Faber- losing its plot

Results Update

For QE30/9/2011, Faber reported a net loss of RM26 million on a turnover of RM309 million. Its turnover increased by 66% q-o-q or 34% y-o-y due to the recognition of revenue of RM107.7 million from IFM non-concession projects in UAE. This revenue "was on the works order issued prior to the expiry of contract (as announced by Faber on January 12, 2011) where works & documentation for invoicing were fully completed post expiry of the contracts". I am quite perplexed by the extremely tortured English used here (see Item 22 of Page 14 of the Notes to the Accounts) to explain something which should be quite obvious, that's to say that, works order must be issued prior to the expiry of any contract and some works & documentation for invoicing can be completed after the contract has expired. So, what's the point to this statement?

The best is yet to come- the reason for the net loss. The loss arose because "recognition of cost amounting to RM44.5 million for works completed for the projects in UAE where the corresponding revenue was not recognized as it cannot be measured reliably." This gives rise to two questions; firstly, how do you get into a contract where the revenue cannot be measured reliably, and secondly, how do you get paid for such work?

In addition, Faber has provided for an impairment loss of RM12.9 million from its dealing with the principal, WRM where the loss is arrived at by comparing "the carrying amount and the present value of the estimated future cashflow discounted at the financial assets original effective interest rates." This contract was not renewed on its expiry date on January 12, 2011 (see below). Did Faber make this provision because it might not be paid? WRM or Western Region Municipality is one of the municipals in UAE. This goes to show that any business dealings in Middle Eastern countries must be treated with caution.


Table 1: Faber's last 8 quarterly results



Chart 2: Faber's last 19 quarterly results

Not again!

Sometime back I have posted a piece on Faber entitled "Faber- now you see it, now you don't" which dealt with Faber's less-than straightforward dealing with the investing public. To wit:

Faber has just announced its results for QE28/2/2010 and it is a HUGE DISAPPOINTMENT! Even though, the results was an improvement over the results of the previous corresponding quarter, it was substantially lower than the immediate preceding quarter, with net profit lower by 66% to RM14.4 million & turnover lower by 39%.

Now, we learned that the big jump in the immediate preceding quarter, QE30/11/2009 was attributable to the higher revenue from Integrated Facilities Management ('IFM') Concession which was mainly due to one-off revenue received from hospital for the claim for linen loss. In addition, it has completed a IFM maintenance contract secured earlier (see Table 2 for Note 20). In the absence of these two factors, Faber's top-line & bottom-line dropped in QE28/2/2010. None of these exceptional items were explained in the Notes accompanying the results for QE30/11/2009 (see Table 3 for Note 21). In fact, if one were to read Note 22 for QE30/11/2009, you would get a very bullish impression of the future prospect of Faber because the note insinuated the improvement was sustainable due to higher revenue from the new business in UAE & higher bed occupancy plus additional new facilities in government's hospital (see Table 3 for Note 22).

Incomplete disclosure of this nature reflects badly on the professionalism of Faber's management.

Look like the same unprofessional practice still persists in Faber.

Concession Agreement ('CA') between Faber Medi-Serve Sdn Bhd ('FMS') & Ministry of Health ('MOH')

FMS's concession to provide Hospital Support Service ('HSS') to some government hospitals under MOH had expired on Oct 28, 2011 but was extended by six months. We do not know whether FMS will get a new CA. Incidentally Faber was recently reprimanded by Bursa for failure to announce "the non-renewal of contracts awarded to the company’s subsidiary, Faber Limited Liability Company, by the Department of Municipal Affairs, Western Region Municipality, Emirate of Abu Dhabi ("WRM") as set out in the company’s announcement on 12 January 2011". For more, go here.

Valuation

I would not attempt to value this stock as too many things are up in the air.

Technical Outlook

From the chart below, Faber is still in an uptrend. It may find support at the uptrend line at RM1.10. I think this uptrend line would severely tested if Faber cannot secure a renewal of the CA for providing HSS to MOH. The decision for that should be forthcoming by April 28, 2012.


Chart 2: Faber's weekly chart as at Nov 29, 2011 (Source: Tradesignum)

Conclusion

Based on the uncertainty surrounding the continuation of its CA with the MOH & its chaotic operation in the Middle East, I think Faber is a stock to be avoided for now. If you still like to get into this stock, you may try to do so at the uptrend line support at around RM1.10. A safe bet is to wait for a favorable outcome by the MOH to renew the CA (as mentioned earlier).

MSM- may have a bullish breakout

Bearing in mind that we have just witnessed a window dressing session today, there are a number of stocks which have broken above their downtrend line. These include MBMR, Sapcres and MSM. Of these, I think MSM looks promising as it has broken above the downtrend line at RM4.92. The three indicators- MACD, RSI & ADX- are quite supportive of a rally for the stock. Let's track this stock closely for the next few days to see whether this technical breakout can lead to a rally for the stock.


