YFG: If it is a bet on a penny stock, this could be it

Penny stocks have again made some headways. I though am very careful at most of them. Some are really bad stocks with no directions. Some are even worse, as they do not just have no directions, over time, it possibly could be a stock that may be in trouble. Some though are gems and if we do detect them early, they are much to gain from. In this group, these companies have decent businesses, priced cheaply, not in financial trouble and definitely if the company's execution is continuing to be strong, one day investors (or speculators) might just take notice. Opensys is one of them although when I wrote of them, nobody took notice. Another, which has potential and was in trouble until a rescue was made is Silk Holdings which sold its Silk Highway to IJM. I did not write anything about this one though, but really I saw the growth potential in the concession at that time.

There is a new one which I am just taking notice. It is called YFG, formerly known as PJI Holdings. While I am just trying to find a trend, I could not see one except for the followings:

- revenue trend is on the increase;
- it has a changed in management and I believe in some of the people behind it to do the right things;
- it was a poorly run company, linked to a politician whose party is on the decline, hence without the political influences it was of no use to the investors at that time.

Revenue trend at the increase

If one is to look below, YFG had a nice steady climb towards FYE2013 and towards its last 3 quarters, it has made significant progress for FYE2014 - which can be seen in the following 2nd diagram.

Why is then the margin so low? This is for me very hard to understand. There could be more than one reasons to it. Firstly, because of the company was in trouble, it has to slowly write-off some of the bad debts, which one may not be able to notice in the accounts Or, the management themselves do not reveal. DO not ask me why this happens, but let's just say it happens. Even auditors sometimes may close one eye - the largest among them. SHIT happens, OK. This one is not shit though as the balance sheet shows that at this moment it is manageable, hence the auditors may just let it go. (This is something which I am not able to qualify by looking at the accounts for this one)

Secondly, it could be another case of building the momentum towards a better company. When an acquisition takes place, it needs time to adjust and phase off the dead woods. Hence, for the first few years, operational costs may even be higher rather than lower, as the company may just need to have 2 person to do 1 person's job as it is just waiting for the dead wood to resign.

3rd quarter results for FYE2014

Thirdly, it is still a poorly run company. Sometimes, although there is a will and idea, it may not be executed as plan. Look at MAS and many other companies that were rescued time and again.

YFG though, to me may not be that type as it is in a space that is seeing some growth - electrical and mechanical engineering for buildings, civil etc. Over the last few years, Malaysia is seeing lots of activities in this space due to domestic driven initiatives by the government - i.e. MRT, WCE, other rails etc. One can notice that in YFG's revenue as well and it is not stopping at now. YFG as I see it is looking for growth - as can be noticed in its MOA for the small hydro power plant in Indonesia.

And if the management manages to turnaround the company, which I am putting some bets on this, it will not be a RM70 million company, where it is trading at for the moment.