EG: An attractive consumer electronic products manufacturer (UPDATED)

Background

EG Industries Bhd ("EG") Group is involved in:

• Provision of electronic manufacturing services (EMS) for computer peripherals, telecommunication and consumer electronic/electrical, and automotive industrial products industries.
• Manufacturing of complete box built products under original equipment manufacturer/original design manufacturer (OEM/ODM) 
• Manufacturing and sale of two layer solid wood parquet flooring

Corporate Development

In July 2014, Jubilee Industries Holdings Ltd. (Catalist:5OS) acquired 26% stake in EG from Jupax Enterprise Sdn Bhd and Tai Yeong Sheng for RM21 million (consisting of 19.504 million shares and 3.704 million warrants). This would valued the stock at around RM1.05 apiece (assuming the warrant is priced at RM0.10 each). Since this development, the earnings of EG has risen substantially, as seen below.

Recent Financial Performance (UPDATED)

For QE31/12/2014 & QE30/9/2014, EG reported net profit of RM10.3 million & RM7.6 million respectively. This compared favorably to net profit/(loss) of RM2 million for the preceding 9 quarters. Revenue has however remained at about RM200-250 million a quarter.

The reason for the substantial improvement is higher profit margin of 3-5% as compared to +/- 1% previously. Given the immediate improvement in profit margin, I can only conclude that the new shareholder has passed on some contracts with higher profit margin to EG. 


Diagram 1: EG's last 11 quarters' results (Sourced: ShareInvestor.com)


Diagram 2: EG's last 11 years' results (Sourced: ShareInvestor.com)

Update to the Financial results for QE31/12/2014 & QE30/9/2014

A reader, Big Sea had pointed out that the result for the last 2 quarters were boosted by exceptional items, which I had overlooked. Thank you, Big Sea!

I have tabulated below the quarterly & yearly P&L for your easy reading. EG had benefited from fair value gain on the realization of available-for-sale financial assets of RM989k & RM1.316 million in QE31/12/2014 & QE30/9/2014, respectively. Even if this gain is excluded, the NP is still very substantial. PER will be revised from 1.7 times to 2.0 times.

 
 Table 1: EG's last 11 quarterly P&L

 
 Table 2: EG's last 10 annuai P&L (plus projection for FY15)

Future Expansion

It is reported that EG is now operating near full capacity. It is looking to expand its production capacity (here). When new capacity has been installed, it is expected to achieved an annual turnover of RM2 billion (or double the current revenue) (here).

Financial Position

As at 31/12/2014, EG's financial position is deemed fairly tight with current ratio at 1 time and gearing ratio at 1.5 times. To financial its expansion as well as to bring down its gearing ratio, EG is likely to propose a Rights Issue this year.

Valuation (Updated)

EG (closed at RM0.835 as at 4.00pm today) is now trading at a current PE of 2.0 1.7 times! (no mistake!). This makes EG an extremely attractive stock.

Technical Outlook

EG has broken above its downtrend line, RR at RM0.40 in early 2014. Its immediate resistance is at RM1.00.


Chart 2: EG's monthly chart as at Mar 23, 2015_12.30pm(Source: ShareInvestor.com)

Conclusion

Based on improved financial performance, attractive valuation & positive technical outlook, EG is a good stock for long-term investment. Its weak financial position is a matter of concern but this can be easily rectified by carrying out a Rights Issue this year.

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, EG.