Chart: MSM's daily chart as at Nov 30, 2011_4.40pm 9Source: Quickcharts)

Incidentally, MSM has just announced its results for QE30/9/2011. For 9-month period ended 30/9/2011, MSM reported a net profit of RM187 million on a turnover of RM1.69 billion. The 9-mth EPS of 26.6 sen would translate to a full-year EPS of 35.5 sen. As such, MSM (closed at RM5.00 today) is now trading at a PE of 14 times. For a consumer stable, MSM is deemed reasonably priced.

Market Outlook as at November 30, 2011

There are some signs of window dressing activities in the market today. This strong buying has pushed the index above the 40-day SMA line, which I have earlier expected to cap the rise of our market under the scenario of a completed bear rally. If the rebound can surpass the downtrend line (RR) at 1475, we may have to re-examine our market outlook.


Chart: FBMKLCI's daily chart as at Nov 30, 2011 (Source: Quickcharts)

Sumatec- buying a Kazakh PSC!

Sumatec has risen from a low of RM0.05 in August to a recent high of RM0.335 on N0vember 25. The news has finally been announced that Sumatec will acquire CaspiOilGas LLP, an Oil & Gas company with a Production Sharing Contract ('PSC") in Kazakhstan. CaspianOilGas LLP is an indirect subsidiary of Markmore energy Sdn Bhd, a company that is 99.99%-owned by Halim Saad, the former Chairman of Renong.

There are a few things that we need to know about this Kazakh PSC & Sumatec. The PSC was first awarded by the Kazakh government in Aug 26, 2000. The "proved plus probable" hydrocarbon reserves was estimated by SRK Consulting (Australasia) Pty Ltd, a mining consultant to be about 122.3 million barrels of oil equivalent. The source of these two news snippets is BTimes (here).

I am not impressed with CaspiOilGas LLP for two reasons. Firstly, it is a very old PSC, which must have been passed through many hands. Secondly, the "proved PLUS PROBABLE" reserves leave a lot of room for doubt. You can contrast CaspiOilGas LLP with another company which is working on a number of oil fields in Northern Iraq, Gulf Keystone Petroleum('GKP'). GKP is listed on FTSE. Check out this link at FT Alphaville (here). You may be interested to know that Malaysia's richest tycoon, Robert Kuok has recently invested only 3.19% in GKP despite numerous reports that GKP has substantial proven oil reserves (here). The reason is simply this: PSC is a very risky business. For Sumatec to buy into a company with a PSC that's of highly uncertain potential is an extremely risky venture.

Sumatec is a very weak company. The proposed acquisition of CaspiOilGas LLP is the company's 2nd restructuring since its listing in 1999. The company was first listed as Malaysian General Investment Corporation Bhd ("MGIC') in 1999. MGIC ran into trouble & was restructured in 2003, with its listing assumed by Sumatec. Now, it is Sumatec's turn to be restructured. As at 30/6/2011. Sumatec has Assets totaling RM746 million, which are financed by Equity of RM111 million & Liabilities totaling RM635 million. Of these Liabilities, Borrowings totaled RM544 million. Of the Assets owned, Property, Plant & Equipment totaled RM645 million.

I am always very suspicious of any company that has undergone a restructuring scheme. The reason is simple. The existing or old shareholders would not accept a fair amount of losses. The existing or old creditors would always hold out for more. The new shareholder would strangely agree to this less-than-satisfactory hair cut on the part of the existing shareholders & creditors in order to get control of a listed vehicle. We can speculate about the Whys until the cows come home but it is undeniable that restructured companies are inherently weak as some of their assets cannot be fully realized. How does the new shareholder protect himself? By overvaluing the business or assets that he intends to inject into the sick company. The only thing that you can be absolutely sure of in the accounts of a restructured company is its liabilities, which should be stated in full.

If Sumatec has gone through one round of cosmetics grossing-up when it morphed from MGIC to the current Sumatec, imagine how it would look after it underwent another round of 'surgery'. The new Sumatec would look more horrifying than Jocelyn Wildenstein. Some details of the new proposed restructuring scheme or regularization plan were given in the report by the Star. To wit:

The company said it was currently finalising the regularisation plan and would announce the details upon finalising the terms of the proposed PSC.

It said as part of the agreement, the company proposed to reduce shares at par value by 50% to 17.5 sen per share from 35 sen. This would also reduce existing issued and paid-up share capital to RM37.51mil from RM75.02mil.

To raise capital, a new share-placement exercise “by way of placement to new third party investors to be agreed by Markmore Energy and the company” was being proposed as well as a proposed renounceable rights issue of shares at par to entitled shareholders.

