Friday, December 28, 2012

CCM- a 6-year decline!


Background

Chemical Company of Malaysia Bhd ('CCM') is the manufacturing, marketing and/ or supply of fertilizers, chemicals and pharmaceuticals products and services.

Recent Financial Results

For QE30/9/2012, CCM's net profit increased by 169% q-o-q or 483-fold y-o-y to RM8.2 million while revenue declined by 7% q-o-q or 5% y-o-y to RM374 million. The decline in revenue q-o-q is due to lower revenue from the Fertilizer division while bottom-line improved q-o-q due to better gross profit margin & operational cost reduction in the Fertilizer & Pharmaceutical divisions.



For the 9-month ended 30/9/2012, the 3 divisional performance are as follows:

  • Chemical- pre-tax profit of RM24 million on revenue of RM259 million;
  • Pharmaceutical- pre-tax profit of RM22 million on revenue of RM214 million; and
  • Fertilizer- pre-tax profit of RM3 million on revenue of RM658 million.


Table: CCM's last 8 quarterly results


Chart 1: CCM's last 26 quarterly results

Financial Position

As at 360/9/2012, CCM's financial position is deemed mixed with adequate liquidity as reflected by a current ratio of 1.3 times while leverage is high, with gearing ratio at 1.1 times. The high leverage is due to the group's heavy borrowing to acquire its Fixed Assets and its subsidiaries. It must be noted that it carried in its books goodwill of RM284 million as at 31/12/2011. This goodwill can be allocated to a subsidiary in the Pharmaceutical division (of RM194 million) and  a few subsidiaries in the Chemical divisions (of RM90 million). Looking at the meager profit reported by these two divisions, it is likely that the goodwill (or amount paid in excess of the underlying assets of a business) is not justifiable and could be written off. This will have the effect of knocking off 70 sen from its Net Assets per share of RM1.86; giving a NTA of RM1.16 per share.

Valuation

CCM (closed at RM0.86 yesterday) is now trading at a PE of 13 times (based on last 4 qaurters' EPS of 6.63 sen). At this PE, CCM is deemed fully valued.

Technical Outlook

CCM has been dropping for the past 6 years. That should give pause to anyone thinking that the stock is a steal. It broke below the "horizontal line" (AA) at RM1.30. It seems to be in an irregular downward channel, XX-YY, with "support" at RM0.60-0.65 (at the line, YY).


Chart 2: CCM's monthly chart as at Dec 27, 2012 (Source: Tradesignum)

However, it seems to have found some buying support at RM0.85 in the past few days. Similar buying came & went in early 2009 & late 2011. The best that one can hope for is that the stock stages a rebound back to the downtrend line that stretches back to 2006. If so, it may go as high as RM1.20-1.30 or maybe just up to the psychological RM1.00 mark.


Chart 3: CCM's 120-min chart as at Dec 28, 2012_3.30pm (Source: Quickcharts)

Other Comments

Sometime in 2008, there was a rumor that Pharmaniaga might takeover CCM (here). Pharmaniaga, currently owned by Boustead, used to be substantially owned by Khazanah in 2008 while CCM was & still is substantially owned by PNB about 70%. Can such a deal be revived today?

Conclusion

Based on poor financial performance, unattractive valuation & bearish technical outlook, CCM is a stock to be avoided at this stage.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, CCM (and, Pharmaniaga).

17 comments:

charles leong said...

Thank Q alex for that very detailed comment on ccm.i will take note of this with a watch full eye.funny though this counter is usually quiet but these couple of days volumm is hight.I wonder ???

cheeheng said...

dear Alex
can u comment on CANONE's financial position, valuation & support and resistance areas. Thanks very much.

Alex Lu said...

Hi charles leong

On CCM, the sudden big volume is due to a seller who threw in his towel. But, his selling was met by a buyer at RM0.85-0.90.

If the selling is finally exhausted, the stock can rebound. I expect the resistance at RM1.00 & RM1.15 to be fairly strong.

At the current prices of RM0.85-0.90 may look very tempting, the bearish outlook remained. At this point, we must treat any rebound as a selling opportunity. So, even if you have gotten in earlier, you have to know when to take profit.

Alex Lu said...

Hi charles leong

On CCM, the sudden big volume is due to a seller who threw in his towel. But, his selling was met by a buyer at RM0.85-0.90.

If the selling is finally exhausted, the stock can rebound. I expect the resistance at RM1.00 & RM1.15 to be fairly strong.

At the current prices of RM0.85-0.90 may look very tempting, the bearish outlook remained. At this point, we must treat any rebound as a selling opportunity. So, even if you have gotten in earlier, you have to know when to take profit.

Alex Lu said...

hi cheeheng

CANONE's immediate support and resistance level are at RM2.30 & RM2.50.

