Emetall: Not Such An Excting Stock After All

Result Update

In QE31/12/2016, EMETALL reported a net loss of RM3.2 million on a 70%-increase in revenue of RM29 million. The loss was incurred mainly due to increase in production cost of steel product and trading activity segment.


Table: EMETALL's last 8 quarters' P&L  

The last 2 quarters of poor earnings raised serious doubt as to the earlier assumption made about this stock.


Graph: EMETALL's last 12 quarters' P&L  

Valuation

EMETALL (closed at RM0.64 yesterday) is now trading at a trailing PER of 8.6x (based on last 4 quarters' EPS of 7.39 sen). With 2 quarters of poor results, EMETALL - a small-cap stock - does not deserve a PER of 8x or better. Thus this stock is deemed fully or over-valued.

Technical Outlook

EMETALL is now hanging onto its intermediate uptrend line, with support at RM0.63. If this uptrend line is violated, it may drop to the support from the horizontal lines at RM0.50 or RM0.40.


Chart 1: EMETALL's weekly chart as at Feb 21, 2017 (Source: Shareinvestor.com)


Chart 2: EMETALL's monthly chart as at Feb 21, 2017 (Source: Shareinvestor.com)

Conclusion

Based on ipoor financial performance and demanding valuation, I downgrade my rating for EMETALL to a SELL.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

EMETALL: An Interesting Machinery & Equipment Manufacturer

Background

EONMETALL GROUP BHD ('EMETALL') is basically involved in the production of flat steel and flat steel products as well as steel machinery and equipment. The business activities may be grouped under Machinery & Equipment and Steel Product & Trading.


EMETALL's 2 Main Businesses

EMETALL has patented a new palm oil extraction plant known as solvent extraction plants ('SEP') which are used to extract residual oil from mesocarp fibre (here & here). Currently, the fibre are either thrown away or burned to generate steam in the mill. There are about 1350 mills in Malaysia and Indonesia which could be the potential buyers of the SEP. To make economic sense, the price of CPO must trade above RM2200. With CPO trading at about RM2600, the demand for SEP is expected to pick up.


Chart 1: CPO's daily chart as at June 6, 2016 (Source:http://ifs.marketcenter.com)

Historical Financial Performance

EMETALL's revenue dropped FY2013  & FY2014 due to lower demand for Steel Product & Trading and Machinery & Equipment segments. In FY2015, both segments enjoyed a rebound in revenue and profits due to improved demand.


Table 1: EMETALL's last 9 years' P&L 


Chart 2: EMETALL's last 9 years' P&L  

Recent Financial Results

EMETALL's revenue rebounded strongly due to higher revenue from the Machinery & Equipment segment.


Table 2: EMETALL's last 10 quarters' P&L  


Chart 3: EMETALL's last 10 quarters' P&L  


Table 3: EMETALL's segmental results

Financial Position

As at 31/3/2016, EMETALL's financial position is deemed satisfactory with current ratio at 1.7x and total liabilities to equity at 0.4x. Debtors' collection period was at 112 days while inventory holding period was at 220 days. The high inventory holding period may reflect the nature of its business where the conversion cycle may take a few months.

Valuation

EMETALL (will close at RM0.75 today) is now trading at a trailing PER of 7.5x (based on last 4 quarters' EPS of 10.38 sen). A this PER, EMETALL is deemed fairly valued for a small-cap stock.

Technical Outlook

EMETALL rallied strongly over the past 6 weeks after it broke above its irregular downward channel at RM0.40. Today, it broke above the resistance from its immediate horizontal line at RM0.70. Its next resistance will be at RM0.90, RM1.00 & RM1.10. A quick rally to the last top could mean a prolonged consolidation ahead. There is no point to rush into this stock if there is no meat left on the bone.


Chart 4: EMETALL's weekly chart as at June 6, 2016_11.00am (Source: Shareinvestor.com)


Chart 5: EMETALL's monthly chart as at June 6, 2016_11.00am (Source: Shareinvestor.com)

Conclusion

Based on improved financial performance, fair valuation and bullish technical outlook, EMETALL could be a good stock to consider for long-term investment. Good entry level is at RM0.70. 

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, EMETALL.