Dufu Technology Corp (RM0.58) - A super undervalued gem riding on recovery and expansion

Dufu Technology, a manufacturer of HDD components, is a gem waiting to be unleashed as this counter remains very underpriced and largely gone unnoticed by the market, despite its massive surge in earnings by riding on the recovery in global demand for HDD and more importantly its expansion into China.

It is operating in a 120K sq ft factory in Bayan Lepas Free Trade Zone, Penang, producing mainly HDD components such as disk clamps, disk spacers, hexagon nuts etc which contributed about 80% of its revenue. The company also manufactures components for industrial safety and sensor, telecommunication, computer peripheral and computer electronics. Its main customers are Western Digital, Seagate and Hitachi Global Storage Technology, which are some of the largest HDD manufacturers in the world. It is understood that Dufu commands a market share of 20-30% of the disk spacers and disk clamps globally while its closest competitors are Disk Precision Industries, Global Primax of China and Notion Vtec.

Ok. The main story is that it has acquired a Chinese company named Futron Technology Limited in 1Q2009 which is complementary to the company's business as Futron also manufactures and trades components of HDD and computer peripherals. About 70% of its revenue comes from South East Asia while the remaining is from China. Its factory is located near Guangzhou and has a size of 90K sq ft which allows Dufu further expansion. The beauty of the acquisition was that Dufu acquired it at a very cheap price of RM20mil which is about PE '09 of 4x. As at 9 months ending Sept 2008, its revenue was about RM20mil with net profit of RM2.5mil. This was about 1/3 of Dufu's earnings. In addition, the acquisition also came with a profit guarantee of RM5 mil for 2009 where any shortfall from the profit guarantee will be compensated.

Currently, utilization rate of its factories is about 90% in Penang and 100% in China. It has planned RM20mil for expansion in 2010 of which about half of it will be used by 1Q2010. With the acquisition of Futron coupled with the recovering market, Dufu's earnings and margins have been expanding significantly and even breached its historical peak. Its latest net profit and net margin reached RM5 mil and 14.2% respectively in 4Q09, surpassing its height of RM3.4mil and 13.5% respectively back in 3Q07.

Assuming that its latest performance will be maintained for the rest of 2010, though I believe that HDD market demand will continue to trend upwards, its net profit will come up to RM20mil in 2010, translating into EPS of 16.7 sen. Consequently, PER for 2009 and 2010 will only be at 6.0x and 3.5x respectively!!!!!!!!! Therefore, even if PER of 6x is attached, the stock price could reach RM1.00 already from its current level of RM0.58, a hefty 72.4% rise!! Dreaming? Hopefully this dream will come true :)

Stock Price: RM0.58

Shares Outstanding: 120 mil

EPS for 2009 and 2010: 9.6 sen and 16.7 sen

PER for 2009 and 2010: 6.0x and 3.5x

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Fajarbaru (RM1.26) 1QFY06/2010 Results: Ok ok, in line

Performance: Results as expected. Revenue & net profit rose 2.3% y-o-y and 68% y-o-y to RM40mil and RM4.4mil respectively. Net margins rose significantly to 11% from 6.7% in 1QFY06/2009. Nonetheless, on q-o-q basis, revenue dropped 27.5%, dragging net profit down by 28%. But this will be a non-issue as the lower revenue might be due to the shorter working period during the quarter owing to Hari Raya festive season.

More cash: Cash pile rose to a ballooning RM112.6 million from RM88.8 million (nice number 888) which translates into 69.3 sen, which is a huge 55.5% of the share price. Borrowings remain at zero. Taking off the cash part, its construction business will be valued at a mere PER of 3.8x!!! Where to find this kind of value??!! Some more construction net margins at double digits.

Share dividend!!: The company just declared share dividends in the ratio of 1 treasury share for 25 ordinary shares with EX date on 5th Nov 2009. This will further increase liquidity of its shares and boost the value of shareholders by approximately 5 sen per share (Assuming current price of RM1.26). A good move to shore up the share price. Worth accumulating now.

