Bernas- could be a good long-term investment

Background

Padiberas Nasional Berhad ('Bernas') is involved in procuring, collection, processing, importing, exporting of rice, paddy, and other grains in Malaysia.

Recent Financial results

Bernas has just announced its results for QE30/6/2011, where its net profit increased by 15% q-o-q or 53% y-o-y to RM63.5 million while its turnover increased by 1% q-o-q or 12% y-o-y to RM832 million. The improved bottom-line was attributed to lower cost of rice.


Table: Bernas's last 8 quarterly results



Chart 1: Bernas's last 22 quarterly results



Chart 2: Bernas's profit margin for the last 22 quarterly results

Price of Rice

The last time Bernas incurred a loss was in 2008- 3 quarters from QE30/6/2008 to QE31/12/2008). This coincided with the price of rice exceeded USD930 per ton. The sharp rise was due to a shortage of rice, which was contributed by many factors (for more, go here). Unless another sharp rise in the price of rice recurred, Bernas should be able to maintain its profit margin of 6%. Another possible factor which may affect its profit margin is pressure from the government to lower the price of rice. This pressure could come as a populist move to assuage an unhappy electorate ahead of the next general election.


Chart 3: Price of Thai Rice [with 5% broken rice] for 50 years & 5 years (Source: Mongabay)

Financial Position

Bernas's financial position as at 30/6/2011 is deemed acceptable, with current ratio at 2.4 times and net debts to equity at 0.8 time. The 'high' leverage is deemed acceptable as half the borrowings was used to finance its working capital.

Valuation

Bernas (closed at RM2.78 at the end of the morning session) is now trading at a PE of 6.2 times (based on last 4 quarters' EPS of 45 sen).

Technical Outlook

Bernas broke above its large triangle (ABC) at RM2.40 in December last year. It is in an intermediate uptredn line (SS) with support at RM2.50.


Chart 4: Bernas's monthly chart as at August 1, 2011_plotted on log scale (Source: Tradesignum)

Conclusion

Based on satisfactory financial performance, attractive valuation & positive technical outlook, Bernas could be a good stock for long-term investment.