Thursday, April 19, 2007

Is PriceWorth really Worth Investing?

My dearest Sally,

I actually posted about PriceWorth on Sahamas before.

Anyway, since I have the time now, here are my comments again. First, the below earnings, highlights PriceWorth's earnings since fy 2002.

First of, it's very clear that PriceWorth earnings growth is incredible. I do NOT dispute this fact all. And if one based its current or ttm (trailing twelve months) earnings per share, then perhaps there is a valid reasoning to invest in PriceWorth with a reasoning that it is selling at a cheap earnings multiple.

But is PriceWorth really worth an investment? How good is the quality of its earnings? Why is the company being priced so low in the current hot market? If PriceWorth is so good, is the market seeing something I am not seeing? Or am I not seeing what the market already knows (ie PriceWorth is a risk?) ( *These are simple basic questions that I will ask myself *)

Now let me highlight another table below. I added in some extra columns. These are some basic issues I think that an investor should consider in their investment.

Here's the list of my concerns as seen from the data above.
  1. Declining net profit margins. Extremely clear margin erosions can be seen each fy since fy 2002. Is this not a concern?
  2. Incredible deterioration seen in PriceWorth's balance sheet. Company's nett debt is increasing each single year at an alarming rate.


For the issue of declining net profit margin, in my opinion (I could be wrong but this is my opinion), this means that PriceWorth is NOT really benefiting as much in this great bull run in timber prices!

And again, this shows that the downstream timber industry such as PriceWorth, is simply not as profitable as them loggers. The loggers enjoys the bulk of the profit when the timber prices rises. The plywood players has to content with the rising inventory cost (logs are more expensive) and players like PriceWorth, as seen in their earnings track record, has not been able to pass the buck down in a profitable manner and enjoy the benefit of higher timber prices.

This is my interpretation on PriceWorth's declining margins.

The second issue of increasing nett debt. Some say that debt is ok. But for me, if the debt increases sharply as seen in PriceWorth example, then I reckon it is a concern. A worry. And in terms of a propsective investor, this is one huge risk.

Consider this simple issue. PriceWorth is on track to record it's largest and best ever historical earnings. But yet, when you look deep down the company and look into their balance sheet, where is the wealth? Where is the Moola? Company now is in a nett debt position of 198.534 million. Just five years ago it was in a mere debt of 18.302 million. Is this justifiable?

So based on these 2 concerns, do you reckon there is enough justification to invest in this company?

Yes, the company is selling at a cheap price but the quality of the company is so questionable. How? Does all cheap PE stocks equate to a great investment? Must it?

Last but not least, my comments were all based from an investor perspective. Timber prices are still hot. And in a hot market, anything can happen. The hot timber prices could result in a timber sector rally for all related timber stocks. Hence, the stock go easily move up despite its poor and questionable fundamentals. I do hope you recognize this issue and most importantly I do not know if PriceWorth can go up to 1.60 as suggested to you.

All I can offer you are these second opinions and I do hope they can help you.

Best of luck.


Anonymous said...

allow me to add some real-life facts. P'worth is also a logger.All the timber concessions are awarded by Yayasan Sabah through YS private arm Innoprise which comes in the form of two agreements-timber extraction contract and logs purchase.Majority of the timber if not all are sold as round logs in the export market...and underdeclaring of price is a common practice in the timber industry...the question is has all the income derived been taken up or just the contracting income...Your Guess. I was a bit surprised when I saw a reputable researcher recommending a Buy.P'wrth & Sanbumi are the 2 principal operators of Yayasan Sabah...notice that Sanbumi reports their monthly production figures. You decide