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Tuesday, July 28, 2015

Focus Lumber Berhad (FLB - 5197) - Undervalued stock

Dear readers,

I took time to research on the market the past few days and noticed a stock that is undervalued with consistent earnings and minimal to zero exposure to China.

This stock is undervalued on these grounds:

1. Beneficary of strong US dollar against RM. US dollar will continue it's up trend and will benefit FLB's earnings significantly.

2. Consistent earnings growth (Revenue, profit after tax has been on a consistent rise)

3. Consistent dividend (High dividend yields - 4.7% at current price)

4. Cash of RM72.8million on balance sheet ( RM0.7 Cash per share and zero gearing)

5. Directors acquired significant portion of shares at RM1.3 per share, which limits downside risk significantly.

6. Low share base of only slightly over 100mil shares.

7. Low market capitalisation of RM170million (Of which RM72.8 million are cash)

8. Buying back (10%) of own shares. Coupled with low share base and high amount of shares held by top shareholder, price can move up very easily.


Simple math calculation =

8 cents dividend per share divided by RM1.70 per share = 4.71% (Dividend yield)

Assume the price reaches RM2.7, the dividend yield would be:

8 cents dividend per share divided by RM2.7 = 3% (Dividend yield - This has not taken into account stronger US dollar, which could potentially increase dividend per share beyond 8 cents, as the company has historically raised it's dividend from 6 cents to 8 cents).

Assuming dividend per share rise to 9 cents per share 12.5% increase (Consistent with increase in USD against RM since January - From USD/RM 3.4 to USD/RM 3.81 = Approximately 11.7%), at RM3 per share, what would the dividend yield be?

Dividend per share = RM0.09

Price = RM3

Dividend yield 3%

In conclusion, the above are the benefits not considering potential M&A activities (With RM72mil cash on balance sheet and zero liabilities, one could not rule out this possibility).

As such, Danny Tan rate FLB a BUY with a target price of between RM3.

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