Hang Seng Index may have a bullish breakout

The Hang Seng Index ('HSI') has convincingly broken above its strong horizontal resistance of 21000 when it gained 300 points to hit 21317 level at 10.16 a.m. this morning. If this bullish breakout can sustain for the next day or two, the Hong Kong stock market's uptrend will continue (see the chart below).


Chart: Hang Seng Index's daily chart as at June 15 (courtesy of Yahoo Finance)

This breakout will re-inforce the bullish breakout of Hong Kong Exchange & Clearing Limited ('HKEX') as noted in my earlier post (go here). In fact, HKEX has gained HK$3.20 (or 3.37%) to hit HK$98.90 as at 11.23 a.m. this morning. HKEX-C1, traded on our exchange, has gained 7 sen to hit RM0.855 as at 11.51 a.m. this morning.

Haio's net profit jumped for QE30/4/2007

On March 20, I have posted on Haio's substantially better results for QE31/1/2007 (go here). Since then, the share price of Haio has risen about 93 sen from RM1.92 to yesterday's closing price of RM2.85.

Yesterday, Haio has announced its quarterly results for QE30/4/2007. Haio's net profit has jumped by 56.5% q-o-q or 239% y-o-y to RM7.8 mil, while its turnover has increased by 10.4% q-o-q or 65.4% y-o-y to RM56.7 mil. If we compared the results of the last 4 quarters with those of the preceding 4 quarters, we can see that its net profit has doubled from RM9.9 mil to RM21.2 mil while turnover has increased by 30% from 146 mil to RM189 mil. For these periods, the 4-quarter EPS has jumped from 16 sen to 32 sen. The company attributed its improved results to higher sales from its MLM & retails divisions.



Based on yesterday's closing price of RM2.85 & last 4-quarter EPS totaling 32 sen, Haio is now trading at a PE of 8.9 times. This is an undemanding PE multiple given its strong growth in both topline & bottomline.

From the chart below, we can see that the share price has risen quite substantially in the past 2 week from about RM2.25 to RM2.85 now. It is quite possible that some profit-taking may occur around the RM3.00 level. You may use any price weakness to gain entry into this stock.


Chart: Haio's daily chart as at June 15 (courtesy of Tradesignum.com)

This call is made without due consideration of the company's position.

HKEX-C1 to benefit from HKEX's bullish breakout

Recently, CIMB has issued 2 CWs for the underlying share of Hong Kong Exchange & Clearing Limited ('HKEX'). These CWs, HKEX-C1 & HKEX-C2 were listed yesterday (June14).

HKEX share price gained HK$1.60 (or, 1.7%) to close at HK$94.90 at the close of this morning session. As a result, HKEX has surpassed its recent high of HK$93.70 recorded in January this year. With this bullish breakout, I believe HKEX should have further upside (see the chart below). To check on HKEX share price, you can go here. HKEX's stock code 388.



Chart: HKEX's daily chart as at June 14 (courtesy of Yahoo Finance)

For this post, I shall ignore HKEX-C2- a Zero Strike Call Warrant over HKEX share- because it is too costly in absolute term. I shall concentrate on HKEX-C1. The main terms of HKEX-C1 are:

1. Exercise Price: RM37.00 (or HK$84.90, assuming exchange rate of HK$1 : RM0.4358)
2. Tenor: 7 months from issue date (May 30, 2007)
3. Exercise Ratio: 10 to 1

Based on the underlying share price of HK$94.90, HKEX-C1 (closed at RM0.775 at the end of the morning session) is now trading at a premium of 8.2%. This is a substantially improvement to the premium of 17.23% at the date of its issuance (on May 30) when it was issued at a IPO price of RM0.635. This is because HKEX share price has gained 12.2% from an average price of HK$84.56 as at May 30.

Based on bullish breakout of the underlying share (HKEX), I believe HKEX-C1 (and, HKEX-C2) would be a good trading BUY.

This is strictly a technical call without any consideration of the company's financial performance & position.

AMMB's uptrend may accelerate

CLSA in its daily report yesterday has highlighted an interesting angle to the story of ANZ’s hiring of Michael Smith (formerly with HSBC) to spearhead its Asian operation. According to the report, this move by ANZ could bode well for AMMB, which is ANZ’s biggest investment in Asia todate. Incidentally, Smith was HSBC Malaysia’s deputy CEO from 1995-97.

From the monthly chart (Chart 1), it appears that AMMB (closed RM4.10 as at June 13) has broken out of its big consolidation pattern at RM3.70/80 level. Its next resistance will be at RM5.00, 5.50 & 7.00. From the daily chart (Chart 2), we can see that its immediate support is at the medium-term uptrend line at RM4.00, while resistance is at RM4.20.

As at 12.00 noon, AMMB share price has jumped 20 sen to RM4.32. The volume accompanying the breakout of the RM4.20 horizontal resistance is huge & convincing. I believe AMMB's uptrend should accelerate & it may test the RM5.00 target next.

