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Healthway Medical: A weak first quarter.

Sunday, May 16, 2010

Earlier this year on 24 Feb, I said that Healthway Medical's share price did not provide value for money anymore. By then, I was 80% divested. Primarily, I was concerned about the heavy dilution which took place due to the rights issue and a following share placement which increased the number of shares from 1.384b shares to 1.841b shares.  I explained that I would not buy more Healthway Medical's shares unless I feel it provides value for money once more.

Even earlier on 16 Jan, I explained the rationale for partial divestment based purely on technical analysis. Healthway Medical's share price gained almost 40% in a matter of days.  "The fundamentals and prospects are still good over the longer term. I just feel that the market became a little too enthusiastic and sent prices up too high and too quickly. I liken it to a sprinter who is able to run very quickly over short distances but the speed is unsustainable over longer distances."

Thus, in the recent months, informed by a combination of TA and FA, I sold down my stake in Healthway Medical and at the moment, I am almost 100% divested, retaining only the rights shares and shares from the scrip dividend exercises.

Technically, now, Healthway Medical is testing resistance at 15.5c after it went CD. Fundamentally, I am still waiting to see if Healthway Medical could utilise the funds raised from its rights issue and share placements well enough to increase earnings at least proportionally to restore EPS to pre-dilution levels. With this in mind, I looked at the 1Q 2010 report released on 14 May.

Compared to the same period last year:
1. Revenue reduced 6.3%.
2. Staff cost increased 20.1%.
3. Profit before income tax reduced 68.5% to S$1.409m.
4. Total liabilities remain more or less the same.
5. Cash and cash equivalents increased from $28.4m to $39.4m.
6. Cash flow from operations became a negative $4.946m compared to a positive $3.974m.
7. Due to its rights issue, cash flow from financing activities is a positive $19.2m.
8. EPS is 0.09c, down from 0.28c.

I would draw attention to points 3, 6 and 8 in bold. The results are disappointing. Given the increase in the number of shares by 33% or so, in the short term, I was expecting the EPS to reduce proportionally by 25% or so.  EPS has instead reduced by 70%!

To be fair, Healthway Medical is going through an expansionary phase and would have more costs and greater expenses. As an investor, to be prudent, I would continue to wait for greater clarity on whether higher earnings would follow, maintaining that the share price at current level does not offer good value.

The technicals suggest that the longer term uptrend is still intact and the rising 200dMA should provide initial support at 14c. The declining 20dMA has formed a dead cross with the rising 100dMA.  Two gravestone dojis were formed in succession in the last two trading days. MFI is flat and OBV has been declining. Ominous signs.  The only consolation I see is the reducing volume as price declined.

There is also a possibility that a double top was formed by the highs in January and March respectively. If the pattern is valid, there is a long way to fall.

Related posts:
Healthway Medical: An updated valuation.
Rationale for partial divestment.


Royston said...

Hey AK, good review of healthway...i'll also be keeping an eye on the counter to see if i can enter at a good price

AK71 said...

Hi Royston,

Thanks. :)

Of course, everyone would have his own idea of what is a good price. What in your opinion would be a good price to enter? :)

Royston said...

Hi Ak,

Looking at the current deteriorating macro-economic environment, i would probably only consider entering healthway at around $0.10 or less.

AK71 said...

Hi Royston,

10c? Wow. You are really bearish then. :) Always good to have a greater margin of safety, I guess. ;)

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