ENG- hit by more than a flood

ENG made the following announcement to Bursa today.

Since the previous announcement on 13 October 2011, the floods have now caused both ETHB Group’s factories in Ayutthaya to be inundated by water. In addition, ETHB’s subsidiaries in China and Philippines have also experienced disruption to their production as a certain proportion of their output was meant for their major customers in Thailand situated in the flood affected areas. The whole hard disk drive industry in Thailand is facing major disruptions as a result of the floods. In the meantime, certain of ETHB Group’s production have been redirected to other plants to maintain supply to unaffected customers.

The above will negatively impact ETHB Group’s overall performance in 4Q2011. The management views the loss to be significant since Thailand’s plants house half of ETHB Group’s machining capacity. However the management is unable to determine the extent of this loss at this point and whether the Group would be profitable for the entire financial year 2011. This will depend largely on the overall damage incurred and subsequent degree of success of insurance claims as well as the timing of reimbursements of these claims which could only be ascertained once the floods subside.

In preparing this profit guidance, management would like to state that it is unable to gauge with great certainty how and to what extent its business will be affected as there has been a substantial disruption to the supply chain of the hard disk drive industry.

The negative points in the announcement have been highlighted. With this announcement, there is a high possibility that the recent buyout deal by its major shareholder would be re-negotiated. A price revision is possible, if the company, which made a net profit of RM10.3 million for 1st half FY2011, might not report a net profit for FY2011. This could mean that the group could incur a loss of more than RM10.3 million from the flood. It must be emphasized that this is a very rough guesstimate because the management has no idea what's the loss will be and how much of it will be covered by insurance claims.

Chartwise, the stock has broken below its strong horizontal support at RM1.60 today. It broke below the long-term uptrend line at RM1.80 yesterday. With this bearish breakdown, the stock is likely to test its next support at RM1.50. If this support cannot hold, it may even drop to the following support at RM1.20. Despite the bearish technical reading, I believe the stock is not a SELL at this stage. The worst case scenario is that the deal may be aborted and the stock could drop below RM1.50 (or, even to RM1.20 for a short while) before recovery. I feel that ENG, being a well-managed group, would have taken adequate insurance & should be able to ride out this disaster.


Chart 1: ENG's daily chart as at Oct 18, 2011_4.30pm (Source: Quickcharts)



Chart 2: ENG's weekly chart as at Oct 18, 2011_4.30pm (Source: Quickcharts)

(Note: I read this announcement at 4.15pm today. If I have read it earlier, I would have advised readers to avoid buying into this stock since the technical outlook took a turn for the worse. Without any visibility, investors are selling or buying blindly. We should step back & do not take part in this selling or buying activities.)