Mediflex @ 51 cents ( Gloves / Malaysia ) 2 comments
(P.S: Sorry for any disturbances the advertisements above may have caused you)
1.Trading at >30X trailing PE and >4X NTA
2.Doubts about ability to maintain margins even as capacity increases
This is such an extraordinarily priced SESDAQ stock that I have to write about it. It is now trading at more than 30 times trailing PE, more than 4 times NTA despite being a relatively low revenue company (~ S$20M) and having profit margins of around 10%.
The main reason is the high target prices set by the covering brokerages Phillip Securities and Kim Eng Securities. The former sets a price target of $1.10 while the latter's is around 80 cents. The underlying reason for these high target prices can be traced to a company announcement in March 2005 which declared that the company would triple its production capacity by the end of 2005. So both brokerages have taken both FY05 revenues and net profits to be 3 times that of FY04 (in fact, slightly more than 3 times)!! The target prices are different only because the target PE set by Phillip is higher than that by Kim Eng. (Also interestingly, they used FY06 earnings to set target PE, even though at the time of the reports we were still barely in the second quarter of FY05.)
Let us see what is wrong with such projections. There are two main problems. Firstly, assuming margins hold, are the new lines all installed at the start of FY05? No, they would be installed in steps throughout FY05, which means output would be only stepped up, not a quantum of 3 times right from the beginning of FY05 (which is what the brokerages assumed). Secondly, I don't see how margins can be maintained even as output triples. Surely customers would look for certain discounts which Mediflex management would be keen to give out to secure launching orders for their new dipping lines. If demand is so strong, the other Malaysian companies in this sector (Mediflex is by no means a big player compared with others in this sector) might as well triple their output to satisfy demand (that is the only reasonable competitive strategy) and then of course margins would come down anyway.
Let's do a reality check. Mediflex manufactures gloves for two segments: cleanroom (mainly semicon sectors) and medical. For the first sector, let's take Micro-Mechanics which manufactures consumables for the semicon sector (albeit not gloves), Micro-Mechanics is now trading at 9 times trailiing PE; a consequence of poor outlook for the sector which makes further investment in capacity unlikely. For the second segment, let's take Medtecs, which manufactures and distributes medical consumables. It is now trading at about 13 times PE. Compare that with the present valuation for Mediflex.
Of course, this high share price came in useful in Mediflex's recent purchase of Sonic-Clean from Unisteel, using new share issue as currency for the acquisition. Unisteel demanded 9-10 times forward PE (FY05) valuation for its stake in Sonic-Clean, quite a high valuation for a subsidiary which is non-listed. Clearly Unisteel finds it pertinent to have a wide margin of safety on its new holdings of Mediflex shares based on their current price.
(1) The latest analyst report on Mediflex from Kim Eng
(2) The latest analyst report on Mediflex from Phillip Securities
(3) Company announcement on 21 Mar 05 on its expansion plans