Nextnat drifting lower ahead of 1-for-2 bonus

I have posted on Nextnat in March this year (go here), where I've recommended a BUY on this stock because of its good financial performance & bright prospect. Despite the healthy run-up in the stock market as a whole, the share price of Nextnat has been drifting lower in the past 6 months (see the chart below).


Chart: Nextnat's daily chart as at May 18 (courtesy of Tradesignum.com)

In the last few days, there were 2 announcements from Nextnat, which I would rate as positive, but they did not have the positive effect of boosting the price. The announcements are:

• 1-for-2 bonus issue that will go 'ex' on May 23; and
• a private placement of 9 million new shares at RM0.60.
  

A bonus issue normally has the effect of increasing demand for the stock from the retail players; thus, giving the stock a boost ahead of the ex-date of the entitlement. A private placement of new shares at a price higher than the prevailing market price is deemed to be a vote of confidence in the stock. As stated earlier, both these 'news' did not lead to the anticipated result. Why?

One possible reason for Nextnat's poor share price performance could be the concern about its balance sheet or financial position (see the table below). While its current & gearing ratio as at January 31, 2007 appear satisfactory at 4 times & 0.02 times, respectively; the main worry could be its ballooning trade debtors. The latter has increased from RM39.6 million as at April 30, 2006 to RM67.1 million as at January 31, 2007. As a result, its debtors' collection period has increased from 128 days to 217 days during that period.

Since total debtors is equivalent to 87% of Shareholders' Funds, every RM1.00 write-off in debtors could translate into a 87 sen drop in Shareholders' Funds. I am not suggesting that this scenario could happen. Neither am I suggesting that Nextnat might default on its financial commitment to its creditors or lenders. The bulk of Nextnat's external financing is in the form of trade credit (or, Trade Payables), which amounted to RM19.9 million as at January 31, 2007. This was well-matched by its cash-in-hand of RM17.9 million as at the same date.

My personal feeling is that the debtors problem will have to be resolved by implementing stricter credit control & more vigorous debt recovery effort. In addition, the company may have to strengthen its Balance Sheet. Here, I see the 2 announcements mentioned earlier as part of a 'balance sheet management exercise', which may include a Right Issue some time over the next 12-24 months, to boost up the Shareholders' Funds.



Conclusion

From the above chart, Nextnat does not have a long-term trend yet as the share price is trapped in a symmetrical triangle. It should have supports at RM0.50/53 level. In the near term, if the share price were to break below RM0.50, the prudent approach would be to sell off or reduce your position. If the RM0.50 level can hold up, the stock could swing up to RM0.75, gradually.