AGM 25th June 2020

AGM Summary

1. Impact of Covid-19 to FPI

Covid -19 impact started from 18th March. Only two weeks of production loss during Q1 FY20, the net profit had decreased by 32%. The management mentioned that there was nearly zero sales for April and limited production on May that slowly increased its operation to 30-50%. June has recovered into 100% operation. 

2. Future prospect of FPI for FY20
Existing sales looks positive but the management remain cautious on year end sales.

3. New product mentioned in Annual Report explanation by the management

FPI jointly design & develop with Wistron (ODM) to introduce new products for clients as mentioned in Annual Report. Since last financial year (2019), the new product had contributed in revenue and it will continue this year. 

4. Question on implementation of automation mentioned in Annual Report

FPI invested new injection machines, CNC machines, fully and semi-automated machines as mentioned in Annual Report. The management mentioned that FPI is having difficulty to implement full automation to their production lines as automation is to reduce man power however there are so many models & products require man power to do packing. Hence, man power is still necessary for FPI. 

5. Reason of lower profit margin and higher revenue recorded in FY19

Revenue increased in FY19 however profit margin dropped. The management explained that due to the increase in basic salary and higher overhead costs. Lower profit margin will still maintain for the coming financial year as 3 more new products will introduce for customers by end of this year.

6. Impairment loss issue reported in FY19

Impairment loss on trade receivables of RM 2.6mil declared in last financial year was from one of the MNC customer. The customer was having cash flow issue and unable to repay within the 180 days of payment term. Hence, the management had to make impairment for this. 

Good news is the customer has cleared the payment and the management will write back the bad debt in Q2 FY20.

7. Concern of FPI clearing backlog orders

The management also mentioned that normally Q2 is normal season, FPI has its peak season during Q3. However, as the lock down happened on the mid of March, the management have to reschedule all the sales order shipment date to June. Therefore, production lines are having peak load in June. 

8. Contribution of new products

The management explained that new products have contributed some in FY19 revenue, if the sales order continues, the operating cost will reduce as initial investment on machinery was done in FY19.

9. Concern of cutting man power or pay cut during MCO 

The management said no staff been layoff. Top management level had cut transportation allowance and some incentives been cut for certain staffs, all staffs have gave full cooperation.

10. Future impairment issue 

At the moment no impairment loss recorded.

11. Supply chain issue during MCO

The management replied that no issue on the supply chain.

12. Concern on Wistron collaboration

FPI and Wistron work together as ODM and the product selling price is tallied to actual market price. 

During FY18, FPI purchased materials from Wistron and new products developed and sold under FY19 as shown in table below.  

13. Other expenses explanation

Foreign exchange gain/loss are recorded in other expenses/income statement.

Point of view after attending AGM

I believe that the coming Q2 will have more negative impact from MCO. I reckon that net profit will reduce by 50% compared to Q2 FY19 due to only one and half month of operation. Higher operating cost will cushion by the write back of bad debt of RM 2.6 mil in this quarter. 

Therefore, I expect EPS for Q2 FY20 to be 1.8 sen. Q3 FY20 will then be fully recovered to the normal condition if covid-19 pandemic is under controlled globally. Q4 FY20 will have higher revenue and profit margin. Hence, I believe Q3 and Q4 FY20 will achieve 6.4 sen and 4.3 sen  respectively. (With 20% increase in EPS compared to Q4 FY19 with the absent of impairment loss and three new products will be launching for customers; higher revenue & lower profit margin for new products)

Overall FY20  EPS to be 14.7 sen. Dividend payout based on 60% ratio expected to be 8.82 sen. 

By taking PE = 9 or 10, TP to be RM 1.32~1.47. Forecast DY for FY20 to be 6%.  

The current share price is still within the target price, buy when FPI trades at undervalue price.

Technical Analysis: 

Stock price is moving in a upward triangle pattern, waiting for price to break above or below the pattern. If the price is able to break above the triangle pattern, FPI will have strong upward momentum, else price will stay side way or downtrend. Support at RM 1.372 (EMA 30), resistance at RM 1.44 (Fibo 0.618). 

FPI Q4 FY19 Review

FPI Q4 FY19 revenue came in above our expectations, revenue rose 17.7% from previous year's corresponding qtr of RM149.0mil to RM175.3mil thanks to higher sales volume and change in sales mix.

However, Q4 EPS was slightly below our target (Forecast Q4 EPS: 3.82) bringing the cumulative EPS of FY19 to 16.9sen which is below our expected EPS of 17.02sen (15% improve from FY18).

Dividend payout has increased 1sen compared to previous year, which bringing DY to 6.7% (RM1.63 stock price). 

 FY 19 FPI recorded higher tax and other expenses compared to FY18. Higher revenue recorded in FY19 was mainly due to the speaker sales contribution from FPI's major shareholder (Wistron), accounting for 25% of its overall revenue. We believe that Wistron will continue to purchase speakers from FPI. 

Comment:

Demands for speaker system is directly related to the global economic conditions. The outbreak of the novel coronavirus (COVID-19) has disrupted the global supply chain. Moreover, the board is also cautious about the operating challenges due to the virus outbreak. Hence, we expect a slow down in Q1 FY20 revenue. Our forecast for Q1 FY20 EPS (2.88sen) is reduced by 10% to account for the slower demand and higher overhead cost of its production lines. Thus, Q1 FY20 TP to be RM1.41 (RM1.52-RM0.11) PE maintain at 10. 

Technical Analysis:

Short term:

Next support line: RM1.62 (Fibo 0.618). 

Although the price has shown a strong momentum of rebound to 0.236 level after heavy sell down to RM 1.52, the weak market sentiment due to virus outbreak might turn FPI into bearish.

Long term:

Stock price is still in bearish trend. The price touched Fibo 0.50 level twice but unable to break through, RM 1.78 is a strong resistance line for FPI to break into bullish trend.