The Dilemma of Focus Lumber Shareholders

The Dilemma of

Focus Lumber

Shareholders

The recent below expectation results for Q1/FY2016 (Quarter One for Financial Year  2016) of Focus Lumber Berhad was reflected on its performance of its share price.

The result was announced on May 21 evening after the closing market. As such, there were a period of two days for many anxious shareholders of Focus Lumber to discuss busily in the website of i3investor.com.

Amongst the discussions were some who predicted gloomy pictures while a few brave heroes were defending the company, pointing out the good fundamentals. We shall never know who will be right or wrong.

What matters is the direction of the share price. It will affect various groups of shareholders or short term players.

So what went wrong with Focus Lumber or was that anything really wrong with the company. I did a bit of "csi" (ha, ha, csi stands for criminal scene investigation, actually). But in this case, I am merely joking, rather I tried to analyse its reasons for its Q1/FY2016 results.

Revenue

Revenue for Q1/FY2016 was RM53.29 million compared to preceding quarter of RM57.77 million. It is a decrease of RM4.48 million which means business is still on as usual. A slight increase or decrease in revenue is expected when a quarter to quarter comparison is used.

Ringgit vs USD

The Ringgit were traded on average mostly between RM3.80 to RM4 during the first quarter of 2016. As such, it has impacted its bottom line. In fact, there was even a huge loss from foreign currency transaction. But we should also note that the Ringgit started to weaken again the USD during the April and has persistently traded above RM4 to RM4.10 despite the widely perceived view that it correlated with crude oil.

But crude oil price has been recently touching or trading near its five months high yet the Ringgit has actually weakened instead. Isn't the Ringgit supposed to be trading higher in tandem with rising crude oil price? But it is not, this time. What will happen to the Ringgit should crude oil price drop to below USD 40 or even lower in the coming months?

Rising cash position

As Focus Lumber continues to make profit (although this time it is making less money), it has a very good cash flow. Its current cash holding is RM88 million (comprising cash RM62 million and Other Investment (OI) RM26 million) compared to RM74 million (cash RM57 million and OI RM17 million.

What is OI? According to its report, it is stated as in Money market fund (unquoted in Malaysia). I believed its cash per share is around 85 sen.

Good Dividend Yield Stock

Focus Lumber is one stock that has been paying increasing dividend each time it has reported a higher level of profits. It has been increasing dividends payout from 6 sen to 8 sen and to 15 sen last year in tandem with rising profits.

How would dividends for 2016 be? To get a good guess, one must first try to get or analyse its eps for 2016. Assuming a conservative eps of 20 sen for this year, I strongly believed a 10 sen to 12 sen dividend payout is there. At current price of just RM1.91, this implies a dividend yield of more than 5 to 6% which is considered high when compared to the fixed deposit rate of bank.

The Dilemma of

Focus Lumber Shareholders

Many shareholders especially long term shareholders are now in a dilemma of whether to cash out or hold on and ride through the storm. There is no one who can tell us the answer of what will happen in the coming  quarters results.

I am also in this dilemma with you as well. Will the share price recover in the coming months if Focus Lumber can double up its eps of Q1/FY2016 in view of a weakening Ringgit since April? What if the USD becomes even stronger and push the Ringgit down to the RM4.20 to RM4.40 level? There are talks that the US Federal Reserve will raise interest rate some times to come this year. All these will have a huge impact the direction of the Ringgit which will eventually has an impact on the bottom line of Focus Lumber.

At the time of writing, Focus Lumber is still trading at the RM1.90 +  levels, earlier having attained the title of Number Biggest Loser on May 23 closing at RM2.07 following a massive drop of 27 sen.

If you think that the coming months, the Ringgit will continue to stay weaken and trade between RM4 to RM4.20 level against the USD, then it is better to hold on to Focus Lumber.

But on the other hand, if you feel that the Ringgit will stay strong and  will continue to trade at RM3.80 to RM4 levels in the coming months, then it might continue to impact the profit of Focus Lumber and hence, another similar result as Q1 might invoke another round of new selling again.

Personally, I feel the Ringgit will weaken in the coming months and those export oriented stocks should resume its higher profits again based on this exchange rate. But I don't have a crystal ball and am just judging this based on my analysis and experience.

The next several coming months will reveal the truth. Stay on course?

You decide because in the investment world, it is every man for himself.