Chart 1: AMMB's monthly chart as at June 13 (courtesy of Quickcharts)


Chart 2: AMMB's daily chart as at June 13 (courtesy of Quickcharts)

This is strictly a technical call without any consideration of the company's financial performance & position.

Dow's correction- how much more?

Dow has been dropping for the past few trading days; down 2.8% to 13295 from its record close of 13676 recorded on June 4. From the chart below, we can see that the Dow may find support at the psychological level of 13000 or the horizontal support of 12845 (Dow's February high). A break of these levels could send the Dow to test its tentative uptrend line, with support at 12600.

The current correction in Dow could be precipitated by investors' disappointment with Fed's decision to leave interest rate unchanged at the recent FOMC meeting. Hawkish comments have raised the prospect of further rise in interest rate in the future. Yesterday, the yield on the 10-year Treasury note soared to a 5-year high of 5.295%.


Chart: Dow's daily chart as at June 12 (courtesy of Yahoo Finance)

Jobs may be testing its all-time high of RM2.07

Jobs is a stock that I've recommended in December last year (go here). The stock has risen only marginally since then. From the weekly chart, you can see that Jobs is in a medium-term uptrend line, with support at RM1.75/80. At the same time, its advances have been blocked by a short-term downtrend line, with resistance at RM1.95. Today, Jobs has broken above that short-term downtrend line as well as poised to test the all-time high of RM2.07. This is a bullish development, but volume is definitely lacking to confirm this breakout. Let see whether the volume can come in tomorrow. If so, Jobs could be a good trading BUY. Remember to set a SELL STOP at the breakout level of RM1.95.


Chart: Jobs' weekly chart as at June 8 (courtesy of Quickcharts)

This is strictly a technical call without any consideration of the company's financial performance & position.

The market correction could be over

The market outlook has continued to improve. It is very likely that the recent market correction is over. I have come to this conclusion after making the following observations:

1. The KLCI has closed above its recent highs of around 1368.
2. The 10-day SMA has crossed above the 20-day SMA.
3. The daily MACD is nearly done a positive crossover.

In addition, you may note that the volume traded has increased to 1.5 billion units. In the light of these positive signs, I believe that we can add to our long positions again over the next days, especially if the market were to soften a bit.


Chart: KLCI's daily chart as at June 6 (courtesy of Tradesignum.com)

Market Outlook as at June 4, 2007

The KLCI made a new high of 1375 today. Unfortunately, the index lost all its gain to close at 1360. In Japanese candlestick charting method, today's market action would be represented by a gravestone doji. Generally, a doji conveys a sense of indecision between buyers & sellers, but a gravestone doji (like its opposite counterpart, the dragonfly doji) normally appears at market turning points. Assuming that this is a potentially toppish signal, this candlestick still requires a bearish confirmation, such as a gap down or a long black candlestick & high accompanying volume.

The appearance of the gravestone doji is certainly a disappointment to me. The way the KLCI has been moving in the past few trading days, I was getting a feeling that the correction is nearly over. The next upside was just around the corner. Well, we will have to wait and see for the next few days for clearer signs of the market ahead.



Chart: KLCI's daily chart as at June 4 (courtesy of Tradesignum.com)

High Noon in Shanghai

After making a high of 4335.96 on May 30, the Shanghai Stock Exchange Composite Index ('SSECI') has pulled back quite sharply. Today, it dropped 330 points to close at 3670.40. From the chart below, you can see that the SSECI will be testing its medium-term uptrend line at 3450 level very soon. This level should provide a short respite & the market may rebound from here. A break of this level could signal the beginning of a bearish phase for the Shanghai stock market.



Chart: SSECI's daily chart as at June 1 (courtesy of Yahoo Finance)

Unlike the February selloff, the current selloff in Shanghai is having a lesser impact on the markets around the region. Some see an orderly correction in Shanghai may benefit other markets, including Bursa Malaysia.

UMW has made a new high again

UMW has just made a new high of RM12.20, after breaking to the upside of the flag formation, which has contained the share price for the past 2 months (see Chart 1 below). The breakout level is at RM12.00.


Chart 1: UMW's daily chart as at May 31 (courtesy of Quickcharts)

We can also see a similar bullish breakout in UMW-CA, at the RM1.15 level. This CW has an exercise price of RM9.60; exercise ratio of 2:1; & expiring on November 13. As at 4.15 pm, the CW was at RM1.30 (see Chart 2 below).


Chart 2: UMW-CA's daily chart as at May 31 (courtesy of Quickcharts)

With these breakouts, I believe UMW & UMW-CA could be a good Trading Buy. Remember to set your Sell Stops at the respective breakout level.

This is strictly a technical call without any consideration of the company's financial performance & position.