Shares issued : 162.6 million

Market Cap : RM204.9 million

Beta : ~1.0x

Dividend Yield : 2.5-3.0%

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Fajarbaru (RM1.21): Watch out for LCCT award in November

Fajarbaru is one construction stock that hasn't moved much for the past 3 months, hovering between RM1.15 to RM1.30. I believe investors are probably waiting for more concrete news to come for this stock such as project awards from the new LCCT terminal worth RM2bil, upgrading of Penang Airport worth RM250mil or subcontracting works from large scale projects.

Orderbook remains strong: Fajarbaru's current orderbook stands at an estimated RM450mil which could last for about 2 years. Ongoing projects and outstanding amount are as below (As at June'09):

1. KTM - Batu Gajah: RM5mil

2. Penang Airport (Airfield pavement, parking apron): RM3mil

3. LCCT expansion: RM71mil

4. Seremban-Gemas Double Tracking: RM280mil

5. Tampin Hospital: RM138mil

Its current orderbook is still alright at RM450mil considering its revenue back in 2007, 2008 and 2009 were RM123mil, RM88mil and RM185mil respectively. By simple calculation, revenue has to reach RM225mil per year to finish its current orderbook, which is still a decent 22% y-o-y increase for FY06/2010 (Financial year ending June), assuming no replenishment of orderbook.

Potential beneficiary of small & large scale Government projects: Fajarbaru is a strong contender for large scale projects such as the new LCCT terminal worth RM2bil and upgrading of Penang Airport worth RM250mil, owing to its vast experience in airport works such as the Phase 1 of LCCT extension, subcontract works for KLIA, Penang Airport taxiway & apron rehab., current ongoing Phase 2 of LCCT extension and MRO hangar at KLIA which added up to a total of RM356mil worth of airport works. In addition, the Company might secure some subcontracting works from large scale projects such as the Double Tracking for Gemas-JB line worth about RM7.5bil (though the timeline for this project remains uncertain) given its current experience in subcontracting works for Gemas-Seremban Double Tracking project awarded by Ircon. Government's stimulus packages which include smaller projects might benefit Fajarbaru as well given its portfolio which includes small-scale projects.

Favorable margins: Margins will remain strong owing to the Company's ability to design & build, which allows them to manage their costs and time more efficiently while at the same time, these design-and-build projects command higher margins. Historically, margins have been impressive at close to 10% for the past 2 years and recorded net margins of 11% and 15% for the past two quarters, a rather impressive feat for a construction company. Furthermore, with raw material prices becoming stable and more predictable as compared to 2007-08, managing of construction costs becomes easier.

Strong management: The company is helmed by MD & CEO of Fajarbaru, Dato Low Keng Kok who was the former joint MD of Road Builder Holdings Bhd (a reputable construction company). Backed by 3 decades of experience in management of building, infrastructure and privatisation projects in addition to being a substantial shareholder with 7.9% stake currently (from 6.4% earlier this year), Low could steer the company to greater heights. (Maybe he wants to create another Road Builder..hehe).

Valuation: The recent private placement of 10% of its shares issued added another RM16mil to its cash pile from RM89mil to RM105mil, translating into 64.6 sen per share which is half of its share price already. The huge cash pile used to gear up for upcoming Government projects probably shows the Company's optimism in obtaining the awards. By imputing RM200mil replenishment of orderbook per year, its net profit has the potential to reach RM30mil by FY06/2011, which is 18.5 sen. Assuming EPS of 15-18 sen for FY2010-11, PER is only at 6.6x-8.2x. By attaching PER of 10x, the share price should rise to RM1.50 from current price of RM1.21.

In the meantime, wait for project awards for Fajarbaru such as LCCT, double tracking projects, Penang Airport etc which will trigger a run-up in share price. Or else, share price might just continue to remain unexciting.

