Sunray's 1Q 2007 results on 14th August 2007

At first glance

Earnings dive about 200% into net loss again this quarter. Company reported in the statements that the poor performance was due to the fire that disrupted its production and the reform in the China's medical equipment industry.

Further Analysis

I think Sunray's have several problems at hand:

1) It is heavily dependent on its TCT business. Though TCT was superior compared to traditional pap spear, is the increase in accuracy worth the increase in price, i.e. in switching from using the latter to former?

2) Ever since the last few quarters, it had attributed a severe drop in profitability (leading to loss making) to reform in China's medical industry - moving towards tender system in equipment procurement. The cited reason is that the tender system resulted in lengthier procurement process and keener competition. Is Sunray fighting against other TCT suppliers or different providers (pap smear, other tests?) for cervial cancer detection?

3) TCT is its strongest segment while the rest are fighting a losing battle (e.g. fetal monitoring products). If it can't depend its TCT, what can it depend on?

Hope?

Given current business condition, all depend on whether Sunray can utilise its relatively huge resources and hopefully achieve the following:

1) Able to expand its TCT business to more provinces in China and beyond

2) Its wireless fetal monitoring is able to sell well post 2Q 2008

3) Deploy (wisely) the 20m RMB to expansion business via R & D, joint venture, or more acquisitions.

The potential ultra cigar butt

Given current subprime crisis that prompted global sell off in equities, Sunray's share price is eroded steadily everyday. If it ever trades below 6 cents (its estimated cash per share as of 30th June 2007), it will be ridiculously cheap to confer it the status of a true blue ultra cigar butt. I will raise cash to buy if this opportunity arises!

Armarda 2Q 2007 results on 13th Aug 2007

At first glance

At first glance, profit was up a whopping 168%! I was thus fortunate to go in at the time its when its profit was at its trough. With the expected positive contribution from Brilliant Time Limited (BTL) and FESCO group Joint Venture, profit was surge 168% for 2nd quarter YOY from HKD 3m from 1.12m.

On closer look

There was no breakdown of the profit contribution from the associates in the financial statement. Both was stated to contribute about HKD 1.8m together. Except for 4Q 2006, BTL contribution per quarter fluctuated around HKD 1.1. It did badly in 4Q 2006, giving only 0.285m. Thus, if 4Q 2006 is an exception, the FESCO group will give a very disappointing and meagre 0.7m to this quarter. However, if BTL is unable to keep up with the good performance it had shown earlier, and hence FESCO group joint venture actually contributed majority of the 1.8m, then Armarda's future is bright indeed.

Going forward

All depend on 3 things:
1) Contributions from the associates, especially FESCO group

2) Ability to secure more Oracle financial services contracts

3) Potential usage of resouces generated from the placement of shares to Firich Enterprises Co. Ltd, hopefully resulting in formation of new joint ventures.

Multi-Chem's Annoucement to purchase drilling equipemnt on 10th Aug 2007

The facts

Just when I thought Multi-Chem's most promising segment- IT distribution segment was fast catching up with its disappointing PCB drilling segment, Multi-Chem dropped another bomb shell by announcing another capital expenditure- to purchase more drilling machines.

The addition of these machines is expected to increase mechanical drilling capacity by 30% and laser drilling capacity by 200%.

The reason they give

1) The capital expenditure to purchase the machines is prompted by the demand from "certain key customers".

2) Based on "indications from customers, the demand for outsourced services is expected to remain strong till end of the year".

My concerns

1) If the key customers stopped outsourcing contracts to Multi-Chem, Multi-Chem will be left with over capacity.

2) They take up mammoth loans just to satisfy certain key customers. Isn't these too much risk to take?

3) Aren't there avenues to mitigate such risk, e.g. leasing instead or buying the machines? Though the margin will be lower, the risk of being left with over capacity if the demand plunge in these cyclical business will hence be much lower.

The impact

Other than the perceived contributions to earnings and net tangible assets, the following are the immediate consequences of taking the mammoth loan.

1) As at June 2007, Multi-Chem has current borrowings of 17.4m and 15.6m of long term borrowings. Finance expense was 0.619m for 3 months ended June 2007. Assuming interest at 1.8% per quarter ~ 0.619/(17.4+15.6), taking another 14.5m USD (multi-chem has neligible "internal resources" compared to 14.5m) implies another 0.27m SGD of interest per quarter. This sums up nearly 0.9m per quarter of interest! With net earnings coming in at only 1.5m in Q2, a further increase of 0.27m in interest expense will amplify any deterioration in earnings in coming quarters.

2) The current global (US + Europe + Japan) liquidity crisis that arose from subprime issue in US might result in higher interest rates ahead. Hence interest expense might even be higher than the estimated 0.27m.

My view

I originally hope the company can turned around in 2Q 2008 with the help of its IT distribution segment (by then, its profit contribution alone could have touched 3m. Multi-chem's best quarter was 4m in earnings).