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)

Tranmil's results for FY2006 & FY2005 in doubt

The preliminary finding of the Special Audit of Tranmil’s accounts by Moores Rowland has revealed the following:

1. Tranmil might have overstated its turnover for FY2006 by RM530mil. If it were to make full provision for this overstated revenue, its unaudited group pre-tax profit for FY2006 would fall by RM333mil and consequently, reflect a pre-tax loss of RM126mil, instead of a pre-tax profit of RM207mil

2. It might have also overstated its turnover for FY2005 by an undisclosed amount. Again, if full provision were to be made in respect of this overstated revenue, its group pre-tax profit for FY2005 would fall by RM197mil and consequently, reflect a pre-tax loss of RM77mil, instead of a pre-tax profit of RM120mil.

The reversal of the 2 years' bottomline (totaling RM530mil) would impact Tranmil's shareholders' funds, which stood at RM1.410bil as at 31.12.2006. Assuming no further adjustment & ignoring tax impact, Tranmil's shareholders' funds might drop to RM880mil (or, its NTA per share dropping from RM5.27 to RM3.33).

From the weekly chart (Chart 1), we can see that the next support will be at RM7.60/70. I doubt this support would hold up Tranmil share price in the face of the massive loss that it has to book in FY2006. Tranmil share price rose from as low as RM2.30/40 in April 2003 to a high of RM15.20 in January 2007 (see the monthly chart, Chart 2 below).


Chart 1: Tranmil's weekly chart as at May 30 (courtesy of Quickcharts)


Chart 2: Tranmil's monthly chart as at May 30 (courtesy of Quickcharts)

Pmetal reported a strong growth in topline & bottomline

Background

Press Metal Bhd ('PMetal') is involved in the manufacturing & marketing of aluminium & related products. The operation is divided into 3 divisions; extrusion, tool & dies and surface finishing.

Recent Financial Results

PMetal has just announced its results for QE31/3/2007. Its net profit increased by 104% q-o-q or more than 17-fold y-o-y to RM25.2 mil. Turnover has also jumped by 63% q-o-q or 149% y-o-y to RM301 mil. When comparing the last 4 quarters with the preceding 4 quarters, we can see that net profit has increased by more than 3-fold from RM10.5 mil to RM44.4 mil, while turnover has increased by 87% from RM453 mil to RM844 mil.



Current Financial Position

PMetal's liquidity position is deemed acceptable with current & quick ratio at 1.2 & 0.8 times, respectively. Despite the sharp rise in sale, working capital management was adequate to contain the rise in debtors & inventory. This can be seen in the improvement in debtors' collection period to 75 days (of sales) & inventory turnover to 67 days (of sales).

Gearing has also improved to 1.4 times due to increased paid-up capital & retained profit.

Valuation

Based on closing price of RM1.66 as at May 29 & annualized EPS of 22 sen (basing on last 2 quarters' earning), PMetal is now trading at a PE of 7.5 times. This is fairly attractive given the company's rapid growth.

Technical Outlook

From the 2 charts below, you can see that the share price may be running ahead of the company's earning. The share price has risen from RM0.45 about 6 months ago to the current level of RM1.60/70; a gain of 370%.


Chart 1: PMetal's daily chart as at May 29 (courtesy of Quickcharts)


Chart 2: PMetal's weekly chart as at May 29 (courtesy of Quickcharts)

Conclusion

PMetal is a stock for the medium-term. The trick is how to gain entry despite the sharp run-up in share price. Maybe, we can accumulate on weakness at the 10-day SMA, currently at RM1.55 level.

CWs for foreign stocks

CIMB Investment Bank Bhd ('CIMB') has launched of its second base prospectus for structured warrants yesterday, where it is expected to issue a total of 40 call warrants ('CWs') this year to take advantage of the Securities Commission's (SC) revised guidelines on structured warrants.

Under the revised SC guidelines, investment banks can issue call warrants, basket call warrants and “bull equity-linked structures” on local and foreign underlying stocks and indices.

Amongst the first batch of CWs on foreign underlying shares to be issued by CIMB are those of HSBC Holdings plc and Singapore Telecommunications Ltd shares. This follows closely on the heel of OSK’s earlier move to issue CWs on China Mobile Ltd, Industrial & Commercial Bank of China & PetroChina Company Ltd.

From the above, you can see that the foreign underlying shares selected are listed either on the HKE or SGX. The trading volume of structured warrants on these two exchanges is many time higher than that is on our exchange. To learn about structured warrants on SGX, go to here. For HKE, go here. The resource centre for derivative warrants of the HKE is very comprehensive. For example, they have a section for Derivative Warrants Pricing Calculation, where you can find the Options/Warrants Calculator.

To check on the prices of CWs traded on HKE & SGX, you must first understand their short name. For HKE, the short name indicates some of the basic features of the derivative warrant:

Example: KK-HSI@EP0608A

1. @: Cash Settlement; *: Physical Delivery
2. X: Exotic Warrant; E: European; R: Regional Warrants; Space: American
3. C: Call; P: Put; Space: Non Call/Put
4. Applicable if an issuer issues more than one warrants with the same underlying asset and expiry date. The warrant is distinguished by A, B, C... etc.

