Hiro may have a bullish breakout at RM1.27

Background

Hirotako (“Hiro”) is involved in the manufacture & sale of automotive parts & components such as seat belts, airbag modules, steering wheels, noise & heat reduction material etc.

Recent Financial Results

Its past 4 quarters’ net profit has improved by 13.3% to RM11.4 mil while the turnover has dropped by 10.0% to RM152 mil. The drop in the topline is attributable to the decline in motor vehicle sales while increased net profit was mainly due to the previous quarters’ net profit being affected by inventory write-offs and provisions for obsolete stocks.

Valuation

Based on the last 4 quarters' EPS of 14.3 sen & yesterday' closing price of RM1.24, Hirotako is now trading at a PE of 8.9 times. At this multiple, Hiro is considered fairly valued for a company involved in the automotive sector, which has seen a sharp drop-off in demand. On the other hand, this demand contraction in 2006 could prepare the ground for a strong recovery in this sector for 2007.

Technical Outlook

The share price of Hiro has been range-bound between RM1.05 & 1.27 (see Chart 1). At about 10.00 a.m., the share price surpassed the RM1.27 level to chalk a high of RM1.30. Hiro is in a short-term uptrend with the support at RM1.18/20 (see Chart 2). If the share can close above RM1.27/30 today, this share is considered to have achieved a breakout of its range on the upside. Thus, it would be considered a buy.

Chart 1: Hiro's weekly chart as at Jan 10


Chart 2: Hiro's daily chart as at Jan 10

Conclusion

Based on possible breakout, Hiro is worth tracking closely. If it can close above RM1.27/30, Hiro would have achieved a bullish breakout. Failing which, it may retrace back to test its short-term uptrend line at RM1.18/20. The latter would be a safe level to gain entry to Hiro if you have the patient to hold. Fundamentally, Hiro is considered fairly priced at the current level.