Wisdom Wise
From an Ugly Duckling to a Golden Swan
GPAROS (GP), stock code 5649 hit the limelight with a big surprise when it reported EPS of 14.84 sen for 1Q14 on 26.05.14. The stock jumped limit-up the following day from 30 sen to 60 sen after the announcement.
The next day, it quickly went up to 80 sen before profiting-taking surfaced and pushed the stock down to a low of 61.5 sen. The quick correction appears to be over after stock rallied back in the last three days to close at 79.5 sen. Its overhead resistance is now at 80 sen. This resistance is likely to be breached, come Monday morning. Keep a close watch on it.
Fundamentally speaking this stock is a rare gem. Over the past years, it had nothing to show except losses and mediocre earnings year after year. But things are beginning to look attractive now. Revenue for 1Q14 at RM46.34 million and profit RM26.802 million before tax are indeed something to crow about. EPS after tax = 14.84 sen. (Note that its profit margin is exceptionally high.)
In the corresponding period of the previous year, revenue was only RM19.32 million and loss was RM379,000. And in the preceding quarter, revenue was RM20.92 million and loss of RM1.835 million. The big turnaround is indeed a big surprise. How it was done, I have no idea. I believe a change in the management did the trick.
It appears to me that GP has been transformed from an ugly duckling to an elegant swan.
In 1999, I made RM100k within 3 months investing in this stock. Here is my chance to repeat that feat and make it better.
GP has a paid-up capital of RM67.273 million. Its par value is 50 sen per share. So the number of shares issued is 134.546 million. This is considered to be a small-cap stock.
The jewels in the crown of this stock are the Dungun Timber Complex Concession Forest and the Cherul Forest Concession it gotten from the Terengganu government. Together they cover some 190,134 ha of good timber forest. This is a huge area to the company as its paid-up capital is small.
The main income for the group comes from the harvesting of timber, saw milling and kiln drying. The other segments of manufacturing and trading of wooden doors and tempered glass do not contribute much to earnings presently.
What is so attractive about this stock is that it timber forest concessions have obtained the FSC (Forest Stewardship Council) endorsed certification.This means the company can sell their logs, timber or wooden products to any country including the European countries without any problem.
My main concern for this stock is whether its earnings are sustainable. Timber prices and the production of logs are the deciding factors.
Lets us have a look at its log productions. For this year, productions are as follows: For Jan: 2525 hpt; for Feb: 4680 hpt; for March: 4625 hpt and for April it was 5328 hpt. ("hpt" refers to hoppus tone = 64 c.f.tonne).
For May and June, productions are expected to be good because weather condition is expected to be favorable. As for the price of timber, demand is not expected to slow down because world economy is slowly being nursed to good health, especially Europe, US and China. The company also exports timber and timber products to the middle east.
As at May 21, 2013, Terengganu Inc held 63.807% and Lembaga Tabung Amanah Warisan Negeri Terengganu held 8.526% of the company. Together, they control 72.333% of the paid-up capital. To me this is an added advantage. You need only to look at KPJ and TDM to understand this.
For the next two quarters, I expect the company to do well. For the last quarter of the year, logging will probably be curtailed because of monsoon rain.
Assuming that in the first three quarters, earnings remain the same and the in the last quarter there is no earnings, the annual earnings will come in at 44.52 sen per share. Barring unforeseen circumstances, this estimation is reasonable, in my opinion.
JTiasa and TAAN are presently being traded at PE of 109 and 17 respectively. The two counters are partially involved in the timber business. While they have high borrowings, GP has close to zero borrowings. As at 31.03.14 its borrowing is only RM1.070. Please compare the earnings of their latest quarter.
In view of the above, what PE should GP be trading at? Let's give it a big discount. Five to six is reasonable. So lets take it to be 5.5. On a PE of 5.5, GP should be worth (5.5 x 44.52 sen) RM2.448!!!
Actually, I think a higher PE is not unreasonable. GP was last traded at 79.5 sen. I expect it to be rated differently in the near future.
Looking at the balance sheet, the company had a current ratio of 1.539 as at 31.3.14. It cash position of RM29.89 million was much better than previously.
Another thing that I like is that though its revenues have gone up, its receivables have gone down.
