Dnonce: Poised for Uptrend

Background

Dnonce Technology Bhd ("Dnonce")  is involved in 3 main businesses- Supply Chain Products & Servuces; Contract Manufacturing Services & Supply of Packaging Materials.

Technical Breakout

Dnonce broke above the line connecting its recent peaks, AB at RM0.48 yesterday. See Chart 1 & 2. This could well signal the beginning of an uptrend for the stock, which broke above its long-term downtrend line, RR in 3-4 months ago. However, its share prices have remained stubbornly stuck at RM0.40-0.46 all the while- until yesterday.


Chart 1: Dnonce's daily chart as at July 20, 2015 (Source: ShareInvestor.com)


Chart 2: Dnonce's weekly chart as at July 20, 2015 (Source: ShareInvestor.com)


Chart 3: Dnonce's monthly chart as at July 20, 2015 (Source: ShareInvestor.com)
(Note: As at 9.45am, Dnonce is trading at RM0.55.)

Recent Financial Performance

From Table 1, we can see that Dnonce has a steady revenue for the past 10 years. Its bottom-line started to improve since 2010. However, its result took a heavy knock in late 2011 when its Contract Manufacturing operation in Thailand was submerged in the Great Thailand Flood. For 2 quarters (QE30/11/2011 & QE29/2/2012), the group took losses from assets write-off and later from retrenchment expenditures.


Table 1: Dnonce's last 10 yearly P&L (Source: ShareInvestor.com)

In the past 4 quarters, Dnonce's revenue has crawled back- albeit at the expense of lower profit margin. 


Table 1: Dnonce's last 10 quarterly P&L (Source: ShareInvestor.com)

In the last quater (QE28/2/2015), Dnonce reported a big jump in the revenue from the Supply of Packaging Materials. This- plus good performance from the other 2 divisions- pushed Dnonce's net profit to RM0.7 million for QE28/2/2015. For 1H2015, net profit amounted to RM1.7 million. This translates to an annualized EPS of 7.6 sen.


Diagram 1: Dnonce's segmental results for 1H2015

Financial Position

As at 28/2/2015, Dnonce's financial position is deemed weak. Current ratio is marginal at 0.97 time while gearing is high at 2.2 times. The high gearing was due to high investment in non-current assets, such as Property, Plant & Equipment of RM42 million & oddly a trade receivable of RM43 million. This unusual trade receivable figure is likely to have arisen from a reclassification of other receivable, deposit & prepayment - which declined by RM30 million. See below:


Diagram 2: Dnonce's Balance Sheet as at 28/2/2015

Proposed Corporate Exercise

In March, the company proposed a corporate exercise, outlined below:


Diagram 3: Dnonce's Proposed Corporate Exercise

What is interesting is that it has proposed a capital reduction of 75 sen per share. This will yield a credit of RM33.8 million which is much higher than the accumulated losses of RM15.7 million as at 28/2/2015. This means that the company is likely to announce losses in the next 1-2 quarters that necessitates a higher credit in order to cover for the losses. In my opinion, this losses is likely to come from the full or partial write-off of the unusual trade receivable of RM42 million.

Valuation

Dnonce (closed at RM0.53 yesterday) is now trading at a PE of 7 times (based on annualized EPS of 7.6 sen). Its Price to Book is about 0.5 time (based on NTA of RM1.11 as at 28/2/2015). At this multiples, Dnonce is reasonably valued.

Conclusion

Based on technical breakout, Dnonce could be a good trading BUY. Its valuation is not demanding. Its performance has potential for improvement- as is its financial position.

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, Dnonce.