MFlour- a disppointing result for QE30/6/2011

Results Update

For QE30/6/2011, MFlour's net profit dropped 49% q-o-q to RM15 million on the back of a 2%-increase to RM466 million. The sharp drop in profitability is due to sharp increase in raw material costs. Compared to same quarter last year, its net profit inched up 2% while turnover jumped 36%.


Table 1: MFlour's last 8 quarterly results



Chart 1: MFlour's 21 quarterly results

Valuation

MFlour (closed at RM7.48 yesterday) is now trading at a PE of 8.2 times (based on last 4 quarters' EPS of 91 sen). However, if raw material costs remained high & MFlour cannot pass on the increased costs to its customers, then the forward EPS should be lowered to 56 sen; thus giving the stock a PE of 13.4 times. At this PE multiple, MFlour is deemed fully valued.

Technical Outlook

From the chart below, we can see that sharp rise in MFlour over the past 6 years, from a low of RM1.50 to its recent high of RM8.50. Except for a short period in 1996, 1998, 1999 & 2011, MFlour normally trades within a big range of RM1.50 & RM4.50. If MFlour's bottom-line were to contract, it is possible that this stock may fall back into that trading range. See my earlier chart.


Chart 2: MFlour's monthly chart as at Aug 1, 2011 (Source: Tradesignum)

From the daily chart below, we can see that MFlour's critical support is at RM7.00-7.09. Investors may hold onto the stock at this level while awaiting the generous capital exercise. If the RM7.00 support level is violated, or if the capital exercise is completed, investors will not hold on to the stock, especially if the results continued to disappoint.


Chart 3: MFlour's daily chart as at Aug 24, 2011_12.30pm (Source: Tradesignum)

Conclusion

Based on the poor results for QE30/6/2011, we should be concerned about the prospect for MFlour. I think you should take some profit on the stock. If it breaks the RM7.00 support, I would downgrade it to a SELL.