Some extracts from the annual report of 2013 are as follows:
A recovery could take shape later in 2014.
Tropical log supply will remain tight as Myanmar will ban log exports starting April 2014. Myanmar is a significant supplier, accounting for 17% of the world's tropical log export in 2011
In 2013, exports to emerging markets for Malaysian timber products particularly Middle-East countries such as Saudi Arabia, Qatar, Oman and Bahrain, showed a positive growth. Mega construction projects in these countries are in favor towards Malaysian timber products, such as sawn timber, MDF and furniture
The outlook for the timber industry remains positive based on the improving housing activities, consumer sentiment and expected improving demand from developed nations in line with the improving global economy.
Our timber management subsidiary has been awarded the Forest Stewardship Council ("FSC") endorsed certification on 21 April 2008 by Scientific Certification Systems ("SCS"), a leader and pioneer in third-party auditing and certification of forest management operations around the world, for well-managed forests. This certification verifies that the subsidiary's forests of 108,900 hectares are managed according to the rigorous international standards of the FSC under a selective cutting approach that maintains continuous forest cover and species diversity.
The certification has been recertified for another five years until 20 October 2018. The subsidiary's concession area is the largest forest in Peninsular Malaysia to have received FSC certification and only the second natural forest in Malaysia to achieve this distinction.
In addition, another subsidiary has successfully obtained the FSC endorsed certification for its 20,243 hectares Cherul Forest Concession on 10 December 2012 as certified by SCS Global Services. The certification is valid for five years until 9 December 2017.
With the FSC certification, the Group would be able to access to an increasing number of markets and customers that demand environmental friendly certified products domestically and abroad.
In addition, the Group's two sawmilling subsidiaries are Chain-of-Custody ("CoC") certified by third party certifiers accredited by the FSC since July 2008. With this certification, it means that the wood used in the sawmills come from well-managed forests, independently certified in accordance with the criteria and principles set by the FSC.
This would mean that the subsidiaries are well placed to market their sawn timber and other wood based products in markets which insist on wood products to be sourced from sustainable and well managed forests.
The above extracts show that GP is likely to do well going forward. If 1Q14 earnings are sustainable in the next three quarters, EPS for the full year may come in at 59 sen.
Please do your own research before you buy this stock. Click here to know more about the company.
As usual, you buy at your won risk.
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1 person likes this. Showing 50 of 55 comments
500plus, I agree the numbers are suspicious. I wish to highlight that JTiasa is a much bigger company. As at 31.03.14, its number of shares issued was 973.718 ml and Treasury shares was 13.679 ml. At GP, the number of issued shares was only 134.546 ml. Moreover, JTiasa had interest bearing loans and borrowings of RM845.885 ml., whereas PG had borrowings of only RM1.070 ml.
2014-06-08 08:40
Price already increased from 0.30 to 0.795 after posting the q1 result...is q1 an one off case or can we see the same in q2?how do they derived such a wonderful high net profit margin in q1??
2014-06-08 08:45
sunztzhe, Sustainability of earnings is also my main concern at GP. But I am prepared to give it the benefit of doubt. I am long on the stock; I intend to buy more, depending on how the stock moves. In the stock market, one should go after strength, not weakness.
2014-06-08 08:48
Ben Gan, Concur with your investment decision. Based on the latest Q1 2014 results, I have taken a position during recent price weakness . Further position sizing will be dependent on the forthcoming Q2 report.
2014-06-08 08:58
Guys..i suggest u go thru and do a comparison on 2013Q4 and 2014Q1. Are the numbers suspicious? NO....its all in the 2 reports if you've read it thoroughly. Would the earnings be sustainable? NOT in 2014Q2 bcoz new venture need time, money, mobilization, closure before you can realized your income. Earnings may dip (lower than 2014Q1 but higher than 2013Q4) in Q2 (and perhaps Q3) unless they have an agreement for the supply of the extracted logs at lower cost to the sawmill. Eventually earnings would pick up once contribution from new biz is captured. The spike in earnings n profit for 2014Q1 was due to the 1-off extraction fee of +27 mil GP received to extract balak from 2k out of 2.5k hecters of concession area granted to them for the new biz. FYI..the Q1 results got nothing to do with financial ratios or efficiency ratios in comparison to other timber cos.
