As the global economy recovers, it is also timely to look at stocks that were hurt by the downturn in global trade. As mentioned during my talk, you cannot outrun a crisis, but if there is little capital being decimated, and your business structure is in place, you should recover splendidly eventually. Evergreen was a prime example. I have just discovered another in Yungkong.
Yung Kong Galvanising Industries (YKGI) manufactures and sells galvanized and coated steel products. YKGI subsidiaries are involved in the manufacture and sale of galvanised and steel products, furniture hardware and accessories. The group primarily operates in Malaysia, where it is headquartered in Kuching.
The group recorded revenues of MYR479.3 million (approximately $144.4 million) in the fiscal year ended December 2008, an increase of 3.8% over 2007. The group's operating profit was MYR19.6 million (approximately $5.9 million) in fiscal 2008, a decrease of 44.2% compared to 2007. Its net profit was MYR1.2 million (approximately $0.4 million) in fiscal 2008, a decrease of 91.5% compared to 2007. Naturally Yungkong felt the harsh realities of the global turmoil, and its chairman explained their situation splendidly with clarity and purpose, facing the harsh realities head on.
Dato' Dr Hii Wi Sing in their Dec 2008 annual report said: "Yung Kong Galvanising Industries Berhad (YKGI) experienced a year of unavoidable and unpredictable norm with an unprecedented steep rise and followed by the deepest slump in prices for most commodities, including our raw materials and products. This happened so abruptly and sharply. Normal market principles become invalid and inapplicable during this plunge, and economies and markets crashed of tsunami scale. Massive consolidation occurred and everyone is rushing to cash out faster than the others. The great expectation of a bumper year for 2008 for our operations was abruptly terminated much earlier than the management’s anticipation, thus reversing most of our Group’s record pretax profit (PBT) of RM23.66 million achieved in the first half of the year to RM4.80 million for our financial year ended 31 December 2008. This is a stark comparison to RM20.56 million achieved in 2007. The weak result was due to a writedown (RM10.70 million) of inventory to their net realizable value and provision for doubtful debts of RM1.74 million. Our profit was further dampened by FOREX loss amounting to RM5.80 million caused mainly by the unexpected strengthening of the US dollar against the trend of most economists and professionals’ general consensus and predictions."
Catalyst #1 Earnings Recovery - This is the key catalyst. For the quarter ended June 2009, it recorded a revenue of MYR82.3m and a net profit of MYR1.92m. I expect even stronger results for the rest of 2009. Another good indicator is their inventories level, which stood at MYR91m as at end of 2008 and has been whittled down to MYR70.8 by end June 2009. Now you will blink if you miss this, for the quarter ended September 2009, net profit for that quarter jumped to MYR7.14m. Thats a strong recovery trend. Owing to the fact that they had a poor 1Q2009, total net profits to date as of end Sep 2009 came to MYR3.12m. It would be silly to incorporate the 1Q 2009 loss to the full year as that would not paint a fair picture of the current state of affairs. Assuming they make another net profit of MYR7m for 4Q2009, total net profits for the year would still be above MYR10m. On 195.5m shares, that works out to be a net EPS of 5.1 sen. At the current price of 46 sen, that comes to a PER of 9.1x.
Catalyst #2 Absurdly Cheap Even For A Cyclical Stock - As I said, if you annualise the third quarter alone MYR7.14m x 4 = MYR28.56m net profit theoretically. That works out to a massive 14.6 sen EPS. Divide that with its share price of 46 sen gives a PER of just 3.15x. A load of comfort here. Even if you take into account the full conversion of its warrants, the share base comes to 237.9m giving a net EPS of 12 sen, still less than 4x PER.
Longevity & Long term partner - On 9 May 2008, Yungkong celebrated the 25th anniversary of the signing of the Joint Venture Agreement between Yung Kong Co. Bhd, Sarawak and Marubeni Corporation (MISI), Japan for the operation of YKGI in 1983. The launching of their Klang’s operation was held on 10 October 2008, thus signifying the completion of the current phase of development in making YKGI an integrated steel coil coating company in Malaysia.
The net asset per share stands at 72 sen, no worries there. Yungkong is symbolic of the kind of cyclical recovery stock you want to hold for the medium term. My anticipated 30% should not be difficult to attain.
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p/s photo: Jessica C.(top model for Wacoal)