For SGX, the short name signifies:

Example: OCBC MBL XCW060119

1. e: European; Space: American
2. X: Non-traditional; Space: Traditional Warrant
3. CW: Call; PW: Out
4. DC: Represents a discount certificate
5. The expiration date is represented in this format: yymmdd
   

To track the price of CWs in SGX, just go here. For CWs listed on the HKE, it is a bit trickier. Firstly, you need to know the stock code (go here). Then key in the stock code here.

Some of you may ask why I should bother myself with all these things. Two reasons: firstly, your CW on any of these foreign underlying shares depend on the underlying share price. Secondly, you may want to see whether your CW is priced correctly by the Malaysian investors as compared to how similar CWs are priced on the home turf.

While these CWs may offer some diversification, I am afraid that our market may not be liquid enough for these CWs. Some may say that the market makers can step in to provide liquidity, but we have seen that this role has seldom being played effectively in Malaysia. In the end, the investors who buy these CWs may have to hold them to maturity. During this period, he or she will see part of the cost paid for these CWs wasted away; that part is known as the CW's conversion premium or time value.

BKoon's net profit for QE31.3.2007 jumped

Background

BKoon’s principal activities are:

1. Manufacture and trading of rebuilt, reconditioned and new commercial vehicles, forklifts, heavy machineries and the manufacture of bodyworks; &
2. Rental of commercial vehicles, forklifts, heavy manchineries, provision of fleet management and other related services.

BKoon has recently embarked on the re-conditioning of Mercedes Benz trucks. In addition, it has also ventured into the Indonesian market, which is expected to boost its business significantly.

Recent Financial Results

BKoon has just announced its results for QE31.3.2007. Its net profit increased by 32.8% q-o-q or 28.5% y-o-y to RM5.5 mil. Turnover has increased by more than 100% q-o-q or 27.5% y-o-y to RM53.7 mil. The substantially smaller turnover for the preceding quarter was attributable to a re-alignment of re-conditioned truck business & the production of heavy duty re-built which has longer lead time, but a better profit margin.

Current Financial Position

BKoon’s liquidity position as at 31.3.2007 is deemed adequate with current ratio at 1.7 times & quick ratio at 0.8 times. Debtors’ collection period at 109 days (of sales) and inventory turnover period at 151 days (of sales) is considered acceptable given the nature of business. Gearing ratio at 1.3 times is considered slightly on the high side.

Valuation

Based on the closing price of RM1.21 as at May 28 & EPS of 14 sen for the past 4 quarters, BKoon is now trading at a PE of 8.6 times.

Technical Outlook

The chart of BKoon is quite unexciting. Since its listing in April 2004, the share price has been moving in a sideway fashion, with higher ‘peaks’ as well as lower ‘troughs’. A break above the recent high of RM1.37 could signal a change of trend. We have to wait & see.

Chart: BKoon's weekly chart as at May 28 (courtesy of Quickcharts)

Conclusion

BKoon could be a good stock for the medium-term. When to buy is the trick. I believe that a better buy would be when the stock has finally broken out of its sideway pattern, i.e. when it has exceeded RM1.40. If you do so and if the price subsequently retraced back below RM1.40, you may want to sell off your position (i.e. set your Sell Stop at RM1.40).

Kwantas' net profit jumped in QE31.3.2007

Background

Kwantas is involved in Oil Palm Cultivation & Processing of FFB; Trading of Industrial Products; and, Biomass Energy.

Recent Financial Results

For the QE31.302007, Kwantas' net profit increased by 88.3% q-o-q to RM22.9 million. Turnover has increased by 13.9% q-o-q to RM496 million. The improved performance was attributable to higher CPO prices; better products margin from increased palm & soya bean oil processing volume in China; as well as trading in refined palm products in China, India & Pakistan.



Current Financial Position

As at 31.3.2007, Kwantas' gearing position is deteriorated to 1 times from 0.9 times as at 30.6.2006. Although liquidity is still tight, it has improved marginally as reflected by the slight increase in current ratio (from 0.83 to 0.90 times) & quick ratio (from 0.50 to 0.52 times). The increase in the current ratio was due to higher inventory (where inventory turnover has inched up from 32.4 days to 36.2 days of sales) and higher trade receivable (where debtors' collection period has jumped from 13.3 days to 27.2 days of sales).

Valuation

Based on the closing price of RM4.80 for today and its EPS of 38 sen for the past 4 quarters, Kwantas is now trading at a PE of 12.6 times. Kwantas' PE multiple is not expensive given its steady growth in the past 1 year.

Technical Outlook

The stock is currently trapped in a symmetrical triangle. A break to upside of RM4.90/5.00 could signal the continuation of its prior uptrend.



Chart: Kwantas' daily chart as at May 28 (courtesy of Tradesignum.com)

Conclusion

Kwantas could be a good stock for medium-term investment. A trading buy when the share price surpasses the RM4.90/5.00 level is also an attractive proposition. Sell stop at RM4.70 may be prudent.

REITS- An Update

Sometime back, I posted a piece on REITs. I have not updated it because there were hardly any interest for REITs. Nevertheless, the recent rally in the property sector may have crossed over to the REITs sector as we have witnessed some upticks in the prices of REITs.