2014-06-08 09:47
Hot T.thanks for your comment. Could you kindly elaborate more on their new biz?
2014-06-08 09:57
The result for 2Q14 matters much. For those who wish to play safe, they should wait. For me it is: Nothing ventured, nothing gained.
2014-06-08 10:04
Refer to Note 19 Events After The Reporting Period in their Q4 2013 result. The excellent Q1 2014 result is an one case and shall not repeat in coming quarters.
2014-06-08 10:05
Refer to note 19 in page 78 of AR 2013. The Group has unutilized tax losses of RM RM 177 million available to offset against future taxable profits and this is positive for future cashflow
2014-06-08 10:19
This can be useful only when they can make profit consistently and improve their cash flow further....
2014-06-08 10:20
Hi ALL..agreed with Ben Gan..i topped up more @ .735/.74 on Friday.
ermmm..sunztzhe..the concession area is abt 2,500 hectares of which +27 mil was for 2,000 hectares...at least there's another 500 hectares of proceed to be realized.
The balak clearing is essential for the future new biz ie iron ore mining which i hope can be sustainable and increase the revenue and earnings contribution to the Co whilst its BAU biz remains status quo.
2014-06-08 13:13
Agreed. The parent got a piece of land want to do mining, so asked GP to chop down everything on it. Once finished, GP will be like what it used to be.
2014-06-08 13:16
wt222...its ok bro. we just need to further analyze the layers to the financials and join the dots and timeline.
2014-06-08 13:16
Just found out, GPHAROS's profit is one off, the logging activities has nothing to do with their normal business, it is part of the special logging they have for the mines they had from their owners! I advise don't chase, next quarter might return to red
in fact, last q end of 2013, if you check financial results, already mentioned about this special 27million profit will be booked next quarter which is Q1 2014, yet no one want to buy at that time? I already sold mine, please analyse carefully guys
2014-06-08 13:24
sunztzhe, the way you analyse is pretty dead wrong, they have been harvesting their own hectares to barely breakeven their operation so they noneed to pay dividend to shareholders! just expense out to their cronies every month! this company used to be RM10, it shows poor quality of corporate governance! anyway I thought they gonna turnover, after analysed it , better not go
2014-06-08 13:26
Hot. T, Thanks for the clarification as a gross miscalculation had been made and it had been taken off.
wt222, Appreciate your timely and incisive feedback! wow it hurts!!!
sklyte, Thanks and your point is noted.
2014-06-08 13:46
It's ok...nobody's perfect....cash is king..info is priceless..hv a good weekend all and berhati hati di Jln Bursa!! :)
2014-06-08 14:22
Sklyte..hope GP's mining biz would help push them in d black on top of their normal biz.
2014-06-08 14:25
Hot.T,
i3 is a great place for learning cum check and balance or rather baptism of fire and angst!! Have a good weekend too.
2014-06-08 14:36
Hope what is appended below is useful:
Operating revenue
The segment's operating revenue increased by 222% to RM38.84 million in the current quarter as compared to RM12.05 million reported in the previous year's corresponding quarter. The increase in revenue was contributed by the logs sales proceeds amounting to RM27.29 million from the concession of the Group's timber management subsidiary, Kumpulan Pengurusan Kayu-Kayan Trengganu Sdn. Bhd. ("KPKKT") during the current quarter under review. The six (6) compartments in the concession were part of a land area in KPKKT's concession that was awarded to the Group's shareholder, Lembaga Tabung Amanah Warisan Negeri Terengganu ("LTAWNT") by the Terengganu State Land Office for mining purposes. In return, KPKKT was given the right to extract and sell the logs therein.
2014-06-08 16:19
The above filings with Bursa did not say for how long the 6 compartments in the concession will last. Hence, we can only guess. Please note that GP is not going into mining. The mining rights are given to LTAWNT that is a shareholder of GP.
2014-06-08 16:26
Do check well before deciding what decision to take as a wrong understanding could cause you to lose a lot of money.
2014-06-08 16:33
Ben Gan,
GP subsidiaries had obtained Forest Stewardship Council ("FSC") endorsed certification on 21 April 2008 by Scientific Certification Systems ("SCS") for 108,900 hectares and another subsidiary had obtained FSC endorsed certification for its 20,243 hectares Cherul Forest Concession on 10 December 2012 that was certified by SCS Global Services.
