Tuesday, 3 May 2016

Arank - Rising Alloy

A-Rank Berhad (Arank - 7214) specialized in the production and manufacturing of customized aluminum homegenized extrusion billets through wholly owned subsidiary Formosa Shyen Horng Metal Sdn Bhd. Started in 1998 with only an annual capacity of 12,000 metric tonnes, Formosa had registered consistent growth. Currently, Formasa had an installed capacity of 120,000 metric tonnes a year, 10 times more from where they had started.

Arank had acquired 55% of equity interest in Hong Lee Group (M) Sdn Bhd which its principal activities are engaged in manufacturing of aluminum based kitchen cabinet and glass cabinet. The group had a quite balance revenue with 60% local and 40% export.

Outlook on Aluminum Application on Automotive Industry

The improvement of technology, the strive to see better efficiency and reduction on CO2 had continue to push for better raw material input. One of the significant industry that will be heading for this big change will be the automotive industry.
Weight reduction is topping the list for automobile manufacturers in searching ways to improve fuel economy and freight efficiency. A research conducted by Ricardo Consulting Engineers had displayed that a commercial tractor-trailer can see it's weight reduced by 1,500 kg with intensive aluminum application. It is estimated that by replacing all of North America class 8 tractor-trailer, that will save 9.3 million tons of CO2 annually.

Aluminum is well positioned as the best solution for weight reduction in heavy and medium duty truck and trailer market. This is in tandem with the EPA (Environment Protection Agency) to tighten the emission profile of the heavy duty truck and trailer market.

With the intensive development from Tesla in changing the automotive industry through a commercialized production on Electric Vehicle, lightweighting play an even more important role.

Tesla had saw it's Model S production featuring intensive usage of aluminum. Data in 2014 reveal that automotive industry (excluding China) consumed 2.87 million tonnes of aluminum. By 2020, the industry will be looking to see a consumption of 4.49 million tonnes of aluminum a year.

Every 1 kg of aluminum used in the car production will reduce the overall weight of the vehicle by 1 kg. For this reason, the application of aluminum are rushing into car parts such as engine radiator, wheels, bumpers, suspension parts, engine cylinder blocks, transmission bodies and body parts (hood door and frames).

A-Rank Berhad and Lb Aluminium Berhad Synergy

A-Rank Berhad and Lb Aluminium Berhad will be seeing further synergy in the foreseeable quarter after significant entry from low profile businessman - Datuk Leow Chong Howa, into A-Rank Berhad.

Datuk Leow surfaced as A-Rank Berhad substantial shareholder after acquiring 27.74% stake in April 2016. On the other hand, Datuk Leow already had 30.17% stake in LB Aluminium Berhad.

Arank is Malaysia largest manufacturer and supplier for aluminum billets, and resemble one of the leading suppliers of aluminum extrusion billets in Asia. On the other hand, Lbalum is the largest supplier of aluminum extrusion in Malaysia and too among the large player in South East Asia.

One would then easily imagine that Arank billets would be used by Lbalum to produce extrusion, forming a vertical integration in the supply chain. According to familiar industry sources, Arank will benefit greatly by becoming an upstream supplier to Lbalum, interpreting to regular steady orders, while Lbalum will enjoy a stable and competitive supply of raw material, of course with better pricing. Expanding vertically will prevent disruption in the supply of input material and reduce threats from suppliers, especially those with greater bargaining power.


Strong Aluminum come back


Aluminum had saw a break away from the long term down trend line that is plagued by oversupply, mainly from China. While most of the factory and production plant are totally shut down, restarting it will easily take up 4 to 6 months.

Aluminum is looking strong to push towards the range of 2,000 in the near term, raising great prospect to aluminum billets manufacturer like Arank in the coming quarters.

The strong rebound in the commodity prices of aluminum had saw major player such as Press Metal reacting immediately.

Medium sized aluminum billets manufacturer such as Arank will be looking to capture investor attention in the coming days.

A-Rank Berhad resting on short term up trend support line

Technical outlook indicate that Arank had good accumulation at the open market in the region of RM 0.65 to RM 0.70. Furthermore, new substantial shareholder, Datuk Leow Chong Howa, acquired his block at the price of RM 0.60.

Given the current rising aluminum price due to closure of Aluminum manufacturing plant in China, as well as increased usage of aluminum in consumer products and electric, it is feasible to annualized Arank consistent performance from 2 previous quarter of a total EPS of 6 cents to a complete EPS of 12 cents for FYE 2016.

Conclusion

Arank will be an interesting company to look out given its bright prospectus. Salient point to take note on Arank includes :
- Emergence of Datuk Leow Chong Howa as substantial shareholder, common shareholder for LB Aluminium Berhad. Datuk Leow will create synergy between the 2 companies in vertical supply chain.
- Aluminum commodity prices broke away from long term down trend prices, signalling a strong rebound, interpreting to better margin for aluminum billet manufacturer such as Arank
- Application of aluminum in more consumer product, with main consumption on automotive industry, using aluminum as a light weighting solution.
- Arank potential FYE 2016 EPS at 12 cents, valuation of PER x10 will see Arank priced at RM 1.20, potential near to 100% capital appreciation from current price of RM 0.67.


Bone's short term TP : RM 1.00

Cheers and have a nice day.

Regards,
Bone

Friday, 22 April 2016

Denko - Changing Tale of Plastic

Denko Industrial Corporation Berhad (Denko - 8176) had acquire PT Winsheng Plastic and Tooling in Indonesia as part of the group restructuring and diversification exercise in order to see higher revenue and profit. PT Winsheng Plastic and Tooling specialized in sophisticated plastic injection moulding and mould fabrication.

