ANALABS

A recycling company which has remain profitable in their core business suddenly got a boost in earnings after acquiring a company producing resin impregnated paper. For the past 2 quarters, their new business is overtaking their core business of recycling in terms of revenues and profits.

Their 4th quarter earnings expected in June will be the next catalyst for their share price as currently their EPS for 3 quarters has already exceeded their FYE 2009 EPS 15.74 sens. If the profits from their new acquisition continues, their FYE2010 EPS would exceed 24 sens assuming they only replicate 50% of last quarters results. But because their new business has only been in business for the past 2 quarters, it is entirely possible that it may have some sort of cyclical business that is still not obvious.

Cash wise they have depleted their bank to acquire their new business with only RM11 mil of cash left. Although they do not have any significant long or short term borrowings, their Payables currently stands at about RM30 mil. Latest reported NTA for the company is RM2.13. Their PER is about 9x at current price of RM1.70 only taking into account 3 quarters EPS of 0.19 sens. Dividend is moderate at about 5 sens FYE2009 when the yearly EPS was 15.43 sens.

The only reason I'm even interested in this is due to the potential explosion of EPS in the coming quarters and the share price follows. With an NTA of 2.13 which is a good 40 sens above the current share price of RM1.70 as well as an expected PER of 6.5x makes it very attractive. Although the share price have appreciated greatly to RM1.70 from less than RM1.30 at the end of March, it still has much more room for upside due to further improvement of EPS. But a more cautious approach would be prudent due to the lack of information regarding the new operations full year operations.

With a low EPS expectancy of 24 sens for FYE2010, their future PER would only be 7x. Higher EPS expectancy of 28 sens would reduce their PER to about 6x. Returns on investments would be expected to be around 11-33% from current stock price of RM1.70. Worst case scenario is when EPS is erased in the 4th due to unforeseen circumstances, at that point PER would be near 9x.