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Friday, November 25, 2016

(Icon) Thong Guan (9) - Earning Came In As Predicted. Next Quarter Profit Likely To Be All Time High

Author: Icon8888 | Publish date: Thu, 24 Nov 2016, 08:48 PM

1. Review Of September Quarter Result

In my previous article dated 20 November 2016, I predicted that in September quarter, Thong Guan will report core earning of RM13.4 mil, translating into fully diluted EPS of 8.5 sen :-

This evening, Thong Guan released its quarterly report. Core earning came in at RM13.7 mil (fully diluted EPS of 8.7 sen). This is very closed to what I have predicted.

Key observations :-

(a) The group reported net profit of RM15.5 mil. However, there was forex gain of RM2 mil. After excluding that, core earning was RM13.7 mil, as mentioned above.

(b) Q-o-Q, revenue increased from USD183.5 mil to USD187.9 mil (I use USD so as to eliminate the effect of exchange rate difference, which happened to be minor vs. the previous quarter).

This is of course a positive development. I have expected this to be the case as the Group commissioned its Nano Tech line after Chinese New Year (June 2016 quarter). The ramping up of production should lead to higher revenue.

(c) Q-o-Q, EBITDA margin improved from 10% to 10.7%. This is a pleasant surprise as USD was more or less the same, while minimum wage was increased in July 2016 by the government. The group must have taken measures to mitigate it (through improvement in efficiency ?). For me, this bears testimony to management's competence and ability to control cost.

(d) This quarter's effective tax rate of 8.7% was lower than previous quarter's 17%.

2. Coming December Quarter Expected To Be Sexy

In coming December quarter, driven by strong USD, I expect core earning to reach all time high of RM16.9 mil.

My earning prediction was arrived at based on the following principal assumptions :-

(a) Revenue remains the same as September quarter at USD46.4 mil.

(b) Higher average USD : RM of 4.30. For the month of October and November 2016, average USD : RM was 4.241. Today, it closed at 4.460. I make the assumption that average December USD is 4.410. Putting all these together will result in 3 months average of 4.300.

(c) Against the backdrop of stronger USD, EBITDA margin improves to 12.3% (using December 2015 quarter as reference).

(d) Tax rate of 12.9%. This figure is plucked from the air, based on average of June and September quarter's 17.0% and 8.7% respectively.

3. Concluding Remarks

I heaved a big sigh of relief after seeing Thong Guan's result today. Originally, I was a bit worry about the potential adverse impact of minimum wage increase. However, it seemed that the group has been able to absorb it relatively well.

As mentioned in my previous article, I have earlier on exited Thong Guan, but decided to jump back in recently due to strong USD. Based on preliminary analysis, I am optimistic about coming December quarter result.

In the latest quarterly report, management confirmed that the group will add another Nano Tech line in 2017.

As mentioned in my previous article, one Nano Tech line can increase revenue by RM90 mil. Combined with additional PVC Wrap lines and margin expansion caused by strong USD, the group's prospect is expected to be favorable going into 2017.

Fasten your seat belt and enjoy the ride.

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