Tongher- a bullish breakout in slow motion?

Results Update

Tongher announced its results for QE30/9/2010 in late November. Its net profit increased by 32% q-o-q or 137% y-o-y to RM8.4 million while its turnover increased by 72% q-o-q or 125% y-o-y to RM109 million. The improved performance is attributable to higher turnover, lower raw material costs & other operating costs. In addition, it recognized a negative goodwill of RM5.1 million. Without this adjustment, Tongher's net profit would suffer a drop of 31% q-o-q but it would still record a growth of 24% y-o-y. Tongher expects its results to be positive in the current financial year.

Business Update

Tongher is mainly involved in the manufacture & sale of stainless steel fasteners (nuts & bolts). It has a 37%-stake in Fuco International Ltd, which holds a 90%-stake in Fuco Steel Corp Ltd. The latter will be involved in the manufacture & sale of steel billets in Vietnam. The steel billets mill is now under construction & nearing completion. Check out this little snippet on steel projects in Vietnam (here). Tongher's fasteners business suffered over the past 2 years due to anti-dumping charges leveled against it by the European Commission. In July this year, the company learned that the EC proceeding has been terminated. With the termination of the anti-dumping charges, Tongher's export business should pick up. For more, go here.


Table: Tongher's last 8 quarterly results



Chart 1: Tongher's 24 quarterly results

Financial Position

Tongher's financial position is considered satisfactory. As st 30/9/2010, its current ratio stood at 2.8 times & debts to equity at 0.3 time.

Valuation

Tongher (closed at RM1.98 yesterday) is now trading at a trailing PE of 10 times (based on last 4 quarters' EPS of 19.18 sen). With positive development rolling in over the next 12 months (from increased export to Europe & the opening of the Vietnam mill), Tongher's earning & its PE multiple should improve accordingly.

Technical Outlook

Tongher has been consolidating over the past 2 years in a symmetrical triangle. It may have broken to the upside of this triangle at RM1.95 yesterday. Over the past 4-5 days, the traded volume has increased. However, this volume (of about 200,000 units per day) is still relatively small. The indicators are slowly turning upward. The much-anticipated bullish breakout is still a work-in-progress at this stage. To sure, I would like to see a break above the psychological RM2.00 & a daily volume of 1 million units.


Chart 2: Tongher's weekly chart as at Dec 2, 2010_9.10am (Source: Quickcharts)

Conclusion

Based on improving financial performance & reasonable valuation, Tongher could be a good stock for long-term investment. The technical outlook is slowly turning positive.