Cymao IV

Cymao reported it's earnings on Friday. It was not pretty at all. It reported a loss of 1.612 million, bring ytd losses to 7.023 million.

And what interested me most was the copy of the OSK report I received this morning.

I had blogged on it before based on OSK report back in Aug 2007: Cymao III

And this was my comments to its report back in Aug 2007.

• 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!

Cymao is currently traded at 0.79.

If one owned Cymao, listening to OSK's Hold recommendation was pretty damaging to one's portfolio, yes?

And here is what they wrote this morning:

• 3Q07 results continued to be disappointed. A loss of RM1.6m was incurred, compared to a RM5.7m loss incurred in the preceding quarter. Although shipment volume was 16% lower, average selling prices were 5% higher and average log cost was 11% lower q-o-q, which resulted in a slightly better margin. We downgrade the stock to a Sell, given its high exposure to the US market, which is currently facing a recession in the housing sector. We think the US housing activities will take some time to recover. Adding to that, the continuous weakening of the US$ will also negatively affect the company. Due to the small operating scale of Cymao, its bargaining power of pricing and ability to withstand adversity will be relatively weaker compared to other bigger timber players. Our fair value for Cymao is revised down to RM0.46 based on FY08 7x PE.
  
  Below. Cymao’s 3Q07 net earnings fell below our estimates. Against 2Q07, shipment volume was 16% lower but average selling prices were 5% higher and average log cost was 11% lower. This resulted in a slightly better gross margin at 7%. No dividend was declared for the quarter. We do not expect the company to pay any dividend this year given its poor earnings.
  
  High exposure to the US market. We are pessimistic on the company’s performance going forward given its >60% exposure to the US market. Plywood volume as well as pricing has been dampened by the depression in the US housing sector. With the US housing starts continued to slump by 33% in the month of Sept 07, we do not think the sector will recover anytime soon.
  
  Negative impact from weakening US$. In addition, the continuous sliding US$ currency will also have an adverse impact to the company’s turnover as almost all the sales are denominated in US$. However, only 10-20% of operating costs are denominated in US$, hence unable to offset the negative effect.
  
  Downgrade to Sell, TP: RM0.46. We remain cautious on the performance of small timber players. Given the relatively smaller scale of operation, bargaining power of pricing is unlikely to be strong. The ability to cushion adversity will also be weaker compared to bigger timber players. As the company is surrounded by various negative factors which are unlikely to turnaround at anytime soon, we downgrade the stock to a Sell.

WOW!

From a Hold of 1.30 to a SELL with a TP of 46 sen?

Holy COW!

Ok.. some has mentioned that I am highly critical of analyst(s)... but... look at this Cymao example and ask if it's justifiable or not? The HOLD recommendation back in Aug was terrible in my opinion. It should have been a SELL. And the SELL recommendation this morning, seriously, isn't the TP of 46 sen way too drastic? In a space of 3 months, this stock went from a hold of 1.30 to a sell with a TP of 46 sen!

Now this is a WOW to me!

Cymao III

I had a chance to look at NetResearch write-up on Cymao and I found the section under earnings outlook rather interesting.

This is what they had to say.

• Earnings Outlook
  
  · Management expects demand from major export markets to remain weak whilst competition is likely to increase in view of the shrinking market size, leading to greater pricing pressure.
  
  · As a result, management has indicated in the 2Q07 results announcement that it is highly probable that the company may not be profitable in 2007, contrary to earlier expectations.
  
  · Cymao’s immediate plans are to commence logging operations in Sabah once the government gives the go-ahead to commence logging activities. The logging venture in Papua New Guinea is facing some delay due to the local elections.
  
  · Although the immediate outlook for Cymao appears difficult, we believe longer-term fundamentals for the company remain intact due to the following:
  
  o The still-firm log prices will eventually push up plywood prices as plywood makers look to recover the higher costs. These plywood makers would include the big Chinese operators which are currently importing logs mostly from Russia;
  o The inventory build-up situation in the US will eventually wind down;
  o The company’s new logging operations in Sabah and Papua New Guinea will reduce Cymao’s reliance on third party log supplies and cushion the volatility in log supply and log costs for the company.

Well, I only have one issue on the US market. Yes, the inventory situation WILL correct itself and the issue of high inventory build up cannot last forever. However, on the other hand, some serious consideration is due on the US housing market. A lame US housing market should probably do no wonders to such plywood players (plywood exporters to US market).

Won't you agree?