News on new LCCT Terminal probably starting works in November. Source: www.btimes.com.my - 10th Oct 2009

Malaysia Airports Holdings Bhd (MAHB) (5014), the country's biggest airport operator, hopes to start earthworks next month on the new permanent low-cost carrier terminal (LCCT) in Sepang, its chairman Tan Sri Dr Aris Othman said.

Aris said it was crucial that works begin next month for MAHB to complete the LCCT by the third quarter of 2011. "We are sticking to our 2011 deadline," he told reporters after the graduation ceremony for 194 airport security staff at the Bunga Raya Complex in Sepang yesterday. In March, MAHB said it would complete the new terminal and a new runway within two and a half years, without exceeding the estimated cost of RM2 billion.

The permanent LCCT will be located to the west of the main KLIA terminal building, roughly 1.5km in distance. The new terminal building will be 150,000 sq m and hold up to 30 million passengers a year, with capacity for expansion of up to 45 million passengers. MAHB is also planning substantial investments to beef up its retail shopping and services division to boost revenue.

In the financial year ended December 31 2008, its retail and food and beverage division posted RM304.9 million sales, or about a fifth of the group's revenue of RM1.51 billion. Aris said MAHB will focus on renovations to the main terminal building of the airport to enhance the retail facilities located there. "We realise we cannot rely on airport charges alone as these tend to remain stagnant or low due to the competitiveness of many airports around the world."

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Mudajaya (RM3.60): Another YTL in the making? A real gem among construction stocks

Mudajaya had a really good run-up for the past 3 months, rising from a mere RM1.50 in mid-July to current level of RM3.65, with its stocks transforming into a rather active trading counter from an illiquid and cold one. Mudajaya also starts to make into media's headlines which bodes well for its stocks as more investors realize the growth prospects of this company. I believe there will still be upside to the stock as the recent run-up hasn't fully justify the strong fundamentals and strong growth prospects that this company could offer. Further price triggers include stronger quarterly results (to be announced end Nov'09), projects awards and financial closures for its IPP projects. In addition, further roll-out of big ticket items such as LRT projects, LCCT terminal, double tracking (Gemas-JB), Pahang Selangor Water Transfer etc. could trigger further upward rerating for construction stocks.

From being a small-mid construction company, Mudajaya is slowly transforming itself into the likes of YTL with businesses in construction, properties, concrete manufacturing and trading of building materials while it is also venturing into IPP (Independent Power Producer) projects in India. Bulk of its earnings come from construction, marginally supported by other business segments.

Huge orderbook: Mudajaya's gigantic outstanding orderbook of RM5.4bn even exceeds the big boys' orderbook like IJM and WCT. Out of the RM5.4bn, 60% comes from its EP (Engineering & Procurement) works for its IPP projects in India while the remaining ones are local construction projects. On top of that, Mudajaya has submitted tenders worth a total of RM1.7bn, of which RM800mil is from Malaysia, RM500mil from Saudi Arabia and RM400mil from India. The Company might secure RM600mil from 2-3 project bids locally, potentially bringing its orderbook past RM6bil mark by end-2009. Margins from these new project bids will be favorable as they are negotiated ones with pretax margins potentially reaching mid-to-high teens.

Power play: Mudajaya has made a really good move going into India's power production. In view of India's negative reserve margin and huge power supply shortage coupled with India's tariff rates which could go up from 17 sen/KWh to 50 sen/KWh (Tenaga is 23-38 sen/KWh), Mudajaya stands to benefit from lucrative recurring income with the commencement of IPPs by 2011. In addition, Mudajaya is the only Malaysian contractor recognised by India's National Thermal Power Corporation (NTPC) which could mean less competition in project bids. Owing to India's economic expansion, the Indian government has set a target to increase its power generation by 78,000MW by 2012. Mudajaya's 1,440MW is only a small fraction of the power needs in India. Therefore, more construction of power plants are expected in the pipeline, which could land Mudajaya with more IPP projects.

