Guanchg's net profit declined by 25% q-o-q to RM26 million while its turnover increased by 9% to RM366 million. Compared with the same quarter last year, Gianchg's net profit increased by 45% on the back of a 23%-increase in turnover.
The break in the sequential rise in the bottom-line was unrealized loss on forex contracts (amount n/a) and lower realized gain on forex contracts (of RM3.8 million as compared to RM6.3 million), which were partially offset by higher gain on commodity futures contract (of RM3.5 million) and higher turnover.
Table: Guanchg's last 8 quarterly results
Chart 1: Guanchg's last 24 quarterly results
Financial Position (Updated)
Guanchg's financial position as at 30/9/2011 is worrying. However, we must bear in mind that Guanchg has set up a new coca grinding plant with annual capacity of 60000 tonnes in Batam. This new operation would require higher inventory of raw cocoa beans and also resulting in the holding of substantial WIP & finished products. The finished products are cocoa powder & cocoa butter. In the past one year, the global demand for cocoa powder was very strong while the demand for cocoa butter was weaker. This different demand for the two output resulted in increased holding of cocoa butter.
While its current ratio is comfortable at 1.1 times as at 30/9/2011, Guanchg's gearing ratio is very high at 1.5 times. The gearing ratio has increased from 1.1 times as at 31/12/2010, as the company utilized short-term loan & borrowings (which increased from RM193 million to RM375 million) & Trade & Other Payables (which increased from RM72 million to RM176 million) to part-finance the huge Inventory (which increased from RM156 million to RM473 million). The increased Inventory is a cause for concern, with Inventory Collection period rising from 48 days in QE30/9/2010 to 117 days in QE30/9/2011. However, this increase is due to the above-mentioned reason which I believe to be valid & acceptable. However, the company should consider raising its share capital in the near future to bring down its high gearing ratio.
(Note: This segment was added subsequently when one reader, Big Sea has raised the concern about the sharp rise in the company's Inventory. I hope this explanation, from my personal knowledge, would suffice to justify Guanchg's rating as a HOLD. Hat tip to Big Sea on this matter as I must admit that I didn't examine Guanchg's Balance Sheet on my first study on the latest results.)
Valuation
Guanchg (closed at RM2.51 yesterday) is now trading at a PE of 6 times (based on last 4 quarters' EPS of 41.85 sen). At this PE multiple, Guanchg is deemed fairly attractive.
Technical Outlook
Guanchg is trying to break above its medium-term downtrend line at RM2.50. If it can surpass this resistance, the stock may continue with its prior uptrend and retest its recent high at RM3.00.
Chart 2: Guanchg's weekly chart as at Nov 9, 2011 (Source: Quickcharts)
Conclusion
Based on continued good financial performance (albeit a break in sequential rise due to unfavorable forex movement) & attractive valuation, Guanchg is rated a HOLD. If it can break above the RM2.50 level convincingly, it can be rated a trading BUY.
4 comments:
Alex.
Guan Chong Inventory holding (in RM):
Q1 - 193 mil.
Q2 - 265 mil.
Q3 - 472 mil.
Total Liabilities : -
Q1 - 337 mil
Q2 - 371 mil
Q3 - 593 mil.
For this year alone, loan increase by 120 mil. Trade Payable also increase by 120 mil. This does not seems like a company that is making money. All the money, including the profit as well as the borrowing are all in the inventory. Why is Guan Chong doing this ?
Top line looks pretty but a closer look the situation is quite confusing.I hope Guan Chong is not another Megan Media or Transmile.
Hi Alex,
Global market is volatile this few weeks with good news coming in today and it might turn all around on tommorow specially the euro zone issues.
My question are:
a) If technical chart showed positive breakout or most likely to be in uptrend but some bad news on global market strike-in on tommorow. Should the bad news to be taken as a priority on consideration?
b) It sound like the Euro zone issue is endless and dramatic. From Iceland to Greece, then to Italy. Later, who know the focus will be Spain and so on. Could you share your opinion on the issue?
Hi Chanhoo,
Technical analysis assumed that the European problem has been factored into the price. This does not mean that a negative event would have no impact. It simply means that the medium-term price direction would likely to remain intact.
It seems like the market is moving onto the next target- Spain. Sometimes, the way the market seeks out target to hit, one gets the feeling that there is a war out there. Skirmishes & battles were fought on weekly basis, with either positive or negative outcome and then the combatants would move on. We are all wanting for the end of this war- a game changer. Hopefully that event will be positive and the global economy & financial system will see a recovery from that point onwards. Until then, we are being jerked around.
Thanks Alex.
I got the feeling that toward end of the year, more positive news will flow-in than bad news. That why some people said 'Christmas rally/ shopping'. While negative news tend to be released at mid of the year, usually right after summer break.
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