Tuesday, August 28, 2007

S&P has a Strong Buy on Mieco Chipbaord!

Just noted that S&P has a STRONG BUY on Mieco Chipboard. Yes, a strong buy.

Here is an excerpt from what it wrote. My comments are in purple font.


  • Results Review & Earnings Outlook

    • Mieco’s 1H07 reported earnings were considerably below our expectations.

    • The particleboard manufacturer reported 1H revenue and net loss of MYR173.0 mln (-9% YoY) and MYR6.1 mln (reversed from a net profit of MYR2.6 mln), respectively. While the top-line figure accounted for 39% of our full-year forecast, the loss was worse than expected.
    (company went from a net profit from 2.6 million to a net loss of 6.1 million!)

    • The fall in revenue was attributable to a plant shutdown for maintenance services (about two weeks), while higher raw material costs (resin and rubber log), and interest and depreciation expenses depressed the profit margin. The plant utilization rate averaged 65% in 2Q07, lower than the 70% in 1Q07 but in line with our projection.
    ( Plant shutdown. Why? Higher raw material cost. With the high crude oil prices, this same cost issue persist! And as long as cost stays high, the it's simply gonna be difficult to make money!)

    • Net gearing increased to 0.66x in 2Q07 from 0.57x in 2Q06. We expect net gearing to remain relatively high throughout 2007 given the limited cash flow from operations.
    ( Net gearing increased! Limited cash flow? Doesn't this indicate clear deterioration in the company balance sheet? )

    • From our channel checks, the average selling price (ASP) of particleboard has softened in 2Q07. We are cutting down our 2007 and 2008 ASP assumptions to US$130/meter cube and US$140/meter cube from US$145/meter cube, respectively.
    ( More problems! Average selling price soften! Look at it, higher cost and lower selling price! Hey, isn't this a recipe for tough times ahead! )

    • In addition, we have lowered our projected gross profit margin by 1%-5% in 2007 and 2008, which brought down our profit forecasts to MYR4.3 mln (from MYR19.1 mln) and MYR30.1 mln (from MYR32.5 mln), respectively. ( WOW! They have lowered their net profit forecast from 19.1 million to 4,3 million!!! )

How?

From those points raised, things simply aren't looking too bright for Mieco, yes?

Let's look at what's written next.

  • Recommendation & Investment Risks

    • We are upgrading our recommendation to Strong Buy fron Buy with a lower 12-month target price of MYR1.17 (from MYR1.26). Our target price is derived from ascribing a PER of 8x (no change) to Mieco’s projected 2008 basic EPS.
    ( Huh??? How on earth did this Strong Buy recommendation is derived from? )

    • Our 8x target PER is at the lower end of Mieco’s four-year historical PER range of 7x-19x to account for its unfavorable near-term earnings outlook that will constrain valuation enhancement. However, Mieco is trading at 0.5x P/B, which we find undemanding from an historical and relative perspective.

    It is clear now that 2007 will not be a turnaround year for Mieco but we remain positive on the longer-term prospect of the company. We believe the producers will have more room for price increases once the new supply capacity is absorbed, hopefully by 2008. The high operating leverage will magnify its bottom-line once the ASP recovers, in our view. The underlying demand for particleboard as a cheaper and more environmentally sustainable substitute remains favorable.

    • Risks to our recommendation and target price include unexpected aggressive capacity expansion by existing or new players that could prevent particleboard prices from moving upwards. Escalating crude oil prices could also adversely affect Mieco’s production costs, in our view.

How?

You see that the writer recognise that 2007 will NOT be a turnaround for Mieco. And as it is, they are only guessing that perhaps things could turnaround in 2008/

If that's the case, why the rush for a Strong Buy recommendation?

Isn't it simply baffling?

2 comments:

Jo Lee said...

Thanks again... now I know we cannot simply trust S&P.. and I thot they are a class above the rest... sigh...

Moola said...

My Dearest Jo,

I do have a simple perspective of things.

Would you not agree that reputation should never been an issue in a discussion?

And what's really important in a discussion is the reasoning of one's views and opinions in the discussion.

Would you not agree?

And if we use this simple prespective in our investment in the stock market, then in a research report, what's not important is who wrote the report.

However, what's most important is how they reasoned out their recommendation in their report.

Would you not agree?

And if so, I do hope my blog posting helps you understand this simple issue.

Cheers