Adventa- rising sharply on better results?

Results Update

Adventa has just announced its results for QE31/10/2010. Its net profit increased by 44% q-o-q or 119% y-o-y to RM11.8 million, while turnover increased by 4% q-o-q or 22% y-o-y to RM91 million. The increased in the net profit is due solely to lower effective tax rate due to availability of reinvestment allowances from capital expenditure incurred by certain subsidiaries and profits exempted under pioneer status for a period of 10 years and other fiscal incentives from the government. This led to a transfer from deferred tax of RM7.7 million for QE31/10/2010.

Adventa's pre-tax profit level continued to slide- dropping 50% q-o-q or 31% y-o-y to RM4.2 million. The company attributed the decline to "the high raw material cost and weak US dollar. The fast hike in rubber prices induced a large time-lag related delay in revenue increase even though cost are eventually passed into selling price. This dragged down the quarter’s earnings. A new factory was completed in this period, adding capacity to the tight high utilization rate in some products."


Table: Adventa's last 8 quarterly results



Chart 1: Adventa's 23 quarterly results

Valuation

Without the deferred tax effect, Adventa's EPS for QE31/10/2010 would be about 2.75 sen (or full-year EPS of 11 sen). In the current environment, it is likely that this EPS number may go down. Assuming that this number can be maintained, Adventa (at RM2.49 now) is trading at a current PE of 23 times. That makes Adventa fairly expensive.

Technical Outlook

Adventa is enjoying a very strong rally this morning. As at 11.40am, Adventa was trading at RM2.49- a gain of 57 sen or 30% from yesterday's close! This means that Adventa has broken above its downtrend line resistance at RM2.40 (see Chart 2 below). The strong rally is very strange as the above results shows that the operating performance has actually deteriorated.


Chart 2: Adventa's daily chart as at Dec 22, 2010 (Source: Tradesignum)

From Chart 3 (plotted on log scale), we can see that Adventa had broken below the longer term uptrend line at RM2.20. It may be a moot point now to note that the stock has also broken below the psychological RM2.00 level.


Chart 3: Adventa's weekly chart as at Dec 20, 2010 (Source: Tradesignum)

Conclusion

The strong rally today causes a crash between the fundamental view- which is still negative- & the technical view- which has turned positive. Which view should we follow? I am inclined to take the fundamental view for now and recommend a "sell into strength" for those holding the stock or an "avoid" for those hoping to get in.