MCLEAN: Soaring Earnings Will Have To Wait

Background

MCLEAN Technologies Bhd ('MCLEAN") is involved in the provision of surface treatment services, precision cleaning & washing and cleanroom assembly service. Its operation is carried out in its plant in Woodlands, Singapore & the newly-acquired DWZ's facilities in Ulu Tiram, Johor. For more on their services, go here.


Source: Company's website

Recent Financial Result

MCLEAN's financial performance has been anything but exciting over the past 5 years (see the half-yearly result since June 2011). This changed since it completed its acquisition of a 55%-stake in DWZ Industries Sdn Bhd in October last year for RM14.1 million. For more on the DWZ acquisition, go here.

This acquisition allows the group to diversify into surface finishing of metal & non-metal parts. This led to a 61%-increase in the revenue recorded by the surface treatment and precision cleaning division for QE31/12/2015. The gross profit of that division rose by a smaller percentage of 32% due to lower cleanroom assembly and higher cassettes precision cleaning done in Singapore to compensate for Wuxi factory golden week shutdown. Overall, the group's revenue jumped by 130% y-o-y to RM21.99 million in QE31/12/2015. As a result, the group chalked up a net profit of RM6.1 million as compared to a net loss of RM813k previously.


Diagram: MCLEAN's last 10 half-yearly P&L
 
Financial Position

MCLEAN's financial position is deemed satisfactory as at 31/12/2015 with current ratio at 2.1X while total liabilities to equity stood at 0.48X.

Valuation

MCLEAN (closed at RM0.165 yesterday) is now trading at a PER of 1X (based on annualized EPS of 18 sen basing on the turnaround in QE31/12/2015). Alas, this amazingly cheap stock may not see its full potential as it is burdened with an urgent & massive legal problem.

Legal Problem

The acquisition of DWZ looks like a master stroke for MCLEAN until DWZ was served with a Letter of Demand by Petroliam Nasional Berhad (“Petroliam”) and Petronas Gas Berhad (“PGB”) in February (here). To wit: 

DWZ Industries Sdn. Bhd. (“DWZ”) and DWZ Industries (Johor) Sdn. Bhd. had been served with a Letter of Demand by Petroliam and PGB (“collectively referred to as “Petronas”) through its solicitors for:

1. unlawful entry or caused to enter the lands held under HS(M) 4144 PTD 179156, Mukim Plentong, Johor Bahru, Johor and no. Hakmilik 1027, Mukim Plentong, Johor Bahru, Johor (collectively referred to as “Lands”) and constructed and/or installed a piping structure of approximately 50 metres under the Lands which is connected to DWZ’s premises at No. 30, Jalan Maju 1, Taman Perindustrian Desa Cemerlang, 81800 Ulu Tiram, Johor (“the Premises”); and

2. discharge of certain noxious and toxic effluents from DWZ’s piping structure and the Premises onto the Lands, which has caused substantial damage to PGB’s pipeline.

Due to the above, Petronas has demanded for a sum of RM46,754,614.07 from the Company and/or its subsidiaries. Failing which, Petronas will commence legal proceedings against the Company and/or its subsidiaries to recover all sums due and additionally liable for interest and costs. 

The company has subsequently announced to Bursa Malaysia that "if in the event the claim is payable it will have an adverse financial impact to the Group."  This is quite obvious as the amount claimed of RM46.75 million exceeds the shareholders' fund of RM34.00 million as at 31/12/2015.

Technical Outlook

Since the announcement of Petronas's Letter of Demand, MCLEAN share price dropped back to the uptrend support of RM0.16. Until this support is broken, the share price should maintain at this level. For the next few days, I expect the stock to enjoy a slight rebound as the market factors in the huge jump in the company's earning for QE31/12/2015.


Chart 1: MCLEAN's weekly chart as at April 13, 2016 (Source: ShareInvestor.com)


Chart 2: MCLEAN's monthly chart as at April 13, 2016 (Source: ShareInvestor.com)

Conclusion

Based on strong financial performance, good financial position, very attractive valuation & mildly positive technical outlook, MCLEAN is a stock that should be a screaming BUY. Unfortunately, the BUY call will have to wait until the Letter of Demand from Petronas has been resolved.

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, MCLEAN.