Earnings: Earnings for the past few quarters were impressive, recording q-o-q increase since Sept 2008, owing to IPPs projects and high margin projects kicking into higher gear. Quarterly net profits rose to above RM25mil mark as compared to historical average of RM10-15mil a year earlier. With most of its orderbook slated to complete by 2012 (RM5.4bil), assuming no replenishment of orderbook which is highly unlikely, revenue has to reach RM1.8bil p.a. in FY2010-12, a massive increase from its revenue of RM422.4mil in 2008 and estimated RM1bil in 2009. Quarterly net margins have been in the range of low-mid teens, thus for conservative sake, we'll assume 10% net margin which could translate into net profit of RM180mil, equivalent of 48.2 sen per share. Note that this earnings forecast has not taken into account potential recurring income coming from its IPPs.

Valuation: Assuming 48.2 sen per share for FY2010-12, PER will be at 7.6x only, a huge discount to its peers' average PER of 15x. Mudajaya is also supported by strong balance sheet with cash pile of RM141mil and ZERO borrowings which is extremely rare for construction stocks, indicating Mudajaya's strong management. In conclusion, Mudajaya's stock remains a cheap entry to the construction sector. By simply attaching PER of 12x, Mudajaya's stock should go past RM5.00. (Hahaha..I have a feeling that I'm analyzing Supermax, similar EPS, PER, current price & target price)

Notable Ongoing Projects:

Malaysia:

1. Batu Kawah Township, Kuching : RM93mil

2. KL-Kuala Selangor Expressway : RM693mil

3. Crest Service Apt/Office Block, KL : RM129mil

4. Pahang Housing - Felda : RM900mil

5. Kuantan Housing : RM141mil

6. Pahang Hospital : RM75mil

7. KLIA Spur Line : RM39mil

8. RA Damansara Housing : RM24mil

India:

1. Rehab & upgrade of road works, Chhattisgarh : RM19mil

2. EP works for IPP Phase 1, Chhattisgarh : RM635mil

3. EP works for IPP Phase 2, Chhattisgarh : RM2,640mil

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Supermax (RM3.60) in the headlines again! Yeah!!!

Source: www.btimes.com.my

Supermax Corp Bhd (7106), the world's second largest rubber glovemaker, plans to pay its first-ever special dividend this year and set a higher dividend policy next year.

It will return whatever it makes above its recently revised net profit target of RM117 million. This means that if Supermax posts RM127 million in net profit, RM10 million will be returned to shareholders.

"I'm confident that the company can hit the minimum of RM117 million net profit by year-end. Any extra profits will be declared as special dividends," group managing director and executive chairman Datuk Seri Stanley Thai told a media briefing in Kuala Lumpur yesterday.

The special dividend will include extraordinary gains like capital gains on sale of treasury shares, which Thai estimates at about RM15 million currently.

Supermax, which has a policy of returning 20 per cent of net profit to shareholders, aims to improve this next year. Thai did not elaborate.

Malaysia's rubber glove manufacturers are enjoying a good run currently mainly because of the influenza A (H1N1) pandemic. The viral outbreak has fuelled strong demand for rubber gloves used by doctors and nurses.

Thai, during a briefing to the media and research analysts, also said that Supermax did not have any merger and acquisition (M&A) plans.

"We have done two M&As. One was bad and gave us so much headache. So it's enough. No more acquisition. We will focus on organic growth, on the GloveCity project for expansion. Instead of adopting a child, you now have a biological son," he said.

Supermax is expecting annual revenue to reach RM1.5 billion by 2011, which is almost double what it made last year.

"We believe the target is achievable based on our expansion plans as well as the demand outlook for gloves," Thai said.

The company will spend RM130.5 million from now until 2011 to increase production capacity by 50 per cent to 21.7 billion gloves a year by the end of 2011. It can produce 14.5 billion gloves a year currently.

Over the next two to three years, it will replace several production lines as well as start work on the first phase of GloveCity.

The first phase involves 32 new production lines with installed capacity of 4.2 billion pieces a year.