However, factoring the new capital expenditure, if demand and the consequential earning contribution are lower than expected, the turn around will be as late as 2009 or beyond, bearing more capital expenditure from the company. I'm no longer that optimistic.

Manufacturing Integration Technology 2H results on 3rd Aug 2007

Results

Electronics sector in Singapore had been in the doldrums for the first half 2007. So it is nothing really surprising if Manufacturing Integration Technology (MITech) also turn up lacklustre results.

But I didn't expect it actually turn out an eye-popping 86% drop in earnings!

A closer look at the results

Due to the relatively high overhead common to all manufacturing companies, a drop in revenue of 47% led to a plunge in profit of 86%. This translated into a profit margin of only 3.6% this half, 1H 2007, compared to 13.9% last year.

The drop in margin is not merely due to high overheads. The fact that various variable cost segments, e.g. cost of sales, selling and distribution expenses did not fall inline with revenue shows that the company also face profit margin squeeze.

The bad

Despite poorer earnings, MITech still declare dividend of 0.25 cent . Last year, they declared 0.5 cents in 1H 2006 but that was supported by earnings of 4.3M, against this half's meagre 0.59M. They are simply paying too much. The money can be put into better use to grow the company. Dividend should always be inline with company earnings. To distribute the fruits during bumper harvest and not waste money during bad times.

The good (potentially)

Going forward, there are reasons to be optimistic about company performance in 2H 2007 and beyond.

1) Expected picked up in the electronics sector in 2H 2007 in general (Singapore's semiconductor growth in June 2007 already picked up strongly). Hopefully, MITech have something to gain from this rebound.

2) Their recent acquisition in RISE (Right Industrial Systems Engineering Pte Ltd) in February 2007 and AMS Biomedical in May 2007 should contribute strongly to its earnings in 2008 and beyond. The acqusitions of RISE in fact came with profit guarantee for 2007 and 2008.

Short term outlook

I expect MITech's earnings to plunge further in 2H 2007 and a strong rebound in 1H 2008, due to the poor 1H 2007.

Long term outlook

There are no competitive advantage that MITech possess as far as its business in the traditionally cyclical and cut throat competitive semiconductor, precision engineering and contract manufacturing are concerned.

However, there are 2 reasonas why I still think it has a positive long term outlook.

1) It is one of the few companies with a net cash position (NIL debt). Thus if it can manage its resources well so as to be one of the most efficient manufacturer, the future will still be bright.

2) With its solid cash horde, it has the capability to diversify its revenue stream away from the notoriously cyclical semiconductor business. The recent acquisitions of RISE and AMS Biomedical provide the needed evidence. These are manufacturing businesses, in line with the core business of MITech. Given MITech's experience and knowledge in this line of business, I trust MITech that the acquisitions are sound and in their best interest. The last thing any company can do to destroy investor confidence is ill conceived diversification via irrelevant acquisitions and merger.

United Food Holdings 2Q results on 1st Aug 2007

I last commented the acute live pigs shortage in PRC might help United Food Holdings (Unifood) to turn around. Lets see whether there is evidence in the 2Q results to suggest this.

2Q results
On the whole, profits attributable to shareholders tumbled 42.6% year on year, comparing 2Q '07 with 2Q '06. Quoting the financial statement issued by Unifood:
...
The Q207 should be read with the following in mind:
The heavy impact of a poorer performance in Q107 when aggregated with Q207;
There is an improvement (on pre-tax profit ) in Q207 over Q107 (for processed meat products, fresh
chilled frozen pork, pig rearing and animal feed divisions)
...

Is there really an improvement?

2Q 2007 compared with 1Q 2007 (Profit before tax)

	1Q 2007	2Q2007	Change	% Change
Processed meat products	7697	8474	777	10.09%
Fresh, chilled and frozen pork	8360	8937	577	6.90%
Pig rearing	3538	5254	1716	48.50%
Animal feed	3860	6419	2559	66.30%
Healthcare supplements	(1,320.00)	(1,160.00)	160	12.12%
Soybean processing	17461	12194	(5,267.00)	-30.16%

There are indeed an improvement across most segments, particularly Pig rearing and Animal feed segment as anticipated due to the acute live pig shortage in PRC. Soybean processing is however disappointing.

Comment on performance
The results is somewhat inline with expectation (my expectation, not market analysts) as already pointed out in my earlier post on Unifood. However, I am still not optimistic that acute live pig shortage (resulting in improvement in 2 segments) is enough to breathe new live into Unifood.

Next quarter, 3Q '07, will allow more light to be shed on the chance their revival. Until then, this cigar butt (50% discount to NTA of 2.04 RMB ~ 40.8 cts SGD compared to last done price of 19 cents today, not that accurate due to market correction) will continue to remain neglected by the market.