Geshen: Patience Paid Off

Geshen FY15Q3 Financial Result

GESHEN (RM mil)	FY15Q3	FY15Q2	FY15Q1	FY14Q4	FY14Q3
Revenue	45.12	36.23	17.73	16.53	24.69
Raw material used	20.17	18.07	5.70
Raw material %	44.7	49.9	32.1
Other Income	5.81	0.51	1.04
PBT	12.09	4.22	1.75	2.44	2.48
PBT%	26.8	11.6	9.9
PAT	8.71	2.82	1.17
MI	1.32	0.52	0.00
PATAMI	7.39	2.31	1.17	2.51	0.29
Total Equity	73.2	64.4	48.2	46.6	44.8
Total Assets	136.7	118.3	65.9	67.3	71.8
Trade Receivables	37.3	26.7	10.1	8.0	13.0
Inventories	17.0	15.5	6.3	7.5	8.5
Cash	12.3	5.2	14.6	16.4	12.8
Total Liabilities	58.0	49.8	17.7	10.7	26.9
Trade Payables	23.9	21.6	5.9	7.3	10.0
ST Borrowings	8.1	7.4	6.0	6.4	6.4
LT Borrowings	3.6	3.5	1.0	1.1	1.8
Net Cash Flow	-7.8	-12.7	-3.1	2.3	-0.8
CFOperation	11.7	5.4	-1.7	3.6	2.7
Depreciation	4.6	2.9	1.3
CFInvestment	-37.1	-33.2	-0.6	1.0	-1.5
PPE Purchase	4.2	0.3	0.6
CFFinancing	17.6	15.1	-0.8	-2.3	-2.0
FreeCF	7.5	5.1	-2.3
EPS	9.60	2.99	1.52	3.26	0.37
NAS	0.95	0.89	0.63	0.61	0.58
D/E Ratio	Net cash	0.09	Net cash

Geshen's management really meant it when they said in previous quarter that "the group envisages improved performance over the next quarter".

Its latest FY15Q3 EPS jumps 220% to 9.6sen from 3.0sen QoQ, while revenue improves 25% in the same period.

The main reason for this extraordinary performance is a RM5.809mil gain in "other income".

From the profit breakdown, this "other income" should be made up of forex gain & interest income.

However, Geshen has registered both gain and loss on forex, with a net gain of RM3.75mil in this quarter.

I think the forex loss should have been included in "other operating expenses".

To be fair, if we take out forex gain of RM5.77mil from "other income" to calculate its core profit, we should add in the forex loss of RM2.03mil.

After deducting the net forex gain, Geshen's core PBT in FY15Q3 should be RM8.35mil.

At a tax rate of 28%, net profit will be RM6.01mil, and PATAMI roughly RM5.1mil.

To me, this is definitely a superb result as I only expect full year PATAMI of RM11.8mil for Geshen.

So, core EPS without forex gain for Geshen in FY15Q3 should be 6.64sen (total shares 76.9mil).

Annualizing this figure we can get 26.5sen EPS a year.

If we give it a fair PE ratio of 10x, then its target price will be RM2.65. If PE 8x, it will be RM2.12.

If it is fully diluted (+30mil RCPS), projected annualized EPS will be 19.1sen.

At share price of RM1.73 now, it seems like Geshen still looks "undervalued" even though it was just trading below RM1 one month ago.

Anyway, please bear in mind that the calculation above is based on annualized figure using single quarter result.

However, I think this is fair as FY15Q3 is the first quarter that included Polyplas's contribution fully.

Geshen did mention in the quarterly report that this Q3 has a seasonal higher production volume.

This is true, as Geshen consistently posted highest revenue in its Q3, but this is not necessarily so for its profit.

With the inclusion of Polyplas, which is basically a better company than the original Geshen, I'm not sure whether this seasonality will stay.

Furthermore, Geshen may still has room to grow as its 75%-owned Polyplas seems to be in growing mode, and it may acquire the remaining 25% shares later.

In another development, Geshen announced that its new major shareholder Mr Chan CK has been appointed as joint managing director of the company, who will be in charge of the company's day to day operation.

Is this a good or bad news?