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!

Cymao II

If you are invested in a sector, it pays to read how other players are faring. Take the plywood sector. Cymao posted its earnings over the weekend. It wasn't a pretty sight.

Quarterly rpt on consolidated results for the financial period ended 30/6/2007

From the company earnings notes, some serious issues were mentioned.

1. Sales volume suffered as a result of demand from US has slown down significantly due to overstocking of plywood and drop in the construction activities.
2. The dumping of plywood products by China into Middle East and South Korea has affected the order book of the Group.
3. In addition, selling price has fallen by 7% compared to previous year corresponding quarter coupled with higher average log cost bu 19% has further damped the current quarter results registered with a negative gross margin.
4. Overall, a loss before taxation of rm6.7 million was recorded.

Lower selling prices, price dumping and most of all lack of demand.

Massive issues?

Blogged on Cymao before too, Cymao

Have a look at the same earnings table again.

Let's compare some simple figures.

1. Sales revenue

• Sales revenue was flat on a Q-Q basis: 48.982 vs 46.621 million.
• Sales revenue on Y-Y basis showed massive concern: 48.982 vs 72.867 million.

2. Net Earnings.

• Cymao loss 5.7 million for the quarter. On a q-q basis massive concern cos the last 3 quarters earnings went from a profit of 9.665 mil to 2.464 million to a net loss of 5.7 million.
• The same period a year ago, Cymao earned 6.15 million

3. Cash Balances.

• Cash balances dropped to 6.729 million.

4. Borrowings.

• Total debts increased to 47.341 million.

5. Nett Cash.

• Cymao is now in a nett debt of 40.621 million. Huge worry because if you look at the quarterly earnings table above, back in 2005 Q1, Cymao showed a nett cash position of 9.376 million. Company's balance sheet has certainly deteriorated for the worse!

How?

Cymao

My Dearest Totomaster,

The above table highlights Cymao earnings performance. And as can seen, the recent fy 2006 showed that Cymao has performed pretty well after its dismal fy 2005 performance.

The above quarterly earnings highlights Cymao's performance. Actually if you look at it, perhaps one would say that Cymao's earnings hasn't been too outstanding.

Anyway, as mentioned by you, Cymao has got their 'forest consession' now.

Yes, in my opinion, the ability to get the supply of logs is rather crucial for a plywood player like Cymao. In a buoyant timber market, without the supply of logs, the plywood manufacturer margins will be squeezed by the higher prices of logs. And in the competitive plywood market, passing the buck down to its customers is rather difficult.

I see two announcements for Cymao.

Logging and Marketing Agreement between Magarida Timbers Limited and Kupiano Forest Products (PNG) Limited, a wholly-owned subsidiary of Cymao Holdings Berhad for the logging and downstream processing operations in Papua New Guinea.

• Cymao group is in the business of plywood production where logs are the main source of raw material for its manufacturing. Logs procurement has always been purchased from third party concessionaires in the State of Sabah where the prices are subject to market conditions. Thus, the margin is highly affected by the log prices. In order to better control the cost of raw material, Cymao group is compelled to venture upstream of the business by securing its own supply of logs by way of having a full control over the operation of logging of logs. In addition, this is also an opportunity to trade timber logs to provide additional income stream to the Cymao group.

ACQUISITION OF 6,000 ORDINARY SHARES OF RM1.00 EACH REPRESENTING 60% EQUITY INTEREST IN SYABAS MUJUR SDN BHD WHICH HAS A TIMBER SALE AGREEMENT

• The Acquisition will be very strategic to Cymao Group's existing operation. The Licensed Area contains log species which are suitable for plywood production as well as export. Log costs form a major cost of production to Cymao Group and logs procurement are made with third party concessionaires where prices are subject to market conditions. Thus, the margin is highly affected by the log prices. Therefore, in order to control the cost of raw material efficiently, the Cymao Group is compelled to venture upstream by securing its own supply of logs.
  
  The prospect of the Acquisition will be positive as the Licensed Area is located in Sandakan where the Cymao Group's plywood production facilities are situated. It is expected that the Acquisition will contribute positively to the Cymao Group by way of savings on log costs which are expected to be about 20-25%. In addition, sale of logs of export grades can provide additional revenue stream to Cymao Group's income.

Will this two said venture pay-off?

I cannot answer you because as you can see, that's all the information I have. (The potential is there for Cymao to perform better, this I have to admit.. but will Cymao turn this potential into reality? )

rgds