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Monday, February 27, 2017

EG: Raising Funds For Its Next Growth Phase

Result Update

For QE31/12/2016, EG's net profit rose 6% q-o-q or 43% y-o-y to RM7.6 million while revenue rose 11% q-o-q or 24% y-o-y to RM260 million. Revenue increased q-o-q mainly driven by higher customer’s demand for consumer electronics products due to year-end holiday seasons. Profit before tax rose 8.8% q-o-q on the back of higher sales, which was partially offset by the increased of labor cost due to revision of minimum wage rate and increase in number of contract workers with higher wage rate for production ramp up.

 
 Table: EG's last 8 quarterly P&L

 
Graph: EG's last 19 quarterly P&L 

Proposed Rights Issue

On 15 February, EG announced a Rights Issue of 1 redeemable convertible preference shares (RCPS) for every 4 ordinary shares owned which comes with 1 bonus share for every RCPS subscribed for. The proceeds will be mainly used to fund acquisitions of equipment and machinery, raw materials, and potential new businesses or assets. For more, go here.

Valuation (Updated)

EG (closed at RM0.92 last Friday) is now trading at a trailing PER of 10x (based on last 4 quarters EPS of 9.27 sen). At this PER, EG is deemed fairly valued.

Technical Outlook

EG has been climbing up gradually since 2013. It appears to have broken out of a descending triangle in December last year. The ensuing rally however failed to make headway until early this month.


Chart 1: EG's monthly chart as at Feb 24, 2017 (Source: ShareInvestor.com)

About 10 days ago, EG rallied to a high of RM0.98. This rally was cut short when the company announced the above-mentioned Rights Issue. From the chart below, we can see that EG is now resting on its intermediate uptrend line support of RM0.85-0.87. Alas, EG-WC broke below its uptrend line support of RM0.56. Is the breakdown of EG-WC's uptrend line a harbinger of more selling ahead for the warrant & the stock? We have to wait and see.


Chart 2: EG and EG-WC's daily chart as at Feb 24, 2017 (Source: ShareInvestor.com)

Conclusion

Based on improving financial performance & fair valuation, EG remains a good stock to ride the ongoing electronic manufacturing services play.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

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