The expansion exercise to set up a plant in Jakarta, Indonesia resemble Denko first footprint outside Malaysia. According to group CEO Tan Chen Wei, the expansion into Indonesia is to create greater value among existing MNC client that had relocated to Indonesia.

According to Allied Market Research, the injection moulded plastic market is expected to reach USD 162 billion by Year 2020. The research project a CAGR of 4.9% from 2015 to 2020, with most of the growth focusing in the packaging of end user segment. On a regional basis, Asia Pacific will be the leading market in terms of consumption and revenues.

The application for plastic injection mould continue to grow wider, replacing heavier metal to plastic. The Automotive Industry is one of one the prime example on how plastic had been replacing heavier metal car parts. This in turn had influence on how all the products are manufactured.

The growing prospect in this plastic moulding industry couldn't be captured more timely by Denko. Currently, Denko's customer based comprises of MNC from automotive, consumer electric, information technology and industrial product sector. Prominent leading names such as Dyson, JVC Kenwood, Pioneer, Panasonic and Schneider Electric had been core clientele for Denko plastic mould injection operation.

Denko consolidation could be looking for a successful
breakout above RM 0.38 after several previous attempts.

According to familiar sources in the industry, Denko's establishment in Indonesia will continue to grow stronger as it is looking to become a turnkey contractor, manufacturing final products for clients. With much of the consumer electric giants closing down manufacturing plant and restructure operation, including outsourcing manufacturing of final product, this is a huge window of opportunity for turnkey contractor such as Denko. Playing along this line could be seeing Panasonic being the first few client to appoint Denko for their final product production after the closure of a factory in February this year.
 
Indonesia is going to be a huge growing business arena as President Joko Widodo open up 35 sector for 100% foreign ownership. Indonesia had on last year drawing in more than USD  30 billion of foreign direct investment.

Consumer electronics had been the prime pushing factor for plastic injection mould industry. Demand will continue to see pick up in Asia Pacific country, especially in new emerging market nation such as Vietnam and Myammar.

Denko is committed and positive in seeing it's revenue for FYE 2016 going past RM 100 million with annual profit of more than RM 5 million. This diversification will resemble the primary path of Denko growing potential and wealth in the future.

The future of plastic injection mould industry is bright. Advance technology in resin material, improved automation and factory connectivity all point to a bright future for plastic manufacturing, and Denko will definitely be one of the pioneer in this great movement.

Friday, 15 April 2016

Halex - Higher Value

Halex Holdings Berhad (Halex - 5151) is principally involved in Agrochemical and Fertilizer products. Subsequently, the group also involved in foliage cutting and landscape potted plants as well as Healthcare disposable products.


With the current stiff competition in the agrochemical division, it had been critical for the group to look out for new business opportunities for diversification purposes in order to grow the company. Halex had been seen having interest in tapping into the real estate industry since 2014 through the acquirement of 25% stake in Kesington Development Sdn Bhd which had prime development land in Kota Kinabalu, Sabah.

Let's have a look at the price chart of Halex to see what would be the development in the company in the coming days ahead.
Based on technical readings, it can be easily identified that Halex had saw good amount of open market accumulation during the month of December 2015. The accumulation can be saw through good solid candle reading which is supported by good participating volumes. Albeit having the volume dying down due to the recent market volatility, Halex had saw a break away from the short term down trend line. The break away candlestick is shown with strong volume support, indicating a possible turn in trend, which is for this case is going uptrend.


Rise Up and Rice Up

One of the critical key project that Halex had secured in 2016 is a rice supply contract to Koperasi Majlis Belia Felda Malasysia Berhad.

Under the salient terms of the contract, Halex can supply up to 80,000 tonne of rice per year for a period of 2 years with a 1 year extension option. According to the agreement, Halex is supply price is based on market price from Bernas + a fixed premium of RM 200 per tonne. The margin for rice trading fluctuate around 7% .

Assuming Halex supply price is RM 2500 a tonne, the gross margin could be looking at a profit of RM 175 per tonne. An annual supply of 80,000 tonne will interpret to a gross profit of RM 14 million, EPS of 13 cents based on current share base of 106 million outstanding shares.

To put it more skeptical, a 70% delivery will still see a potential EPS of 9.2 cents based on rice trading alone.

The rice trading business will commence in June 2016, and will greatly contribute to the bottom line of FYE 2016.


Corporate Exercise

Halex is vying to venture into the property scene through the acquirement of Kensington Development Sdn Bhd through it's wholly owned subsidiary - Halex Realty Sdn Bhd. The prime land that Kesington own in Kota Kinabalu that span an area of 15.43 acres is a potential spot to churn in RM 1.1 billion of mixed development of commercial and residential project for the next 4 to 6 years.

This huge exercise will see Halex enlarging share base and share capital. Sources are probably seeing Halex looking to set placement share at a possible pricing around RM 0.65 to RM 0.70, due Halex having clinch the rice trading contract, and approximately 40% discount from it's NTA of RM 1.20.

The corporate exercise will raise enough capital for Halex to fully acquire Kensington Development Sdn Bhd.


Conclusion

Based on the current development in Halex, the current pricing is deemed attractive to investor. At the current juncture, the rice supplying contract can easily see Halex valuation jumping to 90 cents based on potential EPS at 9 cents per annum, valued at PER x10, that it notwithstanding it's other business in agrochemical and healthcare disposable products.

Bone's TP: RM 0.65




Cheers and have a nice day

Regards
Bone