BKoon may have a bullish breakout, but ...

Boon Koon Group Bhd ("BKoon") is involved in the manufacture of commercial vehicle bodies as well as the rebuilding of commercial vehicles. BKoon's financial performance for the last quarter ended 31/3/2008 has been quite disappointing. Net profit dropped 53% q-o-q or 67% y-o-y to RM1.8 million. Its turnover dropped 13% y-o-y to RM46.8 million, but was up 1.6% from the immediate preceding quarter. The company attributed the drop in net profit to the decrease in profit margin resulted from clearance exercise of slow moving inventories and the continued unfavorable movement in foreign currencies. The topline decline (compared to last year) was due to the relatively lower demand and longer on-the-road processing.



If the negative factors depressing its profitability were to subside, then BKoon's net profit could normalize to 12-14 sen per share. BKoon (closed at RM0.24 yesterday) would be trading at a PE of 2 times (assuming an EPS of 12 sen). Its P/Book is also very attractive at 0.3 times (based on NTA per share of RM0.76 as at 31/3/2008).

Why then is this stock dropping? From the Balance Sheet as at 31/3/2008, we can see that its current ratio is quite comfortable at 1.64 times (compared to 1.50 times as at 31/12/2007). The increase in current ratio was attributable to a drop in its short-term borrowings. Total bank borrowings remained relatively unchanged and its gearing ratio remained very high at 1.46 times (compared to 1.51 times as at 31/12/2007). The main reason for the high gearing ratio is the need for a large working capital, to finance its inventory (due to the slow conversion cycle from parts & components to finished vehicles pending certification) and the need to provide some suppliers' credit to its buyers. I believe that BKoon is under-capitalized for its current operation.



The sharp decline in its share price can be traced to continuous selling by 2 substantial shareholders, i.e. The Blackhorse Emerging Enterprises Fund (handled by UBS AG)& an undisclosed fund (handled by HSBC Trustee). These 2 funds collectively hold 21.5 million shares in BKoon (or, constituting about 15.5% of its present outstanding share capital). Against such over-sized & determined sellers, would any investor dare to step into the ring & be a contrarian?

This morning, BKoon's share price has a big jump to hit a high of RM0.315 as at 9.45 am. It appears to have broken above its medium-term downtrend line at the RM0.30 level. I doubt this breakout can sustain, but we will have to wait & see.


Chart: BKoon's weekly chart as at July 28th (source: Quickcharts)