A NEW beginning?The April-June 2003 quarter was a milestone in Eng Teknologi’s (RM3.52) corporate history as it brought the merged Altum Group (Singapore-based) under its wing in May. During the quarter, Eng recognised a RM2.6mil gain from the disposal of a subsidiary to Altum, and subsequently raised its stake in Altum to 60%.
Not yet realising potential. To recap, the merged Altum Group would be progressively shifting its operations to Thailand (under the unit acquired from Eng) to minimise costs while maximising economies of scale and margins.
To this end, the impact has not been felt as the transition will only begin in the second-half. In less than two months based on the existing structure, Altum brought in RM19mil or almost 40% of Eng’s April-June 2003 turnover.
While the revenue impact should be fairly reflective going forward, we are confident of significant scope for Altum to raise pre-financing pre-tax contribution from the just over RM1mil in the latest quarter, or about 13% of group profit.
Temporary Malaysian setback. Outside Altum, Eng’s operations in Hong Kong and the Philippines did well with sequential turnover and profit growth in April-June 2003. In particular, Hong Kong posted 30% growth to almost RM3mil pre-financing pre-tax profit, or a 72% share.
On the other hand, the disappointing showing at its Malaysian operations with an almost 60% profit decline was partly due to the phased implementation of a vendor managed inventory (VMI) system – an increasingly common method of assisting customers in their inventory management.
Here, although Eng has shipped out VCM (voice coil magnets) to a third party warehouse, it has yet to book in revenue, which will come in the coming quarter.
Overall, Eng’s latest results are slightly disappointing but this is more of a timing issue due to the unexpected shipment delay. Excluding exceptional disposal gains, Eng would still have staged an impressive turnaround from a loss in Jan-Jun 2002 to register 6 sen earnings per share (EPS) in January-June 2003.
Stronger second-half and 2004. Looking forward, we expect moderate performance in the July-September 2003 quarter before a strong uptick in the final quarter. On the whole, we believe the stronger second half is in sight for Eng in view of the following factors:
·The shipment of the delayed VCM products;
·Expected commencement of a RM100mil component contracts for US-based Emerson;
·Rising contribution from Altum
Industry-wise, the outlook should also be considerably brighter come 2004, when the restructuring of Altum should be expected to bear fruit. Overall, we see more than just an industry-driven turnaround for Eng, as its strategic positioning efforts would also be beneficial over the longer term.
Meanwhile, even after paying RM37mil cash as part of the Altum merger exercise, Eng still has a well manageable balance sheet with net debt of RM22mil at end-June 2003, or only about 17% of shareholders’ funds.
Maintain BUY. While Eng may have fallen out of the radar screen of many investors following the industry downturn in the past few years, we believe its improved fortune would not be unnoticed for long, especially noting the well regarded management and their previous following among institutional investors.
Based on our full-year pre-exceptional EPS forecast of 17 sen (no change from previously, as we believe Eng will make up for its second-quarter shortfall in the second-half), Eng is trading at just over 20 times price-earnings ratio, which we feel is not demanding for a recovery story helmed by a proven management team.
As it is, valuation will fall quickly when growth strengthens into 2004. Maintain BUY on Eng.