Tecguan- powered higher by palm oil business

 Background

Teck Guan Perdana Bhd ('Tecguan') is involved in the two main businesses:

1) Oil Palm products business, where it owns oil palm plantation as well as operates a kernel crushing plant; and
2) Cocoa products business, where it manufactures & sells cocoa products as well as trades in dried cocoa beans.

In the past 4 years, Tecguan's cocoa products business has shrunk while the oil palm products business has grown significantly. The bulk of Tecguan's oil palm products business comes from the kernel crushing plant as the acreage of its oil palm estates is only 2020 acres. Based on this small acreage, we can deduce that 10-15% of its turnover came from FFB sales while the balance came from sale of kernel oil.


Table 1: Tecguan's 1Q Segmental Results for the past 4 FY

Part of a large Conglomerate

Tecguan is a part of the HTG Holdings Sdn Bhd group of companies. Its business dealings with related companies could be fairly extensive. This situation could become problematic when substantial amount of money is owing to its holding company while equally large amount is due from related companies. For example, if you look at the Annual Report for FY2010, there is an amount due from a related company of RM70.6 million, which was classified under Current Assets. Tecguan in turn owed its holding company RM79.1 million, which was classified as Non-current Liabilities. It also owed related companies a total of RM13.5 million, which was classified as Current Liabilities. All amount advanced or owed carries interest at a rate of 5.55% pa.

In its detailed accounts for QE30/4/2011, Tecguan's Trade & Other Receivable dropped to RM17.8 million from RM73.4 million as at 31/1/2011 while its Cash Balances increased to RM46.4 million from RM11.5 million. On the Liabilities side, the Other Payables (which should include the Amount due to Holding Company) dropped slightly from RM78.6 million to RM64.2 million.

Recent Financial Results

Tecguan's financial performance has improved significantly over the past two quarters. When compared to last year, Tecguan's net profit increased by 52% despite an unchanged turnover. Net profit has however declined by 20% q-o-q to RM4.0 million despite a 22%-increase in turnover to RM54 million. The decline in bottom-line on a q-o-q basis is due mainly to lower FFB prices.


Table 2: Tecguan's last 8 quarterly results



Chart 1: Tecguan's last 16 quarterly results

Financial Position

Tecguan's financial position as at 30/4/2011 is deemed satisfactory, with current ratio at 3.3 times and debt to equity ratio at 0.3 time. Tecguan was holding cash balances of RM46 million as at 30/4/2011. However, this cash position is likely to be money advanced by its holding company for unspecified purposes. In the past, the money has been on-lend to related companies.

Valuation

Tecguan (closed at RM0.83 at end of the morning session) is trading at a PE of 2 times (based on annualized EPS of 40 sen). Even adjusted for the current slide in the price of CPO, Tecguan is deemed very cheap.

Technical Outlook

Tecguan has been in a bottoming phase from 2006 until early this year. It broke above its strong horizontal line at RM0.80 today. Its next resistance is the horizontal line at RM0.95-1.00.


Chart 2: Tecguan's monthly chart as at June 27, 2011 (Source: Quickcharts)

Conclusion

Based on good financial performance and attractive valuation, Tecguan can be a good stock for long-term investment. The upside breakout above the RM0.80 horizontal line could signal the start of a new upleg; thus, a possible trading BUY. However, Tecguan is such an integral part of the HTG group of companies that it is bound to be afflicted with issues of corporate governance and transparency. These issues could affect investors' enthusiasm for the stock

Overconfidence

One of the most documented of all psychological errors is the tendency to be over optimistic. In general, most people do not see the need to improve the way they make decisions, as they believe that they are already making excellent decisions. The unwarranted belief that we are usually correct is a major real-life barrier to critical thinking.

People exaggerate their own abilities and this is particularly common in managing their assets. Overconfidence often results in investors being fooled by small gains in a few trades, feeling much more in control of a situation than they are. Money managers, advisors and investors are consistently overconfident in their ability to outperform the market, but fail to do so.

For example, mutual fund managers, analysts, and business executives at a conference were asked to write down (1) how much money they would have at retirement and (2) what is their net worth now. The average figures were $5 million and $2.6 million respectively. The professor who asked the question said, 'regardless of the audience, the ratio is always 2:1'. People are definitely very confident that they will at least make more money in future than now.

Overconfidence can lead to the followings:

1. Not having an investment plan
Perhaps the most common reason why investment plans fail is that the investor doesn't actually have a plan. The very first step of a rational investor is to draft a plan stating investment goals and conditions. This is to make you detached from the whole investment business and follow strictly by the book not your heart.

2. Overtrading
In Odean and Barbet's study of 78,000 investors' accounts in a large brokerage firm from 1991-1996, the most active traders scored an average return of 10% compared to the less active investors' 17.5% profits. And online traders suffer even lower returns as they tend to overtrade and thus lose money to brokerage charges.

3. Lack of diversification
Due to overconfidence, investors tend to invest heavily on a particular investment with the optimism that it will generate good returns. This lead to insufficient diversification of portfolios.

In general, overconfidence is caused by mental bias that leads investors to over-estimate their knowledge, under estimate the risk and exaggerate the control they have over a situation.

Happy, Investing,
Jordan Tan