Lonbisc: A possible breakout of a long-term downtrend line

Background

London Biscuit Bhd ("Lonbisc") is involved in the manufacture & sale of confectionery, snacks, sweets & candies and other related foodstuffs. It has a controlling stake in Kheesan, another listed company involved in the same business (here).

Housekeeping

In the past 3 years, Lonbisc had disposed off its investment in two listed companies involved in the production of eggs. In 2010, it sold off its 23.86%-stake in Lay Hong Bhd to QL Resources Bhd for RM11.852 million (at a small loss of RM130,000). In 2011, it sold off its 33.65%-stake in TPC Plus Bhd to Huat Lai Resources Bhd for RM8.075 million (at a small loss of RM400,000). With these disposals, Lonbisc has freed up its financial resources and can concentrate in its core businesses. 

Results Update

In QE31/12/2013, Lonbisc's net profit increased by 13% q-o-q or 69% y-o-y to RM4.9 million while revenue improved by 26% q-o-q or 46% y-o-y to RM92 million. Lonbisc is not very strong on investor relation or communicating to the investing. However, it furnished a surprising detailed segmental report, which I have reproduced below.



Table 1: Lonbisc's last 8 quarterly results



Chart 1: Lonbisc's last 39 quarterly results 

Lonbisc, which is not very strong on investor relation or communicating to the investing, surprised me by releasing a detailed segmental report (below), which gives the revenue numbers but omitted the results/profit numbers. I can't fully understand the report except to note that the market conditions for all 3 product segments (confectionery, snacks and sweets & candies) are either good or strong. That could only be good news for its shareholders.


Table 2: Lonbisc's segmental reporting for QE31/12/2013

Financial Position

Lonbisc's financial position as at 31/12/2013 is deemed mixed with poor liquidity as refelcted in its current ratio of 0.6x while gearing ratio is fairly elevated at 0.7x. The poor liquidity & high leverage position is due to poor assets management, with investment in property, plant & equipment amounted to RM528 million while annualized revenue for FY2014 is about RM330 million.

Valuation

Lonbisc (closed at RM0.765 today) is trading at a PE of 8 times (based on annualized EPS of 10.3 sen). Based on this PE, Lonbisc is deemed fully valued for a smallcap.

Technical Outlook

Lonbisc may have broken above its long-term downtrend line at RM0.70. It has also broken above its horizontal resistance at RM0.75. With this double breakout, Lonbisc could be poised to rise further. Its next strong resistance levels are RM0.90 & RM1.00.


Chart 2: Lonbisc's weekly chart as at Mar 10, 2014 (Source: Tradesignum)

Conclusion

Based on improved financial performance & mildly positive technical outlook, Lonbisc could be a good stock for a recovery play. Its negative factors are its poor liquidity position & elevated leverage- both are the result of its poor assets management.

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, Lonbisc.