I have done a study of all the REITs & tabulated the results below. There are a few things to note here:

1. Annual net profit is net off revaluation surplus or shortfall.
2. Where net profit for the past 4 quarters are not available, annualized net profit is computed. Such is the case with ALAQAR, AMFIRST, HEKTAR & QCAPITA.
3. Annual Income Distributed is based on 12 months' period. Where a REIT is listed for less than 12 months, I have ignored the Annual Income Distributed.
   

Based on the table below, we can conclude the following:

1. The REITs with the highest Income Yield is STAREIT, followed by UOAREIT.
2. The REITs trading at the lowest Price to Book (PB) ratio is AHP2, followed by AHP.
3. Generally, most of the REITs are trading at a Price to Earning (PE) ratio of about 13 times.
   
4. The REIT that trades at the highest PE & PB is QCAPITA.
   

Table: REITs Pricing Table as at May 25, 2007

Conclusion

If you are looking at maximising your stream of income, you may go with STAREIT or UOAREIT. The current effort by the substantial shareholders of Amanah Millenia Fund Bhd to dissolve the fund in order to unlock value may help to stir up interest in AHP & AHP2. Sometime back, you may recall CIMB privatizing the CIMB REIT because the market failed to accord that REIT its fair value. Would we be seeing something like that in AHP & AHP2?

Market Outlook as at May 28, 2007

The much-anticipated market correction has finally begun. Some analysts expect this correction to be relatively mild & the market should stay above the 1300 level. I believe this to be the best case scenario. Our market may find some support from the buoyant oversea markets as well as expectation that the market may still rally in the second half of this year because of the upcoming general election.

Nevertheless, the buoyant global equity markets is a double-edged sword. While these buoyant oversea markets, especially the overheated Chinese markets, have helped to fan the flame of bullish sentiment locally, they are also hanging like the Sword of Damocles above the investors' head. A sharp correction in the Chinese stock markets could easily trigger an equally sharp sell-off here. A break below the 1300 level could bring forth a more frightening scenario of our market entering into a bearish phase. At times like this, caution is needed.


Chart: KLCI's daily chart as at May 25 (courtesy of Quickcharts)

3 new CWs to be listed on Wednesday- Commerz-CD, Gamuda-CC & YTLPower-CA

3 new CWs i.e. Commerz-CD, Gamuda-CC & YTLPower-CA were listed this morning. The main terms are outlined below together with comparable CWs & company-issued warrants. On the whole, these new CWs are priced at a premium to the existing warrants. As such, the existing warrants are preferred to these new CWs.

Always fix a protective stop when buying a stock

Recently, one of my client bought into a stock at about RM0.60. When the stock dropped below its purchase price, he decided to hold onto the stock. The stock then went into a non-stop slide and lost 60% of its value in just 11 trading sessions. The stock is Scomal (see the chart below).



Chart: Scomal's daily chart as at May 22 (courtesy of Tradesignum.com)

Here, I like to point out the most important rule of trading i.e. to fix your protective stop before buying any stock. The protective stop (known as a sell stop for long position) is not just a mental note. It must be implemented when the share price dipped below it. This will help to preserve our capital for the next trade.

If you search the internet for 'trailing stops', you will find many interesting articles on this subject. For those who want a simpler method, you may try a 10-day SMA. If your stock dropped below the 10-day SMA by a certain percentage (say, hit the 11- or 12-day SMA), then your sell stop would be triggered & you should proceed to sell off your stock.

You can do this quite easily by using Tradesignum.com's public chart (go to the link provided). Firstly, set the price overlays accordingly (eg. SMA for 10 days). Then, select your stock symbol. Finally, compare the closing price against the pre-determined SMA (see the cut-up below).



As our market goes higher & higher, the need to preserve our capital by cutting our losses earlier becomes even more important. So, learn to cut your losses early by setting protective stop.

Ranhill hit the jackpot?

Ranhill has announced on May 18 that it has commenced drilling operations “on the Pasundan prospect on Citarum PSC, West Java, Indonesia. The block is operated by Bumi Parahyangan Ranhill Energia Citarum Pte Ltd ("BPREC"), in which Ranhill Energy Sdn Bhd ("RESB"), a wholly owned subsidiary of the Company, has 60 % equity interest through its wholly owned subsidiary namely West Java Energy Pte Ltd. The well is targeting the Baturaja and Talang Akar formations together with other secondary targets in the Upper Cibulakan and Jatibarang formations. The mean prospective resources for the prospect are 75 million barrels of oil equivalent. The well will be drilled to a total depth of 10,300 feet, and is expected to take about 50 days to complete. The well is being drilled by PT Tekindo Kerjatama/Greatwall Drilling Company with Rig 93.”

Yesterday, the share price of Ranhill has shot up by 17 sen to RM1.46. By 3.30 p.m. today, the share price has gained 24 sen to RM1.70. So, Ranhill share price has broken above its long-term downtrend line at RM1.45 as well as its strong horizontal resistance at RM1.67. The next resistance for this stock is RM2.00.