Total forest hectares under its management = 108,900 + 20,243 = 129,143 hectares
Could you or any one here put a market value on $$$$$$$$$ per hectare basis?
2014-06-08 16:46
You two a bang adik ah......still back to square one despite so many discussion earlier today.....
2014-06-08 16:51
Sunztzhe,u deleted yr earlier ridiculous analysis and come back now with the similar story....why????
2014-06-08 16:53
wt222,
As you are a very accomplished and experienced investor in investment valuation, please advise how would you value 129,143 hectares of timber concessions on RM per hectare basis?
2014-06-08 17:03
They have been in this biz all these while....not the first day in this biz..seems been struggling for years.....so what makes you to have high expectation on their future outlook?
2014-06-08 17:05
The q1 result is one off case,period.biz back to usual,unless u see something special...
2014-06-08 17:07
I didn't say price will drop for sure since there is a technical break out....this stock has been moving below rm0.50 for the past few years.....tightly held by the big boys---mayb they have some interesting game plans ahead----just that it seems to be speculative.....as little change in its fundamental at the moment.....who knows....
2014-06-08 17:14
wt222,
The basis of high or very low expectation of any stock in BURSA including GP is dependent on a host of factors including one's personal experience with the stock as well. Did you have any past negative experience with GP? I don't.
However as an investor I am keen to learn from you or any one here who is willing to share his/her knowledge in estimating a valuation of timber concessions on RM per hectare basis. What is the methodology that one goes about in determining an estimated value of 129,143 hectares of Timber concessions?
2014-06-08 17:18
....please dont restrict the info gathered only from the annual reports. lots can be obtained from other sources...it would also help if u do have some insider info...right?
Cheers..Roger & Out.
2014-06-08 17:22
They have been in this biz for the past many years may....net profit seems to be so so..I don't know why..--what makes you to think that their future outlook will be changed??any expert in timber to provide their comment?they owned the concessions but not the land..-isnt it?
2014-06-08 17:23
What will the estimated profit from their timber concessions?they don't own the land....
2014-06-08 17:25
In fact I made some this round....no negative feelings-...just try to make things cleared before my next step on this counter....
2014-06-08 17:28
Q4 2013 as written
19. Events after the reporting period.
Subsequent to the period end, the Group's timber management subsidiary, Kumpulan Pengurusan Kayu-Kayan Trengganu Sdn. Bhd. ("KPKKT") opened a tender to extract logs from six (6) compartments covering 2076 hectares in it concession area. The successful applicants that have been selected on 28 January 2014 had paid 30% tender deposit of RM8.19 million out of total logs sale proceeds of RM27.29 million. The balance has to be paid within 30days of the issuance of the approval letter.
All payment should be received in 2014Q1??? Consider One off??? Be careful anyway, cheers.
2014-06-08 17:33
wt222,
GP is committed to sustainable forest management on 129,143 hectares of forest under its management under selective cutting approach whilst maintaining continuous forest cover and species diversity.
The valuation per hectare will most likely be based on the Net Profit per hectare. Based on recent Q1 results, GP made a net Profit of 19.96 million per 2000 hectares of timber concessions.
Assuming no change to status quo on company business operations the potential net profit for the entire concession = 129,143 hectares X 19.96 million/2000 hectares= RM 1,288 million.
Market Capitalization for GP based on last Friday's closing price = RM 107 million
Does this infer that GP Market cap for forest concession of 129,143 hectares could potentially be valued at RM 1,288 million or 12X 0.795= RM 9.54 per share??
If you do not concur with this estimate of value, please do advise and share with fellow i3 members on a more realistic approach to value 129,143 hectares of GP timber concessions.
Does anyone in this thread has the experience or network of friends who can assist in estimating a value for the 129,143 hectares of forest concessions?
2014-06-08 18:02
Thanks, Jen. If management acts with integrity and competence, then its timber forest concession is definitely a gold mine. But if the management is unable to unlock the value of land, for whatever reason, then, no matter how valuable the land is, it will not be of much use to the company.
2014-06-09 06:20
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Jaack1, I share your thought. I think there was a change in the top management. That probably did the trick.
2014-06-08 08:29