Ekowood may benefit from the current timber play

Background

Ekowood is involved in the supply & installation of engineered solid hardwood flooring and sub-licensing of strip lock system.

Recent Financial Performance

Ekowood reported a net profit of RM3.9 mil for QE30/6/06, which represents an increase of 16.0% from the net profit of the corresponding quarter last year (of RM3.3 mil) but a decline of 15.5% from the immediate preceding quarter’s net profit (of RM4.6 mil). The latter is attributable to lower current tax in the preceding quarter as RM0.41 mil of the current tax was transferred to deferred tax while for the latest quarter, an amount of RM0.23 mil was transferred from deferred tax to current tax (thus reducing the net profit for QE30/6/06).

Stripping off the tax effect, Ekowood’s performance has improved as seen in its higher pre-tax profit, which has increased 11.2% q-o-q or 71.0% y-o-y to RM5.5 mil. This was achieved on a turnover, which has increased by 0.7% q-o-q or 8.0% y-o-y to RM37.7 mil.

If we compared the latest 4 quarters with the preceding 4 quarters, we can see that net profit has dropped by 30.1% from RM19.4 mil to RM13.6 mil, despite a marginal 5.3% increase in turnover to RM139.7 mil from RM132.6 mil. See the table below.







Valuation

Based on the last 4 quarters’ combined EPS of 8.1 sen and yesterday’s closing price of RM0.90, Ekowood is now trading at a PE of 11.1 times.

Technical Outlook

From the weekly chart (Chart 1), we can see that Ekowood has just broken above its downtrend line at RM0.80.

















Chart 1: Ekowood's weekly chart as at Oct 18



















Chart 2: Ekowood's daily chart as at Oct 16

From the daily chart (Chart 2), it is clear that Ekowood's big move yesterday has broken above the resistance area between RM0.81-0.86. If weakness surfaced in the next few days, the share price may retrace back to this resistance-turned-support area. This then can present a good entry level for the stock.

Risk

This is a fairly quiet stock with low trading volume. A big position in this stock may pose difficulty in the event of an exit.

Conclusion

Fundamentally, Ekowood is a profitable company but the PE is not low at 11.1 times. Its main attraction is that it has just broken above its downtrend line and it has the potential of turning bullish in light of the current timber theme play.