Wednesday, June 15, 2011

Hexagon- tough times never last or never end?

Background

Hexagon Holdings Bhd ('Hexagon') is involved in many businesses, which are grouped 3 broad divisions:
1) Engineering & Design
2) manufacturing & Distribution
3) Trading & Services

Recent Financial results

Since 2008, Hexagon's financial results can only be described as unexciting. In FYE31/3/2011, that pedestrian performance took a turn for the worse. Its turnover dropped 21% from RM414.3 million to RM326.8 million, which led to a 43%-decline in gross profit from RM65.0 million to RM37.3 million. This level of gross profit was insufficient to cover overhead expenses and the company incurred an operating loss of RM33.5 million. This compared to a small operating profit of RM2.5 million recorded for FYE31/3/2010. Net losses increased from RM4.4 million to RM47.0 million.

It must be noted that the company made a provision of RM12.6 million for FYE31/3/2011 (of which RM12.3 million was booked in during QE31/3/2011). Would there be more provision or write-off in the future?


Table 1: Hexagon's past 8 quarterly results



Chart 1: Hexagon's last 16 quarterly results

Financial Position

Hexagon's financial position as at 31/3/2011 is very weak. Its leverage is excesssive as reflected by debts to equity ratio of 3.6 times. At the same time, its liquidity is tight with current ratio of 1.1 times.

What is worrying is the deterioration in the debtors' collection period, which had steadily risen from 181 days as at 31/3/2009 to 225 days as at 31/3/2011. While it is not unusual to have some debtors dragging out the settlement of their debts to 4-6 months, Hexagon's debtors seems to be setting a new record. To be sure, a longer than usual debtors' collection period raises concern about quality of some of the debts. Was a write-off of RM12.6 million in FYE31/3/2011 a reasonable sum as compared to the debtors of RM201 million as at 31/3/2011? Poor quality of high debtors (or account receivable) coupled with high leverage is a serious sign of danger. Assuming a further write-off of 20% (or RM40 million), Hexagon's debts to equity was soared to 8 times! Since Hexagon's debts are mostly short-term debts, any banker recalling its facilities could trigger a default.


Table 2: Hexagon's financial ratio as at 31/3/2011, 31/3/2010 & 31/3/2009


Table 3: Hexagon's Balance Sheet as at 31/3/2011, 31/3/2010 & 31/3/2009

Valuation

Hexagon (closed at RM0.23 yesterday) is trading at a Price to Book of 0.6 times.

Technical Outlook

Hexagon is in a downtrend line, with resistance at RM0.50-0.52. On May 31, it broke below the horizontal line RM0.40 and touched a low of RM0.18. Yesterday, the stock has a rebound which hit a high of RM0.27. This rebound will face strong resistance at the horizontal line of RM0.40 & the downtrend line at RM0.50-0.52. Instead of buying into this stock, those holding position in it should try to sell into strength.


Chart 2:Hexagon's weekly chart as at June 15, 2011 (Source: Quickcharts)

Conclusion


Based on the poor financial performance & financial position plus bearish technical outlook, Hexagon is a stock to be avoided.

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