Cymao III

Early this morning, I had blogged an update on Cymao II.

So when I received a copy of OSK research report on Cymao, I was rather interested to read what they said on Cymao.

The following is the excerpt from their notes.

• Earnings will be bad this year
  
  2Q07 results were disappointed. A loss of RM5.7m was incurred, mainly due to: (i) 35% lower y-o-y shipment volume; (ii) 7% drop y-o-y in plywood prices (iii) margin squeeze from 19% higher average log costs. In our sector report dated 17th Jul, we already highlighted the downside risk that smaller Sabah based timber manufacturers will face due to the housing market recession in the US and margin pressure because of heightening log costs. As Cymao has an exposure of 65% to the US market, we cut the company’s FY07 net profit by 86% and expect a recovery in FY08 when its logging activities in PNG and Sabah come on stream in 4Q this year. While we maintain a Neutral call, our fair value for Cymao is revised down to RM1.30 based on FY08 7x PE.
  
  Below. Cymao’s 2Q07 net profit came in below our expectation. Compared to the preceding quarter, although volume has increased by 17%, selling prices continued to fall by 13%. Despite flat log cost q-o-q, the net impact was neutral. Adding to the disappointment, no DPS was declared for the quarter vs a 5sen tax free DPS in the same period last year.
  
  Rising log costs squeezing margins. The continuous strengthening of log prices has negatively affected Cymao, which is not a timber concession holder. Margin for its plywood manufacturing this year is weakening when log cost is rising. Due to the delay in the issuance of log harvesting licence by the local authorities in PNG and Sandakan, Cymao is unable to capitalize on its own log resources to mitigate the negative impact.
  
  Expect a better FY08. We nevertheless expect an earnings recovery in FY08 when the high-yielding logs trading come on stream in Oct/Nov this year. A large % of raw logs are likely to be exported to China as the management sees strong demand and the company has established business relationship with the local buyers. The absence of logs export quota in Sabah will allow Cymao to maximise its logs felling capacity.
  
  Maintain Neutral with FY08 TP at RM1.30. We slash our FY07 earnings forecasts by 86% as the US housing market depression is likely to persist in the remaining of the year.
  
  We maintain our Neutral call with a fair value of RM1.30 based on a PE of 7x for small cap timber players.

Ses, I do not understand it. They understand that earnings will be bad and they acknowledge the fact that the US housing market depression will have an impact on Cymao.

And incredibly, they had slashed their FY 2007 earnings by a whopping 86%!

WOW!!

So, if they can slash their earnings by 87%, from 15.3 million to a mere 2.1 million, does Cymao deserves a HOLD recommendation with a TP of 1.30??

Oh.. Cymao is currently trading at 1.02, down 12 sen!