CCM- a 6-year decline!

Background

Chemical Company of Malaysia Bhd ('CCM') is the manufacturing, marketing and/ or supply of fertilizers, chemicals and pharmaceuticals products and services.

Recent Financial Results

For QE30/9/2012, CCM's net profit increased by 169% q-o-q or 483-fold y-o-y to RM8.2 million while revenue declined by 7% q-o-q or 5% y-o-y to RM374 million. The decline in revenue q-o-q is due to lower revenue from the Fertilizer division while bottom-line improved q-o-q due to better gross profit margin & operational cost reduction in the Fertilizer & Pharmaceutical divisions.



For the 9-month ended 30/9/2012, the 3 divisional performance are as follows:

• Chemical- pre-tax profit of RM24 million on revenue of RM259 million;
• Pharmaceutical- pre-tax profit of RM22 million on revenue of RM214 million; and
• Fertilizer- pre-tax profit of RM3 million on revenue of RM658 million.

Table: CCM's last 8 quarterly results


Chart 1: CCM's last 26 quarterly results

Financial Position

As at 360/9/2012, CCM's financial position is deemed mixed with adequate liquidity as reflected by a current ratio of 1.3 times while leverage is high, with gearing ratio at 1.1 times. The high leverage is due to the group's heavy borrowing to acquire its Fixed Assets and its subsidiaries. It must be noted that it carried in its books goodwill of RM284 million as at 31/12/2011. This goodwill can be allocated to a subsidiary in the Pharmaceutical division (of RM194 million) and  a few subsidiaries in the Chemical divisions (of RM90 million). Looking at the meager profit reported by these two divisions, it is likely that the goodwill (or amount paid in excess of the underlying assets of a business) is not justifiable and could be written off. This will have the effect of knocking off 70 sen from its Net Assets per share of RM1.86; giving a NTA of RM1.16 per share.

Valuation

CCM (closed at RM0.86 yesterday) is now trading at a PE of 13 times (based on last 4 qaurters' EPS of 6.63 sen). At this PE, CCM is deemed fully valued.

Technical Outlook

CCM has been dropping for the past 6 years. That should give pause to anyone thinking that the stock is a steal. It broke below the "horizontal line" (AA) at RM1.30. It seems to be in an irregular downward channel, XX-YY, with "support" at RM0.60-0.65 (at the line, YY).


Chart 2: CCM's monthly chart as at Dec 27, 2012 (Source: Tradesignum)

However, it seems to have found some buying support at RM0.85 in the past few days. Similar buying came & went in early 2009 & late 2011. The best that one can hope for is that the stock stages a rebound back to the downtrend line that stretches back to 2006. If so, it may go as high as RM1.20-1.30 or maybe just up to the psychological RM1.00 mark.


Chart 3: CCM's 120-min chart as at Dec 28, 2012_3.30pm (Source: Quickcharts)

Other Comments

Sometime in 2008, there was a rumor that Pharmaniaga might takeover CCM (here). Pharmaniaga, currently owned by Boustead, used to be substantially owned by Khazanah in 2008 while CCM was & still is substantially owned by PNB about 70%. Can such a deal be revived today?

Conclusion

Based on poor financial performance, unattractive valuation & bearish technical outlook, CCM is a stock to be avoided at this stage.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, CCM (and, Pharmaniaga).