PRESS
ARCHIVE
GeFung's plan to offset profit shortfall
The Edge Malaysia, 17 December 2007
GeFung Holdings Bhd. Which markets 80% of its marbles and granite slabs in China, wants to expand its business in Turkey and the Middle East.
The group is venturing upstream in Turnkey by buying to extract marble blocks while trying to establish new markets in fast developing areas in the Middle East such as Abu Dhabi and Dubai.
It is banking on its expansion plans to help it achieve its profit guarantee of some RM 28 million for the financial year ending Dec 31, 2008.
GeFung's current business was listed on the Second Board of Bursa Malaysia in November 2006 via a reverse takeover of financially distressed Jin Lin Wood industries.
GeFung's share price was hit after it said in a note to its third-quarter results that there would be a shortfall in its guaranteed profit before tax (PBT) for FY2007 and FY2008.
The vendors of Syarikat Bukit Granite Sdn. Bhd. And Shanghai Ge Fung Marbles & Granite Ltd, the two companies injected into GeFung, have guaranteed that the group's PBT shall not be less than RM28.08 million in FY2007 and RM28.33 million in FY2008.
The reason for the shortfall is mainly the delay in execution of property development projects by GeFung customers in China.
“Also, the acquisition of the subsidiary in Turkey was only completed in the second half of the year, hence contribution to the current financial year will be minimal,” said GeFung in the notes.
Its share price was trading at an average of RM1.50 and hit a high of RM1.97 on July 26. Its reference price was RM1. Selling pressure has been mounting on the stock in the past 5 months. From a high in July, the share price fell as much as 57% to close at 84 sen on Nov 28.
In the nine months ended Sept 30, GeFung posted a PBT on RM9.56 million. This means the group needs to rake in PBT of at least RM18.77 million in the final quarter of FY2007 to achieve the guaranteed PBT.
This huge gap between its nine months' PBT and profit guarantee is likely the reason that the investing community has turned bearish on the stock. GeFung managing director Seo Aik Leong declined to say how much PBT the group could achieve in FY2007.
However, he says GeFung's sales of marble and granite slabs in China are seasonally strong in the forth quarter.
“In China, many development projects will be fast-tracked in the final quarter, before workers go for long the Chinese New Year holiday at the beginning of 2008,” Seo tell the Edge. He says the group is working on closing as many sales as possible before year-end.
“We are banking on the strong fourth-quarter results to boost our full-year results.” he says.
Based on PBT guarantee of RM28.08 million in FY2007, and the assumption the tax rate is 23%, GeFung's net profit would be RM21.6 million. With 154.08 million shares issued, its earnings per share (EPS) amounts to 13.9 sen.
Research houses had earlier pegged a price-to-earnings ratio (PER) of 12.4 times to FY2007 EPS. The earning multiple given to GeFung is based on the average PER for the building material sector in China.
This gives rise to a target price of RM1.77. However, GeFung's EPS in the first nine months in only 42.2 sen, which is a far cry from the 13.9 sen guaranteed by the vendors for FY2007.
Judging from the lower share price, it appears the investing community has re-rated GeFung downwards. Based on a closing price of 90 sen last Thursday, and assuming the group is still pegged to a PER of 12.4 times, the market is expecting the group to achieve an EPS of about 7.3 sen in FY2007, down from the earlier anticipated 13.9 sen.
Currently, as much as 80% of GeFung's revenue comes from China, with the remainder from Malaysia. The company plans to diversify its revenue and profit base to include Turkey and the Middle East. Its venture in Turkey involves the acquisition of a Turkey company for RM15.75 million that has extraction rights for two quarries. The acquisition was completed in July.
Seo says the ability to source for highly sought blocks is the key to profitability in the marble and granite slab business.
Marble and granite slabs are not homogeneous products. The color and pattern of marble and granite determine their quality and price.
“If the demand for the particular type of marble in high and it is only available at a certain quarry, the price of such block will be high,” Seo explains.
Having extraction rights to two quarries in Turkey will give GeFung more control over the supply and price of raw material, he adds.
Turkey is GeFung's largest supplier of marble blocks, accounting for 40% of total supply, followed by Indonesia with 35%.
Also in the pipeline are plans to build a marble processing plant in Turkey to cater to demand in the Middle East. A portion of the marble blocks extracted will also be sold to other processing companies.
The group will receive full-year contribution from the quarries in FY2008. Seo expects revenue from Turkey to contribute about 20% of total revenue next year.
Meanwhile, in the Middle East, GeFung has formed a joint-venture company with Jeddah-based Saudi Economic & Development Company Ltd (Sedco) to explore business opportunities in the region.
GeFung has a 50.01% stake in the JV while Sedco owns the remaining 49.99%. In August 2007, Sedco emerged as the second-largest shareholder in GeFung after it acquired a 22% stake. Sedco is a private wealth management company with focus on direct investment, financial investment and real estate.
Seo says GeFung is tapping into Sedco's network of contacts in the Middle East. Works are underway to establish contacts with property developers, contractors, architects and consultants.
He is optimistic of gabbing a share of the demand for building material in the region. Some 1,400 development projects with an estimated total development value of about US$700 billion are currently being carried out in the Mideast. He declined to give the group's sales from the region.
If plans in Turkey and the Middle materialize, GeFung could be on the recovery path. If not, buying support is likely to remain weak.