Its financial position is mixed, with adequate current ratio at 1.4 times while high gearing ratio at 1.3 times. The high gearing ratio is due to heavy borrowings taken to finance the acquisition of Kianjoo. The high gearing can be rectified by a Right Issue which can come in early 2013.

Canone's valuation is fairly attractive. Using the latest quarterly earning (for QE30/9/2012), we can estimate full-year EPS to be about 56 sen. This means that Canone is now trading at PE of 4.2 times.

Canone is rated a long-term BUY.

cheeheng said...

thanx Alex fr ur comments on Canone. :)

vincent chua said...

Hi Alex,
Can you kindly comment on current breakout of Hapseng at 1.67? Thanks.

hng said...

Hi Alex

About CCM, there are some latest development

1. PNB have exercise all its stake in CCM-WA at 1.36, 50% higher than market share. Thus have increase further stake in CCM and raise fresh capital for CMM, improving its balance sheet

2. PNB have just today announce purchase of CCM share from open market, absorbing selling pressure from EPF, which have cut its stake from 9% to around 6%

3. CCM, major division, CCM pharm has secure insulin right distribution, improving earning visibility.

hng said...

Hi Alex

For your information, according to CCM current shareholding, PNB is major buyer while EPF is major seller.

PNB has purchase more share open market and raise its stake to 62.1% based on enlarge share capital after take into account all warrant conversion.

As PNB has fully exercise its warrant but its entitle new share only will be list on 2 Jan. Therefore based on enlarge share capital, PNB has actual raise its stake 73.5% and EPF has only left with 5% stake, soon will ease to be substantial shareholder.

hng said...

Ho Alex

If PNB continue buy share through open market and absorb selling from EPF remaining 5% stake. Then, PNB stake will continue raise from current 73.5% to reach critical level at 75% and if exceed, it could trigger MGO

Alex Lu said...

Hi hng

Thank you for the analysis on CCM's latest changes in the shareholders. With the exercise of the warrants, PNB's shareholdings could increase to 73.6%- just 1.4% below the 75% mark. Once you own 75% of a stock, the stock would not comply with the 25% public shareholding spread. It does not mean that PNB must take the company private but if it chooses to keep CCM public, it must address the public spread.

How to do that, especially when you subscribe for the warrant at RM1.36. You can do a share placement but that must be above RM1.36 in order to avoid incurring a loss. Hopefully Bursa will grant it a longer time-frame to comply with the public spread requirement and in the interim, the share price can recover to above RM1.36.

The exercise of the warrant at RM1.36 each by PNB does suggest strongly that it may take CCM private. However, this is only true if you are looking at this action strictly from the point of view of an investor. PNB is more than an investor. It is the holding company of CCM and it has an obligation to look after the financial well-being of the subsidiary. The warrant could be tied to a loan or bond and the settlement of the loan or bond is from the proceed receivable from the exercise of the warrant.

CCM is turning out to be a big headache for PNB. It is interesting to see how PNB can salvage this investment.

Alex Lu said...

hi vincent chua

Hapseng has broken above the horizontal line at RM1.68. It nearly tested its recent high at RM1.77. For Hapseng to go higher, it must break above its recent high.

hng said...

Hi Alex

I'm bit confuse about take over code? PNB acquire SP setia last year, exceed 33% stake trigger voluntary take over offer at 3.97 and warrant at 97sen.

In current situation, PNB which already have 70% initially and subsequently increase stake further due to full conversion of warrant at 1.36, raising stake up to 73.6%. If PNB continue buy CCM through open market again that leas to its stake exceed 75% threshold, how come there is not trigger take over code?

Ivan said...

Good day Alex Lu,

Happy New year 2013 :)

Alex Lu said...

Hi hng

To be frank, I am not 100% sure. If I am not mistaken, if you crossed the 33% mark, you must make a conditional GO. It is conditional in the sense that if you don't get 50% plus 1, you may choose not to accept the share proffered. After that, you may increase your shareholding by no more than 2% per annum.

If you crossed the 50% mark, you must make an unconditional GO. You must accept whatever that was proffered in the GO. Once you hit the 75% mark, you then must decide whether you want to keep the company listed or otherwise. To keep it listed, you need to maintain a public spread of 25%.

If you crossed the 90% mark, you can then proceed to privatize the company.

Please correct me if I am wrong on any of these points.

hng said...

Hi Alex

Thanks for clarification. Currently my portfolio have CCM, MBF and IGB

1. CCM - PNB already have stake 73.6% and still buy share through open market: threshold: 75%

2. MBF - Major shareholder, Tan Sri Lourin already have stake 86.5% and still buy share through open market: threshold: 90%

3. IGB - Tan family + Goldis combine already have 39.7% + share buyback accumulating 4.82% treasury share and still buy share through open market: threshold: 50%

Lee Jack said...

By the way, if PNB announce that it has purchased from market on 28/12, 02/01 and 03/01, it show a good signal to market. Hope there is a good news be announced soon.