Based on the above bullish breakout, Ranhill is a good trading BUY. It is prudent to set a SELL STOP just below RM1.67.

Chart: Ranhill's daily chart as at May 21 (courtesy of Quickchart)

Note: In this post, I have not examined the company's financial performance nor financial position.

Nextnat drifting lower ahead of 1-for-2 bonus

I have posted on Nextnat in March this year (go here), where I've recommended a BUY on this stock because of its good financial performance & bright prospect. Despite the healthy run-up in the stock market as a whole, the share price of Nextnat has been drifting lower in the past 6 months (see the chart below).


Chart: Nextnat's daily chart as at May 18 (courtesy of Tradesignum.com)

In the last few days, there were 2 announcements from Nextnat, which I would rate as positive, but they did not have the positive effect of boosting the price. The announcements are:

• 1-for-2 bonus issue that will go 'ex' on May 23; and
• a private placement of 9 million new shares at RM0.60.
  

A bonus issue normally has the effect of increasing demand for the stock from the retail players; thus, giving the stock a boost ahead of the ex-date of the entitlement. A private placement of new shares at a price higher than the prevailing market price is deemed to be a vote of confidence in the stock. As stated earlier, both these 'news' did not lead to the anticipated result. Why?

One possible reason for Nextnat's poor share price performance could be the concern about its balance sheet or financial position (see the table below). While its current & gearing ratio as at January 31, 2007 appear satisfactory at 4 times & 0.02 times, respectively; the main worry could be its ballooning trade debtors. The latter has increased from RM39.6 million as at April 30, 2006 to RM67.1 million as at January 31, 2007. As a result, its debtors' collection period has increased from 128 days to 217 days during that period.

Since total debtors is equivalent to 87% of Shareholders' Funds, every RM1.00 write-off in debtors could translate into a 87 sen drop in Shareholders' Funds. I am not suggesting that this scenario could happen. Neither am I suggesting that Nextnat might default on its financial commitment to its creditors or lenders. The bulk of Nextnat's external financing is in the form of trade credit (or, Trade Payables), which amounted to RM19.9 million as at January 31, 2007. This was well-matched by its cash-in-hand of RM17.9 million as at the same date.

My personal feeling is that the debtors problem will have to be resolved by implementing stricter credit control & more vigorous debt recovery effort. In addition, the company may have to strengthen its Balance Sheet. Here, I see the 2 announcements mentioned earlier as part of a 'balance sheet management exercise', which may include a Right Issue some time over the next 12-24 months, to boost up the Shareholders' Funds.



Conclusion

From the above chart, Nextnat does not have a long-term trend yet as the share price is trapped in a symmetrical triangle. It should have supports at RM0.50/53 level. In the near term, if the share price were to break below RM0.50, the prudent approach would be to sell off or reduce your position. If the RM0.50 level can hold up, the stock could swing up to RM0.75, gradually.

GPacket has broken its uptrend line

GPacket share price dropped by 28 sen to RM3.92 at 11.00 a.m. With this sharp fall, GPacket has broken its long-term uptrend line support at RM4.16/20 as well as its "horizontal" support of RM4.00. Without a quick recovery, this stock may slide further.


Chart: GPacket's daily chart as at May 17 (courtesy of Quickcharts)

Note: In this post, I have not examined the company's financial performance nor financial position.

Petra poised to make a new high

Quek Leng Chan has raised his stake in oil and gas-based Petra Perdana Bhd ('Petra') to 35.5 million shares or 11.93%. His private company, HL Management Co. Sdn Bhd had acquired 27 million shares or 9.07% stake on May 7 at RM2.75 each (go here). The shares were placed out by Petra at a steep discount of 21.4% to that day’s average price of RM3.50 because the buyer would not be entitled to the renouceable restricted issue tranche of the proposed public issue of new ordinary shares of RM0.50 each in Petra Energy Berhad, a subsidiary of Petra, pursuant to the initial public offering of the ordinary shares of RM0.50 each in Petra Energy Berhad.

Today, Petra share price has broken to upside of the ascending triangle pattern at RM3.60 (see Chart 1 below). With this breakout, the stock’s next resistance would be its all-time high of RM3.78 (see Chart 2 below). A break above the all-time high would be very bullish for Petra. If so, Petra would be a good trading buy.

Chart 1: Petra's daily chart as at May 16 (courtesy of Quickcharts)



Chart 2: Petra's monthly chart as at May 16 (courtesy of Quickcharts)

Note: In this post, I have not examined the company's financial performance nor financial position.

Property sector to consolidate its recent gains

The Property index had a sharp run-up, rising from a low of 711 on March 5th to a high of 1098 on May 7th. The Property index has defied many predictions of its imminent correction despite bearish signals exhibited by declining volume as well as negative MACD crossunder (whether using the MACDs calculated using weighted average or exponential average). Finally, the Property index broke its uptrend line 4 days ago as well as going under its 10-day SMA 2 days ago. With these latest signals, I believe the Property sector is finally entering into the consolidation phase (see the daily chart, Chart 1 below).

