PBA- profit margin eroded further

Results Update

PBA's results for QE31/12/2011 was disappointing. Its net profit increased 12-fold q-o-q or 33% y-o-y to RM16.7 million while its pre-tax profit dropped 14% q-o-q or 51% y-o-y to RM6.3 million. The reason for the divergence between the pre-tax profit & the after-tax profit is because of a small tax credit which arose due to reinvestment allowance & an origination & reversal of temporary difference for deferred tax of RM9.5 million.

If we looked at the bottom-line at the pre-tax profit level, we have reason to be concerned about PBA. In the latest notes to the accounts, the management has attributed the poorer performacne to increase in the cost of sales. This means that the company will have to raise the tariff rates on water- something which may be unpopular with the General Election around the corner. As such, I expect PBA's financial performance to be disappointing for the next 2 or 3 quarters.


Table: PBA's last 8 quarterly results



Chart 1: PBA's last 27 quarterly results

Valuation

If we exclude the one-off origination & reversal of temporary difference for deferred tax of RM9.5 million, PBA's after-tax profit for the past two quarters would be RM13.02 million. This would give a 6-month EPS of 3.93 sen or a full-year EPS of 7.86 sen. PBA's outstanding shares issued is 331.27 million. As such, PBA (closed at RM0.945 yesterday) is now trading at a current PE of 12.0 times. For a utility stock, that PE is deemed fair. The stock proposed or paid dividend totaling 3.5 sen for the past 4 quarters. Thus its dividend yield is only 3.7%.

Technical Outlook

PBA is still in a bottoming phase, despite a failed breakout above its long-term downtrend line in June 2011. It should have good support at RM0.85-0.88 from the line connecting its recent lows.


Chart 2: PBA's monthly chart as at Feb 2, 2012 (Source: Tradesignum)

Conclusion

Based on poorer financial performance, unexciting technical outlook & almost-full valuation, I would rate PBA as a SELL and redeploy your cash into something more rewarding.