MFlour- impact by high price of raw material

Results Update

MFlour reported its results for QE30/9/2011. Its net profit dropped 36% y-o-y to RM15.5 million on the back of a 12%-increase in turnover to RM474 million. When compared to the immediate preceding quarter (QE30/6/2011), its net profit inched up by 2% while turnover was also 2% higher. The company attributed its poorer results to lower profit margin (due to higher raw material cost).


Table: MFlour's last 8 quarterly results



Chart 1: MFlour's profit margin for the last 22 quarterly results



Chart 2: MFlour's last 22 quarterly results

New Business development

MFlour has signed a shareholders' agreement with Indonesian investment company PT FKS Capital, Japan’s Toyota Tsusho Corp (TTC), Toyota Tsusho (Singapore) Pte Ltd (TTS) and PT Toyota Tsusho Indonesia (TTI) to establish a joint venture company named PT Bunga Sari Flour Mills Indonesia. The principal activities of Bunga Sari will be flour milling and the distribution of flour products and by-products in Indonesia. FKS will be the biggest shareholder of Bunga Sari with a 40% stake, followed by MFM (30%) and TTC (25%). TTS and TTI will hold 3% and 2% respectively. The current issued and paid-up share capital of Bunga Sari is 6.6 trillion rupiah (RM2.4 billion). For more, go here.

Indonesia, with its large population, could be the next growth area for MFlour.

Valuation

MFlour (traded at RM7.51 at 10.30am) is now trading at a current PE of 13.2 times (based on the average EPS for the last 2 quarters of 14.21 sen). At this multiple, MFlour is deemed fully valued.

Technical Outlook

From the weekly chart below, we can see that MFlour's immediate support is at the 10 & 20-week SMA line at RM7.20-7.40. Its immediate resistance levels are RM7.85 & RM8.00. As noted previously, investors are awaiting the generous capital exercise. Once the capital exercise is completed, MFlour's true color may appear.


Chart 3: MFlour's weekly chart as at Nov 16, 2011_9.30am (Source: Quickcharts)

If the financial result does not improve, MFlour may drift lower to test its immediate accelerated uptrend line (S2-S2) at RM5.50. If this uptrend line is violated, MFlour may even test its intermediate uptrend line (SS) at RM4.50. The first scenario is possible while the second scenario is very unlikely.


Chart 4: MFlour's weekly chart as at Nov 15, 2011 (Source: Tradesignum)

Conclusion

Based on the unchanged financial performance, I would keep my rating on the stock as 'sell into strength' (especially if it approaches the RM8.00 mark). However, since this is a good stock for long-term investment, you should look out to buy it if it drops to the support level as noted above.