Robust company results for Q2

AMID the muddle and mayhem of sub-prime debts driven from the Wild, Wild West, many companies in the Earthy East, including Malaysia, reported improved productivity and profits last week.  

The current results season has one more week to go, ending this Thursday, but many of those issued so far have been reassuring.  

It was a no-brainer the plantation and oil and gas (O&G) support services sectors would generally show strong growth. The extent of expansion would, however, differ among companies as well as some that would disappoint.  

In the O&G sector, one of the fastest growing companies is Coastal Contracts Bhd which reported on Friday a 143% increase in net profit to RM19.7mil for its second quarter (Q2) ended June 30, 2007.  

It is one of the better listings on Bursa Malaysia. It has just achieved in a single quarter a net profit higher than the full-year earnings of RM13.9mil it forecast for 2003 when it made an initial public offering.  

The company started as a builder of basic tugs and barges and progressed into constructing sophisticated support vessels. With a good track record behind it, Coastal Contracts has now confidently indicated it is ready for growth to the next level.  

The company said in its results statement it has a new yard of 52 acres that would enable it to “jump start participation in the offshore structure sector.” This is believed to refer to services for structures such as offshore platforms that potentially involve huge contracts.  

Glenealy Plantations Bhd reported last week a 96.5% surge in its net profit to RM12.6mil for its fourth quarter ended June 30 compared with the preceding quarter when it earned RM6.4mil. The latest quarter's earnings work out to earnings per share of 11 sen and the stock closed at RM3.34 on Friday. 

An offshore vessel made by Coastal Contracts Bhd

The company's cash holdings rose 18% to RM125mil which amount to about RM1.10 a share, and it is debt free. It is poised for a price-to-earnings ratio (PE) of a single-digit this year, and given its cash generation, it's good value for a plantation stock.  

Success Transformer Corp Bhd proved its successful transformation in its Q2 results last week. This was the first full quarter in which the company recognised the contribution of newly acquired Seremban Engineering Sdn Bhd, now a subsidiary in which it owns 60%.  

Seremban Engineering contributed RM1.2mil in that quarter to Success' pre-tax profit which totalled RM5.8mil for that period. It shows that even small companies can accelerate their organic growth by acquiring small but promising businesses.  

In addition, Seremban Engineering, which manufactures process equipment, has diversified Success' traditional business in industrial lighting products and transformers. As Success put it, Seremban Engineering's contribution substantiated its strategy to diversify to ensure long-term sustainable earnings growth.  

The group continues to expand its export sales. Its latest results showed its export revenue rose to over RM18mil in the first half this year, which is higher than that of RM16mil for the whole of last year.  

Evergreen Fibreboard Bhd is a larger company that has similarly expanded well through a combination of organic growth and acquisitions.  

In fact, its earnings have become so large that they exceed that of Top Glove Corp Bhd, but Evergreen's total market value is less than half that of the global glove manufacturer.  

Evergreen's Q2 net profit, announced last week, rose 128% to RM32.1mil and it currently has a market value of RM860mil compared with Top Glove's latest quarterly net profit of RM25.9mil and its market value of RM2.07bil.  

The difference in their market values is mainly due to Top Glove's proven track record of 11 years of continuously strong earnings growth, whereas Evergreen has a shorter track record of uneven growth.  

It is for Evergreen's management to prove to investors that having made the right acquisitions towards vertical integration into its raw material requirements, it can offer a more stable earnings expansion.  

Like Top Glove, Evergreen has become a global player in processing commodities, which in its case is rubber wood which it processes into medium density fibreboard (MDF).  

Evergreen has become one of the 10 largest MDF manufacturers in the world. There is room for it to rise in these ranks, especially as it is highly cash-generative, with virtually no borrowings.  

Consumer services 

Utility companies are also highly cash-generative, although they are perceived to be plodding along at a slow pace of growth.  

The independent power producers (IPPs) have shown, on the contrary, that they can grow as well as companies in the manufacturing or property sectors.  

One of the features of utility companies is that they provide essential products or services for consumers, and demand for their output therefore tend to be stable and continually increases.  

Furthermore, there is much to be said for cash generative qualities.  

YTL Power International Bhd and PLUS Expressways Bhd reported such qualities last week.  

Although YTL Power started as an IPP, its earnings from water and sewerage services in Britain now far exceed that of its profits as an IPP in Malaysia.  

The company announced last week that its earnings expanded over 97% to RM520.5mil in its fourth quarter (Q4) ended June 30, 2007.  

This is an unusually high rate of growth for a company in any industry. There were, in fact, some exceptional items like a large deferred tax credit arising from a reduction in future tax rates in Malaysia and Britain. There was also “other operating income” that may not be recurring.  

These items obscured the surge in the operating income of the group's water and sewerage division in Q4. The results of this division mainly comprises that of Wessex Water Ltd, YTL Power's wholly-owned subsidiary in Britain.  

This division posted an operating profit of RM568.8mil in Q4 compared with about RM270mil in each of the four preceding quarters.  

The latest quarter is the first in which Wessex Water benefited from higher rates for its water supply and sewerage services. Ofwat, the regulator for water and sewerage services in Britain, approved higher rates of between 5.7% and 10.1% from April for companies in this sector.  

Wessex Water was approved for an average rate increase of 9.4%. Its high Q4 contribution to YTL Power would therefore be recurring in its current financial year.  

The rate increases for the industry there were allowed to enable the companies to invest further so as to reduce waste and improve their environmental impact.  

With an operating profit of RM1.38bil for the year ended June 30, Wessex Water is one of the best-executed acquisitions overseas by a Malaysian company.  

In addition, YTL group has given Malaysia a good name in Britain where under its watch, Wessex Water was named the top water and sewerage company there by Ofwat last year when it received a seven-star rating for customer services.  

YTL Power, with gross cash of RM6bil, may find it easier to acquire more utility assets, if competing private equity companies find it hard to raise financing for leveraged buy-outs as a result of a credit crunch in the US.  

PLUS produced a 16% increase in its Q2 net profit to RM310.4mil. Interestingly, traffic growth on its tolled highways increased from just 1% in the first half last year to 6% in the first half this year.  

The momentum appears to continue as PLUS reported its traffic growth in July was 10.7%. In terms of profit margins, the company is scheduled for a 10% increase in toll rates next year, according to brokers. Its earnings momentum could accelerate.