One of FinanceTwitter’s readers was curious as to why low-PE stock such as Tong Herr Resources Berhad was bleeding profusely, stock price wise. Is Tong Herr a fundamental stock? Based on its past financial statements Tong Herr is definitely a sound company with sustainable profits, not to mention great EPS (earnings per share) and DPS (dividend per share). The company is the largest manufacturer and exporter of stainless steel fasteners and almost 95 percent of its products are exported overseas.

The Penang-based Tong Herr operates via its subsidiaries – Tong Heer Fasteners Co. Sdn. Bhd. (100% owned) and Tong Heer Fasteners (Thailand) Co., Ltd. (50.01% owned) are engaged in the manufacture and sale of stainless steel fasteners, including nuts, bolts, screws and all other threaded items. As with any company in the manufacturing field the cost of raw materials and the selling prices determines the profit or loss of the business – hence the setting up of the plant in Thailand.

The fall of Tong Herr

Tong Herr Resources Bhd’s (KLSE: stock-code 5010) net profit for the third quarter ended Sept 30, 2007 fell 26.5% to RM15.23 million from RM20.71 million in 2006. Although the company announced its revenue surged 57.7% to RM139.11 million from RM88.22 million in 3QFY06, the stock was punished the moment it said the earnings per share (eps) fell to 11.95 sen from 16.26 sen in 2006.

Tong Herr also declared a lower dividend of 10 sen in 3QFY07 compared with 16 sen in 2006. Although the global demand for stainless steel fasteners is estimated to grow by eight per cent a year over the next few years, some factors are hindering Tong Herr from pleasing the investors:

• lower demand of its product
• higher cost of raw materials purchased
• lower selling price of goods during the quarter

Investors do not like weaker expectation in terms of earning and will not hesitate to sell upon the sight of such weaknesses, the same way U.S. stocks are being assessed.

FTA the answer to better earnings

Tong Herr has definitely taken the wise step in shifting part of its manufacturing into Thailand (in May) due to import duty issue. All the manufacturing companies have (or plan to) no other choice but to find alternative countries that have preferential tariffs with the U.S. This is one of the reasons why Malaysian government is favoring FTA with U.S. albeit other issues such as NEP which is preventing a speedier execution.

Consider this – Tong Herr has to pay import duty of 8.6% in the U.S. for stainless steel screws and bolts exported from Malaysia since the country lacks the FTA with U.S. However there’s no duty for exports from Thailand to U.S. for the same products.

Should you consider Tong Herr in your portfolio?

The stock has been on the plunge since the bonus issue of 2 for 1 on 16th Oct 2007. Interestingly there were insider sellings by the Tsai shareholders. If you’re trading U.S. stocks or option such selling could weaken the investors’ sentiments and the same reason applied here. The target price lowered by some investment banks or research institution did not help either.

Nevertheless the low P/E ratio is definitely the main bullet that you should consider for this stock. Assuming the full financial year 2007 will bring in the same earnings per share as of 2006 (62.18 sen) which should be achievable since the first half of 2007 already saw it registered 51.38 sen, the stock could be a steal at a P/E of 5.3 multiple only based on today’s closing price of RM3.30 a share.

Is Tong Herr stock price expensive? If you take its competitors Chin Well Holdings Berhad and Techfast Holding Berhad (KLSE: TECFAST, stock-code 0084) which are trading at multiple of 21 and 10 respectively into consideration, Tong Herr could be one of the hidden gems available. However the timing of entry is of paramount important and you should buy in stages with lots of patience.

Tweet

December 4th, 2007 by financetwitter

If you enjoyed this post, what shall you do next? Consider: