Background

Tradewinds (M) Bhd ('TWS') is involved oil palm cultivation, sugar refining and rice processing & distribution. For more on the group, check out its website (here).

Recent Financial Results

TWS's top-line & bottom-line rose sharply in the past 2 quarters after the completion of its acquisition of a majority 50.1%-stake in Padiberas Nasional Bhd ('Bernas') in January 2010. For QE30/6/2010, its net profit increased by 13% q-o-q or 562% y-o-y to RM87 million while turnover declined marginally by 1% compared to the immediate preceding quarter (QE31/3/2010) but increased by 210% y-o-y to RM1.286 billion.


Table 1: TWS's last 8 quarterly results


Chart 1: TWS's last 8 quarterly results

Financial Position

The main concern for this stock is the high gearing position after the acquisition of Bernas. From Table 2 below, we can see that the gearing ratio is very high at 1.28 times while liquidity position as reflected in its current ratio is adequate at 1.26 times. As 54% of the bank borrowings are classified under current liabilities, they are most likely used to finance its working capital requirement. As such, I believe the gearing is not excessive though it would be good if the company can raise its capital & bring down the gearing ratio to below 1 time.


Table 2: TWS's Balance Sheet as at 30/6/2010

Valuation

TWS (closed at RM3.53 yesterday) is now trading at a PER of 3 times only (based on the annualized EPS of 119.52 sen). At this multiple, TWS is deemed very attractive.

Technical Outlook

TWS is trapped between the horizontal lines of RM3.30 & RM3.60. From October 2008 to July 2010, TWS was tracing out a pattern known as a wedge. The stock broke above the wedge in late July at RM3.30. As such, the RM3.30 is a strong support level.


Chart 2: TWS's weekly chart as at Aug 25, 2010 (Source: Quickcharts)

Conclusion

Based on major shift in financial performance & attractive valuation, TWS could be a good stock for long-term investment. However, the main concern for the stock is its higher gearing as well as nagging corporate governance issue that always follows its major shareholder, Syed Mokhtar.