The share-placement exercise would raise gross proceeds of RM15mil while the proposed renounceable rights issue would raise gross proceeds of up to RM445mil and would take place following the completion of the capital-reduction and placement exercises.

For more, go here.

I have appended below the semi-log chart for Sumatec. The stock is in a downtrend. If you draw an irregular downward channel connecting the peaks & the troughs, then the stock had recently tested the 'upper channel' at RM0.33. Based on the chart, I see very little upside but plenty of downside to this stock. For those fortunate enough to hitch a ride on this horse recently, I think it is high time that you take a walk.


Chart: Sumatec's weekly chart as at Nov 29, 2011 (Source: Tradesignum)

Market Outlook as at November 29, 2011

Over the past few days, there have been a lot of reports & rumors of what may or should happen in Europe. It ranges from extremely negative to mildly positive; from the insightful to the incredulous. The European sovereign debts crisis is turning out to the parable of the blind men & the elephant.

If we fall back on charts, there is a good reason to be less pessimistic about the ongoing European debt crisis. The main stock market barometer of the two countries that are in the heart of the crisis- Germany & France- are actually showing some strength. You would agree that the crisis today is likely to be more critical than two months ago and yet you can see that the DAX & CAC are both trading at a higher level than end of September. This may explain why these markets rose sharply yesterday on rumor that IMF is arranging a bailout for Italy totaling EURO 600 billion. The market rally did not fizzle out even when this rumor was subsequently denied by IMF (here). Nevertheless, we should note that the long-term charts for both markets are still bearish and they can easily take a turn for the worst if the debt crisis blew up. For long-term charts of DAX & CAC, go here & here.


Chart 1: DAX's weekly chart as at Nov 28, 2011 (Source: Stockcharts)



Chart 2: CAC's weekly chart as at Nov 28, 2011 (Source: Stockcharts)

Since our market was closed for Monday, we should do some catching-up today. As noted in previous post, the resistance for our FBMKLCI is the 40-day SMA line which is presently at 1453. This resistance was tested this morning. We will have to wait & see whether the index can break above it. If that were to happen, it would be mildly positive for the market. Failure to do so, would mean that the market is likely to continue to slide.


Chart 3: FBMKLCI's daily chart as at Nov 29, 2011_12.15pm (Source: Quickcharts)

Coastal- top-line & bottom-line dropped on lower sales of vessels

Results Update

For QE30/9/2011, Coastal's net profit dropped by 21% q-o-q or 32% y-o-y to RM37 million while its turnover dropped by 53% q-o-q or 43% y-o-y to RM110 million. The drop in the bottom-line & top-line was due to lower number of vessels delivered of 5 units compared to 8 units in 2Q2011 or 7 units in 3Q2010.


Table 1: Coastal's last 8 quarterly results



Chart 1: Coastal's last 28 quarterly results (including profit margin)

Financial position

Coastal's financial position is always weighed down by concern about its high inventory level, which is a product of its rolling vessels building programme. In this programme, the company builds standard vessels for its inventory in addition to building vessels to customers' specification. This resulted in the carrying of higher inventory level. I have reduced the Balance Sheets for 30/9/2011 & 31/12/2010 to a simplified version below:


Table 2: Coastal's Simplified Balance Sheets as at 30/9/2011 & 31/12/2010

If we assumed that all finished vessels ordered are delivered once completed, then the Finished Goods (vessels) in the Inventory are the standard vessels awaiting for sale. If we assumed that Advance Payment from Buyers is equivalent to the value of work-in-progress ('WIP') done on vessels ordered by buyers, then the balance of the WIP is for standard vessels under construction. Based on these assumptions, we can make the following conclusions:
1) the bulk of the WIP is for vessels constructed to buyers' orders.; and
2) 52-58% of equity is tied down in standard vessels (both WIP & Finished Goods).

With the low leverage and high cash & bank balances, Coastal's financial position is considered very sound. The only risk is the risk of obsolescence of the Finished Goods & that is capped at 58% of equity.

Valuation

Coastal (closed at RM1.85 today) is now trading at a PE of 4.6 times (based on last 4 quarters' EPS of 40.37 sen). At this PE multiple, Coastal is deemed very attractive.

Technical Outlook

Coastal is in an uptrend line with support at RM1.70-1.80. Thereafter, it may find support at the horizontal line RM1.60.


Chart 2; Coastal's weekly chart as at Nov 21, 2011 (Source: Tradesignum)

Conclusion

Based on attractive valuation & positive technical outlook, Coastal could be a good stock for long-term investment.

Market Outlook going into the Year-End

November 22, 2011

In September, I had posted about the market making a cyclical top (here). The SELL signal that followed is still intact despite a healthy rally in the market for the past 6 weeks. See Chart 1 below.

