Guanchg- time for some profit-taking

Results Update

Guanchg has just announced its results for QE31/3/2011. Its net profit dropped 30% q-o-q to RM30.0 million on the back of a 13%-decline in turnover to RM290 million. Compared to the same quarter last year, Guanchg's net profit increased by 53% while turnover was higher by 8%.

Guanchg explained its improved bottom-line on a y-o-y basis to the following factors:
1) higher revenue generated in current quarter,
2) net gains arising from foreign exchange due to appreciation of Ringgit Malaysia,
3) gain on commodity futures contracts and
4) net fair value gains on foreign exchange derivatives.

Item (1) is self-explanatory. Items (2) and (4) mean that the company has sold their USD sale proceed forward and it has benefited in an environment of a depreciating USD. Item (3) means that Guanchg took position in the cocoa market, by hedging its raw material cost via buying of long duration futures contract for cocoa beans. Since the cocoa beans prices have appreciated substantially (due the commodity boom & the ban on the export of cocoa by Ivory Coast), the company made substantial profit. The ban on the export of cocoa has now been lifted (here) and the sharp rally for commodities is weakening, can Guanchg record further gain on the futures contracts? That's why the first drop in the top-line & bottom-line on a q-o-q basis in QE31/3/2011 is very significant. It could be signaling the peak in Guanchg's top-line & bottom-line.

I believe that it is very difficult for Guanchg to maintain the same level of profitability going forward as the USD seems to be rebounding and the cocoa beans market seems to be correcting.


Table: Guanchg's last 8 quarterly results



Chart 1: Guanchg's last 26 quarterly results



Chart 2: Cocoa & Guanchg's price chart from 2006 up to May 16, 2011

Valuation

Guanchg (closed at RM3.08 on May 16) is now trading at a PE of 8.9 times (based on last 4 quarters of EPS of 34.53 sen). While this PE multiple may not be excessive, we must be cautious as Guanchg's earning is significantly attributable to taking correct position in the forex market & cocoa market- a demanding feat that cannot sustain indefinitely.

Technical Outlook

From the chart below, we can see that Guanchg has rallied substantially after breaking above the horizontal resistance of RM0.70. While the uptrend is intact, we can see bearish divergence in the chart- the thinning volume and the lower high recorded in the RSI indicator. While this bearish divergence is not yet a sign to sell, we must be more cautious in trading this stock. (Note: I first highlighted this stock for close tracking in 2007.)


Chart 3: Latexx's daily chart as at May 16, 2011 (Source: Tradesignum)

Conclusion

Based on the analysis of Guanchg's financial results and the huge rally in the share price, I believe it is advisable to take some profit on this stock.