From the weekly chart (Chart 2), we can see the Bollinger Band has also begun to constrict, another sign of consolidation ahead.


Chart 1: Property Index's daily chart as at May 14 (courtesy of Quickcharts)


Chart 2: Property Index's weekly chart as at May 14 (courtesy of Quickcharts)

Based on the above, you should be taking profit for some of your investment in the Property sector as well as to avoid entering into large position in that sector, for now.

Evergreen's net profit jumped in QE31/3/2007

Background

Evergreen is a fibreboard maker. It currently has a total production capacity of 700,000 cu m per annum – 280,000 cu m at its Batu Pahat plant, 320,000 at its plant in Hatyai, Thailand and 100,000 at its Permas Jaya facility.

Evergreen has just formed a JV in Indonesia, which will set up a plant in Palembang by October this year. The plant will have an annual production capacity of 110,000 cu m of fibreboard in the first year and 300,000 cu m in the third year. Evergreen will hold a 51% stake in this JV. In addition, Evergreen will add a third line at the Hatyai plant by the third quarter 2008.

When these expansion programs are completed in late 2008, Evergreen’s total annual production capacity would increase to 1.06 million cu m of fibreboard, making it one of Asia's top five fibreboard makers.

Recent Financial Results

Evergreen has just announced its results for QE31/3/2007. Its net profit has increased by 63.8% q-o-q or 182.4% y-o-y to RM28.4 million. Turnover has also increased by 21.7% q-o-q or 34.9% y-o-y to RM166.8 million.

Current Financial position

Evergreen’s liquidity position as at 31/3/2007 is satisfactory, with current & quick ratio at 3.9 & 2.0 times, respectively. Debtors & inventory’s quality should be acceptable as debtors’ collection period & inventory turnover period are fairly low at 26 & 39 days, respectively. Gearing is low at 0.33 times.

Valuation

Based on its closing price of RM1.73 as at May 10 and an annualized EPS of 23 sen (basing on latest quarterly EPS of 5.91 sen), Evergreen is now trading at a PE of 7.5 times. This is not a demanding multiple, considering Evergreen’s future growth prospect.

Technical Outlook

Evergreen has broken above its downtrend line in October last year, at the RM0.90 level (which I've posted in October last year). In the past 6 months, Evergreen share price has been moving in an upward channel, with a failed breakout in February. Two weeks ago, Evergreen share price again surpassed the upper channel at the RM1.50 level. With the good results just announced, I expect the share price to stay above this breakout level.

Chart: Evergreen's daily chart as at May 10 (courtesy of Tradesignum.com)

Conclusion

Evergreen is a good stock for the medium-term investment. While its price has moved up a bit in the past 2 weeks, the current price may reflect its improved performance. On weakness, you may accumulate this stock if the price were to drop back to RM1.60-70 level.

Maybulk has rebounded from its uptrend line support

On April 24, I've posted on Maybulk's correction that might see the stock testing its short-term uptrend line at RM4.00, which I believe would be a good entry level for this stock (go here). Since then, Maybulk share price has drifted lower, tested its uptrend line & went below it marginally before recovering (see Chart 1 below).

Two reasons could have contributed to the recovery. Firstly, Maybulk has fixed the 'ex' date for its 1:4 Bonus Issue yesterday ('ex' date being May 21st). Secondly, Maybulk will continue to benefit from the on-going parabolic rise in shipping rates. To have an idea of how much shipping rates have gone up, take a look at the Baltic Exchange Dry Index (BDI) chart below (Chart 2). From the chart, you can see that BDI has recently surpassed its 2004 high of just under 6400. As at May 9th, BDI spot rates closed at 6478. With these positive developments, there is a good chance we may see Maybulk testing the recent high of RM4.50/52.


Chart 1: Maybulk's daily chart as at May 9 (courtesy of Quickcharts)



Chart 2: Baltic Exchange Dry index (BDI) as at May 9 (courtesy of Investmenttools.com)

Tranmil's accounts for FY2006 may have to be re-stated

Tranmil, one of the darling stocks listed on Bursa, was sold down heavily today on news that its accounts for FY2006 may have to be re-stated. Its auditors, Deloitte & Touche were “unable to obtain relevant supporting documentation from the management on certain transactions relating to the trade receivables and related sales and additions to property, plant and equipment so as to satisfy themselves on the fairness or validity of those transactions.” The company has also commissioned a special audit to examine the reliability of the unaudited consolidated results announced on Feb 15, 2007.

With the accounts statements sidelined, we have to fall back on 2 things, i.e. a business model which many analysts have found to be very profitable and the presence of Robert Kuok as a controlling shareholder in Tranmil (with a stake of 20%). The Robert Kuok factor should not be underestimated. His team must have done a due diligence before investing in Tranmil & has found the business model & the operation to be satisfactory. Having said that, I do not believe the accounting problem to be a minor one. It is likely to be fairly significantly in value for Deloitte & Touche to refuse to sign off the audited accounts.

