SEG- yet another share split!!!

"Too much of a good thing can be wonderful"
by Mae West

Fantastic Share Price Performance

In July 2010, I have posted on SEG's sharp rally (here). To wit:

SEG International Bhd ('SEG') is one of the top performer in our market for the past six months. It rose from RM0.95 (as at 31/12/2009) to a recent high of RM4.75 (on June 24)- chalking up a gain of 500% over a 6-month period!! (Note: After a Share Split & Bonus Issue in July 2010, these price should be adjusted to RM0.40 & RMRM1.98, respectively).

After the short pause in July 2010, SEG rallied to a high of RM2.70 in August 2010 before it consolidated for the next 5 months. I had recommended that we should avoid the stock as it was overvalued (go here). In February 2011, the stock continued its prior uptrend. Last month, it announced another share split of 1-to-2. The announcement resulted in further rally until the share price tested its all-time high of RM4.10. See Chart 1 below.


Chart 1: SEG's monthly chart as at May 3, 2011_log scale (Source: Tradesignum)

Recent Financial Results

From the table below, we can see the substantially better financial performance achieved by SEG over the past 4 quarters. If we compared the results for the past 4 quarters with the preceding 4 quarters, we can see that net profit increased by a whopping 302% while turnover increased by 30%. The higher increase in net profit was due to increased profit margin, where pre-tax profit margin rose from 10.6% to 27.5% and net profit margin rose from 7.2% to 22.1%. Can SEG continue to grow its turnover & profit margin, or can it maintain its profit margin without sacrificing growth?


Table: SEG's last 8 quarterly results



Chart 1: SEG's last 12 quarterly results

Financial Position

SEG's financial position is satisfactory as at 31/3/2011, with current ratio at 2 times & debts to equity at a very negligible 0.04%.

New Corporate Exercise

In April, SEG announced yet another share split of 1-to-2. You would recall that SEG had a share split of 1-to-2 plus a bonus issue of 2-for-5 in July 2010. In addition, SEG had also issued warrants in July 2010 on the basis of 1-for-2 at RM0.05 each. The 2010 exercise had ballooned up SEG's outstanding shares to 265.455 million (plus 108.735 million warrants). The proposed share split will increase the shares & warrants outstanding to 530.910 million shares & 217.470 million warrants. While it is good to reward your shareholders from time to time with dividend and other freebies, SEG is carrying this exercise to a new height. The last company that indulged in such excessive share splitting and/or issuance of bonus shares was KNM. Strangely, KNM carried out a 4-to-1 share consolidation last year to reduce its outstanding shares.

Valuation

SEG (closed at RM3.91 yesterday) is now trading at a PE of 18.6 times (based on the last 4 quarters' EPS of 20.91 sen). If SEG can grow at a pace of 20% per annum, then the current PEG ratio is less than 1. As such, SEG may not be over-valued.

Technical Outlook

From Chart 3 below, we can see that SEG is in an uptrend. A good proxy to an uptrend line is the 40-week SMA line (which is currently at RM3.70). However, we can see some bearish divergence between the rising share price & the MACD & RSI indicators. Bearish divergence could indicate correction ahead. In addition, we could get an early warning of a reversal by checking on the uptrend line in the Slow Stochastic.

We can see SEG's price movement followed the timeline of the earlier corporate exercise as well as moving ahead of the current proposed corporate exercise. Would the share continue to rise, up to the last cum date of the new proposed share split (which has yet to be fixed)? One thing you can be sure of in the stock market is that thing seldom repeats itself.


Chart 3: SEG's daily chart as at May 19, 2011 (Source: Tradesignum)

Conclusion

Based on strong financial performance & fairly reasonable valuation, SEG could be a good stock for long-term investment. However, the share price has rallied very substantially due in part to the company's aggressive capital management policy. This policy could lead to significant out-performance in the good time but it can also lead to significant under-performance in the bad time. Given the sharp rally todate for SEG, I believe it is a good time to take some profit on this investment.