MAEMODE

*Sigh* ... just when I was thinking of taking a break, someone posted this in my chatbox:

"maemod: hey ichi, i got some maemode after analyst say buy. You seem confident it go up soon but i see smart's blog say lousy stock, so what to do now. did you see?"

So, I moseyed over to take a look at Smart's post on MAEMODE. Without spending too much time on this, I will try to address some comments made. Here's an excerpt of Smart's comments in italics:

"Net gearing of 86% is very high for a business without a steady cash flow. Earnings can be volatile and one have to be very optimistic to value it at 9-10x PE for such kind of business when debt level is so high. In fact, I will value it at 7x PE at most. To achieve a PE of 9x, MAEMODE will have to earn about 4c in the next quarter, which is a growth of 24% from the current quarter. It would not be an easy task in a business where operating margin is less than 15%. "

Me: OK, first of all, I would like to post this little comment which was in the notes section of MAEMODE's latest quarterly announcement.

Notes:

The group generated a net profit of RM3.07 million for the current quarter under review as compared to RM2.72 million for the immediate preceding quarter.

For the current year to date, the Group achieved a turnover RM172.76 million as compared to RM123.25 million registered in the preceding year's corresponding period, while net profit for the year to date increased by approximately 21.89% from RM6.48 million in the preceding years' corresponding period to RM7.90 million.

For the current quarter, the Group has written off approximately RM5.0 million as operating expenses incurred in securing the RM200 million Islamic Commercial Paper/Islamic Medium Term Notes Programmes. The better result, even after taking into consideration the above expenses, was due to the significant increase in the overall sales of the Group and the lower financing costs incurred during the current quarter under review.

Me: So you see, revenue over three quarters increased by 39.8% yoy while net profit increased by 21.9%. Nothing great, you say? But wait, this is AFTER writing off RM5 mil one-off expenses for its Islamic debt programmes in the latest reported quarter. So, if you add back RM5.0 mil to the unadjusted FY06 Q3 PAT of RM3.08 mil, you get total Q3 PAT of RM8.08 mil vs RM2.7 mil for Q2 (ie. PAT has tripled q-on-q). Against a share cap of 95 mil equals EPS of 8.5c for Q3.

Smart mentioned he doesn't think MAEMODE can grow EPS by 24% to hit 4c EPS next quarter, but this quarter is already 8.5c if you add back the one-off expenses! So why talk about trying to hit 4c next quarter? This is only relevant if you ignore the one-off expenses this quarter and take the unadjusted EPS for Q3 as 3.23 c.

RM5 mil for a Rm200 mil debt programme = 2.5%, which is on the high side but still not unreasonable, especially if you incur broker/introducer fees, on top of arranger fees, placement fees, stamp duties, trustee fees, rating fees, legal costs, due diligence costs, etc.

Do I expect PAT next quarter to be near RM8.0 mil again? Probably not, but the unadjusted RM3.08 mil is still 14% higher than the previous quarter. Even if next quarter earnings comes in at the mid-point between RM3.08 mil and RM8.0 mil, I would say it's ok. Looking at the bigger picture, Indonesia is taking great efforts to revitalise its resources sector and investors are starting to return in droves. Anyone involved in handling M&A deals on a regional basis would confirm this. An analyst sitting at a desk in KL may be oblivious to this. With soaring oil and gas prices, coal is a natural cheaper alternative. Just look at Malaysia's new Jimah IPP. What fires it? Coal. This would be positive for MAEMODE's conveyor business, especially if efficiency is stressed by foreign investors, as it sure beats coal transport by trucks.

On the borrowings side, it's a bit high but if earnings are growing like gangbusters, then it's partly justified. Also, overall finance costs have come down, probably indicating the lower costs of the Islamic CP/MTN compared to their previous borrowings. Besides, I don't believe in calculating net gearing using market cap as a base, 'cos then if the company is significantly undervalued, it would compound the calculated gearing "problem" and throw one off-track on a possibly good thing.

Anyway, I have the utmost respect for Smart's analysis, so anything he says is definitely worth pondering about. Maybe he just didn't think the RM5 mil expenses in the last quarter would be one-off in nature. Or maybe he thinks management is lying about the figures, though I should think management would be idiotic to lie about something so easily verifiable as that. Or maybe I made a mistake somewhere in my somewhat "rough" calculations. To maemod (sic) who posted in my chatbox, you should verify the figures yourself and make your own decision. Sorry, but I'm not qualified to tell you what course of action to take...

To Smart (if you ever read this, which I seriously doubt though) sorry for posting some of your comments here, just thought it would be the easiest way to address a reader's query. Hope I didn't offend you in any way.


/ichithekiller