Eng, yet another contrarian stock to consider

Background

Eng Teknologi Holdings Bhd ('Eng') is involved in the business of precision die-casting and manufacturing of mechanical components and assemblies.

Past 5-year Financial Performance

Eng's turnover has grown from RM103 million in FY2002 to RM381 million in FY2006. Despite the healthy growth in topline, its pre-tax profit contracted sharply in FY2006 because of a substantial drop in its business volume in its China operation from one major customer due to industry consolidation; spiraling raw material cost & additional start-up cost arising from its expansion in China.

Recent Financial Performance

The effect of the decline in business volume (noted earlier) & the higher operating cost due to the increased capacity was felt up to the third quarter ended 30/9/2007. In QE31/9/2007, Eng's net profit increased by 25.1% q-o-q or 91.5% y-o-y to RM9.4 million. Turnover jumped 38.8% q-o-q or 37.6% y-o-y to RM141 million.



If the improved performance of QE30/9/2007 can be maintained in QE31/12/2007, Eng may report EPS of 8.7 sen for FY2007. While this is still lower than the EPS of 23.9 sen for FY2006 or its best year (FY2005)'s EPS of 46.9 sen, Eng could well be on the road to recovery.

Valuation

Based on Eng's closing price of RM1.29 as at January 8th, Eng is now trading at a PE of 14.8 times (based on projected EPS of 8.7 sen for FY2007) or 0.9 times its book value (based on NTA of RM1.44 per share as at 30/9/2007).

Technical Outlook

From the monthly chart, we can see that Eng has been drifting lower for the past 4 years, from a high of RM3.64 recorded in March 2004. It has recently tested the horizontal support of RM1.20.


Chart 1: Eng's monthly chart as at January 8 (courtesy of Quickcharts)

On the daily chart, we can see that Eng share price is moving in a downward channel. Until the share price has surpassed the upper channel at RM1.55-60, Eng's recovery is not on the card yet.


Chart 2: Eng's daily chart as at January 8 (courtesy of Quickcharts)

Conclusion

Based on improving fundamental, Eng is a stock worth tracking. A contrarian may choose to buy slowly at the present level of RM1.20-30, but it may be safer to wait until the stock has broken to the upside of its downward channel at RM1.55-60.