Supermax has bought the land for the project and construction is scheduled to start in the second half of next year. The facility will be operational as early as the first quarter of 2011.

Supermax is expecting global demand for gloves to increase steadily at about 8-10 per cent a year. The world used about 125 billion pieces of gloves last year and the number could hit 155 billion pieces in 2011.

The company is also looking at various measures to cut its finance cost, which was RM20.34 million last year. In the nine months ended September 30 2009, finance cost was about RM13.66 million.

Thai said Supermax was in talks to buy back bonds from its bondholders.

"The bondholders have basically agreed in principle," he said.

Updated 21Oct2009: Another news:

http://www.btimes.com.my/Current_News/BTIMES/articles/20091021131524/Article/index_html

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Supermax (RM3.35): After a good rally, more legs for upside?

My humble answer is YES! Supermax has just released its 3QFY2009 quarterly results and the earnings are nothing short of magnificent!! Net profit for 3QFY2009 results were 155% y-o-y and 55% q-o-q higher. The better performance was due to stronger demand, greater operating efficiency, cost control and its OBM business which commands higher prices, leading to higher margins.

Currently, there are six listed glove companies, namely Top Glove, Supermax, Kossan, Hartalega, Latexx and Adventa. Let's compare the valuations of these six companies:

1. Top Glove: PER'09 - 15.2x

PER'10 - 12.9x

2. Supermax: PER'09 - 7.3x

PER'10 - 6.6x

3. Kossan: PER'09 - 11.7x

PER'10 - 8.8x

4. Hartalega: PER'09 - 13.3x

PER'10 - 10.9x

5. Latexx: PER'09 - 13.6x

PER'10 - 10.2x

6. Adventa: PER'09 - 16.0x

PER'10 - 10.8x

Supermax the cheapest: Supermax has the lowest forward PER of only 6.6x, which is grossly undervalued compared to average forward PER among peers of about 11x. Should Supermax trade at 11x, its share price could reach more than RM5.60. In addition, Supermax, being the world's second largest glovemaker after Top Glove, should trade close to Top Glove's valuation at 12.9x, which is double that of Supermax's.

Industry: Due to the strong demand for gloves worldwide especially with the emergence of developing countries such as Brazil, China & India which have an increased awareness of hygiene, coupled with the threats of viruses like HIV, H1N1 etc against a backdrop of lack of capacity expansion among glovemakers worldwide, glovemakers are clearly the beneficiaries. According to industry trends, glove demand is expected to have double digit growth. Assuming 10% growth p.a., the world will need some 170bn gloves by 2011, of which 55% could be supplied by Malaysian glovemakers. As such, Malaysian glovemakers are carrying out aggressive expansion plans to increase each of their capacities by 3-8bn pieces p.a.

Expansion: As for Supermax, it is planning to accelerate its expansion plans, bringing forward its expansion of 12 new production lines in Klang from Jan 2010 to Nov 2009. It also plans to refurbish some old lines and put in new lines in its Malacca and Sg Buloh plants which will raise its total capacity from 14.5bn to 17.7bn pieces by mid-2010. In addition to all these, it also intend to build a glove city in Klang, starting with its first plant there by 2011 which will have capacity of 3bn pieces p.a. Should all these go well as planned, the company will have about 20bn pieces p.a. capacity by 2011 from its current 14.5bn.

4QFY2009 to be better: Supermax has already booked its sales right up to Feb 2010, which means its 4QFY2009 results are more or less secured. Should they maintain their performance as 3QFY2009, their EPS could reach 47 sen in FY2009. With this, their PER'09 will only be at 7x, compared to peer PER'09 of 14x. This is a massive 50% discount.

Valuation: On the conservative side, Supermax should trade close to RM4.70 just by attaching PER'2010 of 10x. If it should trade close to Top Glove, its share price should break past RM5.00. I don't see any reason for Supermax to trade at this level of RM3.35 which has a lower PER compared to its smaller competitors like Hartalega or Kossan.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.