Saturday, June 07, 2014

From an Ugly Duckling to a Golden Swan

GPAROS (GP), stock code 5649 hit the limelight with a big surprise when it reported EPS of 14.84 sen for 1Q14 on 26.05.14. The stock jumped limit-up the following day from 30 sen to 60 sen after the announcement. 

The next day, it quickly went up to 80 sen before profiting-taking surfaced and pushed the stock down to a low of 61.5 sen. The quick correction appears to be over after stock rallied back in the last three days to close at 79.5 sen. Its overhead resistance is now at 80 sen. This resistance is likely to be breached, come Monday morning. Keep a close watch on it.

Fundamentally speaking this stock is a rare gem. Over the past years, it had nothing to show except losses and mediocre earnings year after year. But things are beginning to look attractive now. Revenue for 1Q14 at RM46.34 million and profit RM26.802 million before tax are indeed something to crow about. EPS after tax = 14.84 sen. (Note that its profit margin is exceptionally high.)

In the corresponding period of the previous year, revenue was only RM19.32 million and loss was RM379,000. And in the preceding quarter, revenue was RM20.92 million and loss of RM1.835 million. The big turnaround is indeed a big surprise. How it was done, I have no idea. I believe a change in the management did the trick. 

It appears to me that GP has been transformed from an ugly duckling to an elegant swan. 

In 1999, I made RM100k within 3 months investing in this stock. Here is my chance to repeat that feat and make it better. 

GP has a paid-up capital of RM67.273 million. Its par value is 50 sen per share. So the number of shares issued is 134.546 million. This is considered to be a small-cap stock. 

The jewels in the crown of this stock are the Dungun Timber Complex Concession Forest and the Cherul Forest Concession it gotten from the Terengganu government. Together they cover some 190,134 ha of good timber forest. This is a huge area to the company as its paid-up capital is small.

The main income for the group comes from the harvesting of timber, saw milling and kiln drying. The other segments of manufacturing and trading of wooden doors and tempered glass do not contribute much to earnings presently. 

What is so attractive about this stock is that it timber forest concessions have obtained the FSC (Forest Stewardship Council) endorsed certification.This means the company can sell their logs, timber or wooden products to any country including the European countries without any problem. 

My main concern for this stock is whether its earnings are sustainable. Timber prices and the production of logs are the deciding factors. 

Lets us have a look at its log productions. For this year, productions are as follows: For Jan: 2525 hpt; for Feb: 4680 hpt; for March: 4625 hpt and for April it was 5328 hpt. ("hpt" refers to hoppus tone = 64 c.f.tonne). 

For May and June, productions are expected to be good because weather condition is expected to be favorable. As for the price of timber, demand is not expected to slow down because world economy is slowly being nursed to good health, especially Europe, US and China. The company also exports timber and timber products to the middle east. 

As at May 21, 2013, Terengganu Inc held 63.807% and Lembaga Tabung Amanah Warisan Negeri Terengganu held 8.526% of the company. Together, they control 72.333% of the paid-up capital. To me this is an added advantage. You need only to look at KPJ and TDM to understand this. 

For the next two quarters, I expect the company to do well. For the last quarter of the year, logging will probably be curtailed because of monsoon rain. 

Assuming that in the first three quarters, earnings remain the same and the in the last quarter there is no earnings, the annual earnings will come in at 44.52 sen per share. Barring unforeseen circumstances, this estimation is reasonable, in my opinion. 

JTiasa and TAAN are presently being traded at  PE of 109 and 17 respectively. The two counters are partially involved in the timber business. While they have high borrowings, GP has close to zero borrowings. As at 31.03.14 its borrowing is only RM1.070. Please compare the earnings of their latest quarter. 

In view of the above, what PE should GP be trading at? Let's give it a big discount. Five to six is reasonable. So lets take it to be 5.5. On a PE of 5.5, GP should be worth (5.5 x 44.52 sen) RM2.448!!! 
Actually, I think a higher PE is not unreasonable. GP was last traded at 79.5 sen. I expect it to be rated differently in the near future.

Looking at the balance sheet, the company had a current ratio of 1.539 as at 31.3.14. It cash position of RM29.89 million was much better than previously. 
Another thing that I like is that though its revenues have gone up, its receivables have gone down. 

Some extracts from the annual report of 2013 are as follows:

 A recovery could take shape later in 2014.

Tropical log supply will remain tight as Myanmar will ban log exports starting April 2014. Myanmar is a significant supplier, accounting for 17% of the world’s tropical log export in 2011

In 2013, exports to emerging markets for Malaysian timber products particularly Middle-East countries such as Saudi Arabia, Qatar, Oman and Bahrain, showed a positive growth. Mega construction projects in these countries are in favor towards Malaysian timber products, such as sawn timber, MDF and furniture

The outlook for the timber industry remains positive based on the improving housing activities, consumer sentiment and expected improving demand from developed nations in line with the improving global economy.

Our timber management subsidiary has been awarded the Forest Stewardship Council (“FSC”) endorsed certification on 21 April 2008 by Scientific Certification Systems (“SCS”), a leader and pioneer in third-party auditing and certification of forest management operations around the world, for well-managed forests. This certification verifies that the subsidiary’s forests of 108,900 hectares are managed according to the rigorous international standards of the FSC under a selective cutting approach that maintains continuous forest cover and species diversity.
The certification has been recertified for another five years until 20 October 2018. The subsidiary’s concession area is the largest forest in Peninsular Malaysia to have received FSC certification and only the second natural forest in Malaysia to achieve this distinction.
In addition, another subsidiary has successfully obtained the FSC endorsed certification for its 20,243 hectares Cherul Forest Concession on 10 December 2012 as certified by SCS Global Services. The certification is valid for five years until 9 December 2017.
With the FSC certification, the Group would be able to access to an increasing number of markets and customers that demand environmental friendly certified products domestically and abroad.

In addition, the Group’s two sawmilling subsidiaries are Chain-of-Custody (“CoC”) certified by third party certifiers accredited by the FSC since July 2008. With this certification, it means that the wood used in the sawmills come from well-managed forests, independently certified in accordance with the criteria and principles set by the FSC.
This would mean that the subsidiaries are well placed to market their sawn timber and other wood based products in markets which insist on wood products to be sourced from sustainable and well managed forests.

The above extracts show that GP is likely to do well going forward. If 1Q14 earnings are sustainable in the next three quarters, EPS for the full year may come in at 59 sen. 

Please do your own research before you buy this stock. Click here to know more about the company. 

As usual, you buy at your won risk.