The big question is whether the current sharp fall is a buying opportunity. Technically speaking, Tranmil's current fall has just broken its long-term uptrend line at RM13.00 (see the weekly chart, Chart 1 below). From the monthly chart (Chart 2 below), we can see that the immediate horizontal support at RM10.80/11.00 has also been broken through & the stock is now resting on its horizontal support of RM9.50. I believe Tranmil share price may be able to hold at the RM9.50 level. If not, then the next horizontal support will be at RM7.00.

The safer course of action is to wait for the dust to settle before buying into this stock. Tranmil, being a funds manager's stock, may see inexhaustible selling as many funds managers (especially the foreign funds managers) are not adverse to dumping a stock which is affected by circumstances such as Tranmil. Over the next few days, we will get a better picture of the problem in Tranmil in order to arrive at a better investment decision. Of course, in the process, the lowest price will never be ours. We have to take comfort in knowing that for every one who managed to buy at or near the lowest price, countless others would have had their hand cut. Let the market tell us when it is safe to buy, before buying.


Chart 1: Tranmil's weekly chart as at May 7 (courtesy of Quickchart)



Chart 2: Tranmil's monthly chart as at May 7 (courtesy of Quickchart)

Note: In this post, I have not examined the company's financial performance nor financial position.

Megan's loan default highlights the important of credit analysis

Megan is one of the stocks recommended by me (go here) as well as a few research houses. While we understand that Megan operates in a very competitive environment, we were attracted to the undemanding valuation of the stock (which trades at a PE of 3-4 times for much of last 1 year). We are aware of its high gearing but we thought the management could find the funds, when needed, to meet its financial commitments. Yesterday's announcement (go here) proves that we were wrong.

From the chart below, we can see that Megan has been range-bound between RM0.55-0.85 for the last 15 months. To some, that should have raised some questions. But, then again, we have seen similar trendless trading for that period in semiconductor stocks, such as MPI & Unisem as well as KESM (which provides burn-in testing for semi-conductor assemblers). So, the question was not raised.


Chart: Megan's daily chart as at May 7 (courtesy of Tradesignum.com)

A careful study of Megan's Balance Sheet for the last 4 quarters (see the table below) could have raised some serious doubts about its ability to meet its current liabilities from normal liquidation of its current assets. While its current ratio remains more than adequate at 1.8-2.0 times, what's worrying is the deterioration of its trade receivables & inventory turnover. Megan's debtors' collection period has increased from 108 days as at 30th April 2006 to 144 days as at 31st January 2007, while its inventory turnover has worsened from 17 days to 49 days during the same periods. At the same time, the current portion of its borrowings has jumped from 35% as at 31st October 2006 to 46% as at 31st January 2007. In the end, Megan's short-term borrowings were too huge to be settled via funds generated from its normal asset conversion cycle. Since there were no new funds from fresh borrowings or through the issuance of new share capital, Megan's fate was sealed.



The interesting question to ask is why did the majority shareholder allow such a default to happen. Why did they not push through the earlier proposed Right Issue or abandoned its earlier proposed private placement? It is not acceptable to blame the depressed stock price. If need be, Megan could have structured a 2-call Right Issue, utilizing some of its reserves to cheapen the Right Issue shares. Why was it not done? Could it be because the majority shareholder does not want to invest more money into Megan for reasons only known to them?

The same shareholder is now faced with the difficulty choice- to pump in more money now, or to sell off the stake in Megan, or to allow a white knight to come in. Any of these options would result in a loss to him as well as to the other shareholders of Megan.

The Megan default has highlighted the important of analyzing a company's financial position i.e. its liquidity position as well as its gearing position. I will re-examine the format of my stock recommendation with the view of incorporating some ratios that would help in the reader coming to an informed decision on a stock.

Market Outlook as at May 7

The anticipated market correction has not materialized. Since the last post, the KLCI has made a new high, surpassing the April 17th high of 1334. The twin MACD have hooked up & are poised to do positive crossovers. The Bollinger Band has expanded nicely, indicating continuation of the uptrend rally. I have re-drawn the short-term uptrend line, with support at 1340 level.


Chart: KLCI's daily chart as at May 4 (courtesy of Quickcharts)

Finance sector may have a bullish breakout

The Finance index surpassed its recent high of 10,765 recorded on Feb 23 when it closed at 10,812 on last Friday (May 4). On closer examination, we can see that the MACD has nearly done a positive crossover. The last time the Finance index surpassed its recent high (and, accompanied by a positive MACD crossover was on Jan 9), it gained 21% from 8,919 to 10,765 in just 1 & 1/2 months' time. There is a good chance that we might be seeing a similar strong rally, which should lift up many stocks in that sector. A few finance stocks have already started moving, such as Commerz & PBBank. I expect Maybank to join in short.


Chart: Finance's daily chart as at May 4 (courtesy of Quickcharts)