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The Deep Breath Before The Plunge; Turning Bearish on KLW
Tradeable, Tradeable Ideas | 04 April 2014
Related stocks:
504
By: Lim Si Jie
Articles (169) Profile
  1. KLW’s revenue and net income has been showing signs for investors to worry about its outlook.
  2. KLW’s P/E ratio as well as NAV are displaying hints of its overvaluation to investors.
  3. Indicators on the chart are showing signs that KLW is poised for a bearish run.

Company Profile & Business Model

KLW Holdings (KLW) is one of the largest medium to high end door manufacturer with a wide spectrum of products. KLW has presence in both the Malaysian and Chinese market through its subsidiaries KLW Wood Products (M) Sdn Bhd and Dongguan LEBEX Door Co Ltd respectively.

The KLW group is known for establishing high value and quality door sets for well-known quality home improvement and DIY chain-stores and distributors throughout Europe, USA, Middle East and Asia. Its products can also be found across Singapore’s residential development such as The Wharf Residence, Waterfront Key and Sophia Residence, just to name a few.

Corporate Development

In February this year, KLW announced that it would not be distributing any dividends for the year. Such declaration is unlikely to bring positive news to even the most optimistic investor. Regardless, we would need to probe deeper into its financial statements to verify the magnitude of such announcement on KLW’s future share price.

A deeper look into KLW’s financial statement shows that no dividend was disbursed to its shareholders for the past five years. Although the non-payment aligns with its usual practise of not paying out dividends, there are other signs that stood out prominently in KLW’s financial statements.

The 5-year average net income of KLW has been in the red. KLW’s revenue has also been on a negative trajectory since 2008 with only marginal improvements in 2012. Other than revenue and net profit, KLW’s cash from operations is also experiencing a drop as well. This certainly does not paint a rosy picture for KLW.

Fundamental Analysis

Current share price: $0.042

Net Asset Value (NAV) per share: $0.00716

The current share price of KLW is an overvaluation of over 400 percent of its NAV per share. This essentially means that as an investor, you are paying more than four dollars for every dollar of asset held by KLW.

This is confirmed by KLW’s high P/E and P/B ratio. Both ratios are relatively high in comparison to the sector and index benchmark. In addition to the expensive valuation of KLW, KLW’s management effectiveness can also be questioned.

A close look on the table below would easily draw your attention to KLW’s negative five year average ROA, ROE and ROI. Although KLW did manage to secure a positive return for all three indicators for the trailing twelve months (TTM), it still lags behind the industry’s TTM returns.

 

Technical Analysis

To gather further confirmation for a bearish call on KLW, let’s take a look at KLW’s one-year chart for the past year to examine what is the reason for the surge in share price in the past year.

In Nov 2013, KLW announced the following news:

  1. MOU signed to acquire Wah Loon Group at valuation of $200 million
  2. KLW to raise approximately $270 million for acquisition and growth.
  3. Brunei Prince to invest up to $50 million in KLW.

This created a sudden spike of interest in KLW.

Using price action analysis, we seek to enter the market at a price that is able to secure better gains.

Although KLW had a higher high, coupled with higher low, it did not hit a third confirmation. Furthermore, it has also broken the upward trend line. If the support at $0.038 was to be broken, it will likely confirm the down trend of KLW.

#Bearish

Based on KLW’s fundamentals as well as a study of the charts, I am rather bearish on the prospects of KLW in surpassing its previous 52 week high.

Instead, a short call would allow investors to capture better gains. KLW’s fundamentals give me good reason to go for the breakout before it breaks the support at $0.038. However, patience may be the key to securing good gains backed by a margin of safety.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

KLW Hldgs  0.002 -0.001 -33.33%   
Business: Engaged in the manufacture and distribution of engineered doors. [FY18 Turnover] Door business (99.7%), property business (0.3%).

Insight: Feb-19, 9M19 revenue fell 9.6% due to lower export... Read More


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