PPB- heading to all-time high?

Background

There are not many stocks that are about to make a new all-time high. One member of this exclusive club is PPB Group Bhd ('PPB'), is a diversified conglomerate involved in the following businesses:
- Foods
- Manufacturing & Services
- Entertainment
- Property Development
- Plantations And Edible Oils

Recent Financial Results

For 1Q2009 ended 31/3/2009, PPB's net profit dropped 25.2% q-o-q or 29.0% y-o-y to RM272 million while its turnover dropped 7.2% q-o-q or 4.5% y-o-y to RM772 million.



Valuation

PPB (closed at RM11.80 yesterday) is now trading at a trailing PE of 12 times (based on last 4 quarters' EPS of 99 sen) or at a Price to Book of 1.03 times (based on NTA per share of RM11.47 as at 31/3/2009). While a PE of 12 times looks like fair valuation for most stocks, PPB may be an exception. It is a blue chip conglomerate & the flagship of the Kuok group in Malaysia. For these exceptional quality & in this difficult economic environment, some may be prepared to pay a bit extra to own this blue chip.

Technical Outlook

PPB is in an upward channel where the upper & lower boundaries are presently at RM12.70 & RM11.20, respectively. To reach the upper boundary, PPB will have to surpass its all-time high of RM12.20. On July 6, the first attempt at the all-time high was made but it fell short when it reached RM12.10. We can expect further attempt in the days ahead. Will it be able to overcome the current all-time high? See Chart 1 & 2 below.


Chart 1: PPB's daily chart as at 7/7/2009 (Source: Quickcharts)


Chart 2: PPB's weekly chart as at 7/7/2009 (Source: Quickcharts)

Potentially negative scenario examined

I have appended a 22-year chart of PPB from 1987 until today. Using my own adaption of three-fan lines, we can see that PPB has been moving between these lines for the most part of the 22-year period until recently. The top & bottom lines acted as resistance & support for about 18-19 years until a bullish breakout happened in 2007. This could have been prompted by huge one-time gain of RM6.4 billion from the disposal of PPB Oil Palms, PGEO Group & Kuok Oils & Grains Pte Ltd. Whatever it is, the breakout was followed by an exponential rise from about RM6.50 to RM12.00.

From a technical perspective, PPB is now in a very precarious position. A test of the all-time (a fairly recent all-time high) could be a set-up for a double-top where PPB could potentially fail to surpass the RM12.20 high & the stock may subsequently enter into a corrective wave. Even if PPB can surpass the RM12.20 high, a subsequent retreat below the RM12.20 could also be a trigger for a sell-off (see a little-known rule called "Rule 2b"). Following technical rules, one may choose to reduce his/her position in this stock ahead of a test of the all-time high of RM12.20. He/she may sell more aggressively if the two scenarios as discussed above were to happen.

In October last year, PPB corrected sharply & found support at the top line of the three-fan lines at RM6.85. If a similar correction were to happen, it may again find support at this line, presently at RM7.00. That's cold comfort from where the stock is right now!

Note: I'm discussing a bearish scenario which may or may not happen. You will have to make this judgment call based on many factors, not just this scenario alone.


Chart 3: PPB's daily chart from 1987 to 7/7/2009 (Source: Tradesignum.com)

Conclusion

PPB will surely pitch the fundamental analyst against the technical analyst within all of us. I bring this perspective to you so that you are aware of the possibility of this stock.