POSHldg- What to expect?

As a consequence of the overstatement of the turnover & pre-tax profit by Tranmil for FY2006 & FY2005, POSHldg- which holds a substantial stake in Tranmil- has made an announcement (go here) on the Bursa today. The content of that announcement is:

The Company wishes to announce that based on the first interim report, there may accordingly be an impact on the audited financial statements of the PSH Group for the financial year ended 31 December 2006 in relation to its investment in TGB, primarily the following:

1. Share of Net Results of Equity Accounted Associates
2. Long Term Investment / Investment in Associates
3. Gain on Dilution of an Associate

However, at this juncture, the Board of Directors of PSH is unable to conclude the effects of the above until the finalisation of the audited financial statements of TGB for the year ended 31 December 2006.

Notwithstanding the above, we can however make a few observations here.

1. POSHldg's stake in Tranmil was diluted from 17.3% to 15.5% in November 2006. As a result thereof, POSHldg has reclassified its investment in Tranmil from an associate to a mere long-term investment. POSHldg carries its investment in Tranmil at the cost of RM7.73 per share (go here for more information).
   
2. The impact of this dilution is that POSHldg had booked in a one-off gain of RM22.8mil in QE31.12.2006.
3. With this dilution of interest, POSHldg did not account for its share of results in Tranmil in QE31.3.2007. Nevertheless, it did account for the share of results in Tranmil in FY2006 & earlier.
   

The most likely impact will come from Adjustment to Prior Years' Results, which may amount to RM80mil. This figure was arrived at by multiplying POSHldg's 15.5%-stake in Tranmil & Tranmil's preliminary profit adjustment for FY2006 & FY2005 totaling RM530mil. The possible reversal of the one-off gain of RM22.8mil, which arose from the dilution of interest in Tranmil, is something interesting. And, POSHldg may have to make some provision for diminution in the value of investment if the share price of Tranmil were to drop below its investment cost of RM7.73 per share.

But, one thing is clear- the financial result for QE31.3.2007 is that of POSHldg's operation alone. Based on this set of results, we can estimate that POSHldg's net profit for FY2007 is about RM178mil or giving an EPS of 34 sen (excluding provision & adjustment arising from the Tranmil affair). Assuming a PE of 15 times, POSHldg's fair value is about RM5.10 per share.

POSHldg's Balance Sheet is very healthy. Its NTA per share stood at RM3.34 as at 31.3.2007. If the entire investment in Tranmil of about RM280mil is written off, its NTA per share would still stood at RM2.70. In fact, POSHldg is currently having a proposal to restructure the group and, as part of the restructuring scheme, it would be returning RM1.50 per share to its shareholders.



Technical outlook

The chart of POSHldg shows that its uptrend line has already broken. A possible Head-&-Shoulder reversal pattern is quite noticeable. A break below the neckline of RM4.10/16, accompanied with huge volume, would satisfy chartists that the stock is heading lower. But, why has it not broken below this level today? Has the shareholders & investors seen the true value in PSHldg? My gut feeling is that, if the RM4.10 level can hold, POSHldg could well turn out to be a Trading Buy, instead of a SELL. If you choose to trade this stock, do set a wider SELL STOP, say RM3.90/95. I have a feeling that the share may break the neckline of RM4.10/16 (maybe, RM4.00 as well) thereby causing traders to throw in their shares in the manner of a bear trap, before recovering.


Chart: POSHldg's weekly chart as at May 30 (courtesy opf Quickcharts)