Another company visit report, low p/e & earnings acceleration.
I visited GEN (1.09) last week and came away rating this one with a “speculative buy”.
This company is more of a turnaround story then a pure value stock. It does not expect to pay any dividends for this year as its still working off some losses for year 2005, when it ran into trouble due to massively rising construction prices back then. However GEN learned its lesson and since then only prices projects after it sourced its raw material. This was an industry wide problem a couple of years ago and all were effected.
Hence there is a good probability the earnings acceleration will continue to recover well into year 2008 as will the net profit margin; and this will allow the company to pay a nice dividend for next years’ operation. The stock price could so well be trading around 1.40 at some point next year.
GEN is on an earnings rebound having reported 0.09 EPS for the first six months ending June 30 vs. 0.06 EPS for the same period of year 2006. This 50% increase is likely to be sustainable according to management as “the profit margin has further room to grow”. While the 3 Q. is historically a slower period for their business (due to rainy season) with guidance of mgt we can guestimate the EPS for this year to be close to say 0.17 or 0.18 Baht per share. Their 2007 p/e is hence an undemanding 6.1 and probably dropping to less then 6 for next year. The thing is next year the company has to start paying income taxes again (as the carry forward loss is exhausted), so this cost will raise. Corporate income taxes are 25% of profits
To see what GEN does visit their web site www. Gel.co.th
Gen is a leader in:
ท Glassfiber Reinforced Concrete
ท Geogrid
ท Epoxy Materials & Prescast Concrete Wall
The company is 45 years old has about 300 employees and an impressive list of clients and jobs completed. 50% of their business comes form Piling and GEN has a 400 mill. Baht backlog. The company has a long history as a listed firm as it IPO in 1994.
The reason to believe profitability is on a continued upward bias is because raw material prices are stable, construction spending is likely to increase next year and mgt is convinced there is more room for net profit margin improvement. The reason I rate the stock a speculative buy is due to the reasons stated above and my minor hesitation in totally believing the company can deliver on their indicated net profit margin improvement.
There are some warrants outstanding but these are convertible at a price of 2.25, so well far out-of-the money and hence no material effect on dilution.
Founding management and related insiders own a substantial portion of the stock, estimated at over 50%. GEN shares are trading right around book value, last show to be around 1.05. GEN shares trade regularly between 10 to 20 million shares per day.
Yet with the stock price having spiked to 1.18 just recently and now in a bit of a correction mode I am willing to give it the benefit of the doubt and so rate it as an interesting pick with the rating expressed above. Clearly GEN's current and forward p/e rating is undemanding and if Thai construction spending and GEN's margins can improve as anticipated there is much upside potential in earnings and so the stock price.
Best Regards,
Paul A. Renaud.
