The following post by Shaun Loong on Focus Lumber (FLBHD) caught my attention.

http://klse.i3investor.com/blogs/shaunloong_blog/101529.jsp

Three key points from Shaun:

1.       Stock is oversold and at 10-month low

2.       FLBHD is significantly undervalued at 5.5x trailing P/E and 2.7x EV/EBIT

3.       Fair value RM2.11 – RM2.24

The stock price sank by RM1.37, or 45% from an all-time high of RM3.09 on 11^th Jan 2016 to RM1.71 today. The price had discounted a big drop (40%-50%) in earnings for FLBHD this year. Is market overreacting? To answer this question, let’s do a check on the numbers in FY2015 Q2 results for a gauge of FY2016 Q2 results.

1. Revenue of RM 50.13 million for FY2015 Q2 included sales NOT recognized in FY2015 Q1 due to delay of arrival of vessel to USA (as highlighted above). The sales brought forward to FY2015 Q2 is projected at RM 8 million. Without that one-off sales, the revenue for Q2 is only RM 42 million.

2. Tax rate was 9.38% in FY2015 Q2. Effective 1^st January 2016, tax rate of 24% will be applied because the double tax deduction on freight charges had been revoked by the government.

3. Net gain on foreign exchange/derivatives was RM 1.15 million in FY2015 Q2. Any one-off gain should be excluded from the calculation of core profit.

In summary

• Without the one-off sales, the revenue for FY2015 Q2 is only RM 42 million (16% lower than RM 50.13 million).
• Tax rate will increase from 9.38% in FY2015 Q2 to 24% in FY2016.
• Net gain on foreign exchange was RM 1.15 million.

Using the figures above, we can calculate FLBHD’s normalized earnings for FY2015 Q2 for a gauge of FY2016 Q2 results.

• All else being equal, normalized profit before tax was RM 7.46 million or 16% lower than the RM 8.88 million enhanced by one-off sales
• Applying tax rate of 24%, normalized profit after tax was RM 5.67 million or 29% lower than RM 8.05 million

Conclusion

The stock price of FLBHD sank by RM1.36, or 45% from an all-time high of RM3.09 on 11^th Jan 2016 to RM1.71 today. Back to my question. Is the market overreacting?

All else being equal, normalized profit after tax for 2016 Q2 is projected at RM 5.67 million or 29% lower. Comparing this to the steep 45% correction of its stock price, it shows the market had over-discounted the stock price of FLBHD by a big margin. What if the actual 2Q results are better than expected? Will the stock price climb above RM3 again?

Investors who trade purely base on the reported figures, without considering one-off sales/gain/loss, will be penalized when they sell in panic. Conversely, smart investors will accumulate more when they are offered great bargains.

Is FLBHD worth investing now that it is oversold? How is its track record of earnings, dividends, ROIC etc? What is the fair value for FLBHD?

“Price is what you pay, value is what you get.”

Update: Focus Lumber's major shareholder Lin Hao Yu started buying more shares this week. Lin was appointed as Executive Director recently. Results announcement is due next week. Good results coming?

http://www.bursamalaysia.com/market/listed-companies/company-announcements/5181405