Chart 1: FBMKLCI's monthly chart as at November 1, 2011 (Source: Quickcharts)

In another post in September, I wrote about how a typical bear market or bull market unfold (here). I postulated that we could be at the initial stage of a bear market decline. At the end of that initial decline, we could see a bear rally. A bear rally is a counter-trend rally within a bear market. That rally kicked in early October. See Chart 2 below.

Chart 2: FBMKLCI's weekly chart as at November 1, 2011 (Source: Quickcharts)

In my blog, I have warned about a possible completion of this bear rally (here). I had compared it with the bear rally in 2008 (from April to May 2008). In the 2008 bear rally, we saw the end of the rally on May 24, 2008 when the following events happened:

• the index broke below 20 & 40-day Simple Moving Average (‘SMA’) lines; and
• the indicators turned negative (such as MACD hooked down, RSI went below its 30-day SMA line & the –DMI cut above the +DMI in the ADX indicator).

See Chart 3 below.

Chart 3: FBMKLCI's daily chart from February to July 2008 (Source: Quickcharts)

On November 18, the FBMKLCI broke below its 20 & 40-day SMA lines and the same list of indicators have turned negative. This means that it is very likely that the bear rally for the past few weeks has ended and the bear market downtrend may continue. See Chart 4 below.

Chart 4: FBMKLCI's daily chart as at November 22, 2011 (Source: Quickcharts)

If you look at Chart 3 closely, you will see that the end of the bear rally in 2008 was followed by a gradual decline. That’s to be expected as the many players were still fairly bullish even after the turn or change-over. Even today, I expect some players will still harbor bullish outlook & they would buy in the market as the lower prices were presented. This group of bullish players would provide the fuel that keeps the slow-burning flame going. In this way, we can expect the market to go down gradually, with occasional rebound that would be capped by the downward sloping 20-day SMA line.

The index would likely to slide & test its immediate support of the horizontal line at 1425-1430 & thereafter the psychological 1400 level. This bearish outlook will only be revised if the index can somehow recover above its recent high at 1493.

Based on the above, the outlook for the market is bearish. You should avoid taking large long position in the market for the next few weeks (or even next few months). If you have large long position in the market currently, you should reduce them accordingly.

(This is my latest article in Merdeka Review. For the Chinese version, go here).

Rumor of the death of 2nd & 3rd liners was exaggerated?

The overall market has not been kind to investors over the past few days. One would expect the sharp rally in the 2nd & 3rd liners to have totally bombed out but that's not the case. Surprising, FBMFLG is still above its short-term uptrend while FBMACE, which broke the short-term uptrend line earlier, has managed to recover above that line today. FBMSCAP- the best of the whole lot- is actually the weakest one. It broke its short-term uptrend line, with no recovery in sight yet.

If FBMFLG & FBMACE can surpass their immediate downtrend line (in red), they may continue their prior short-term uptrend. These 2nd & 3rd liners could well be the only game in town!


Chart 1: FBMFLG's 75-min chart as at Nov 24, 11_9.10am (Source: Quickcharts)



Chart 2: FBMACE's 75-min chart as at Nov 24, 11_9.10am (Source: Quickcharts)



Chart 3: FBMSCAP's 75-min chart as at Nov 24, 11_9.10am (Source: Quickcharts)

Latest Chinese PMI number indicates contraction

The preliminary HSBC China PMI for November was released one or two days ago. It shows a drop from 51 in July to 48 November. Generally, a PMI number above 50 indicates growth while below 50 indicates contraction.


Chart: Chinese PMI (Source: CNN Money)

This negative report adds to the long list of market concerns. If this preliminary report is correct, the probability of a soft-landing for the Chinese economic is beginning to look less likely. Some optimists feel that the prospect of a grim outlook would prompt the Chinese government to ease off its current tightening policy. We will have to wait & see whether that will be the case & if so, whethre that would save the Chinese economy from a hard-landing. The prospect of a hard-landing in China, a recession in US and a collapse of the Euro would make for a perfect storm in the financial market.

Harison- uncertainty ahead

Results Update

Harison's net profit dropped 4.5% q-o-q & 0.8% y-o-y to RM8.3 million while its turnover dropped 4.5% q-o-q but rose 4.4% y-o-y to RM308 million for QE30/9/2011. The decline in turnover on a q-o-q basis was attributed to the termination of the distribution arrangement between F&N and Harison. This arose because Harison is now distributuing for Coca-Cola, which has in turn terminated the bottling arrangement with F&N. This has resulted in a break in its turnover growth for the past 11 quarters. However, prior to this, we can see that Harison's bottom-line & profit margin have been sliding for the past 3 quarters. The decline in profit margin coupled with a break in the turnover growth could be a sign of consolidation for this company.


Table 1: Harison's last 8 quarterly results



Chart 1: Harison's last 22 quarterly results (including profit margin)

An interesting piece of information was extracted from the past two quarters' Notes to the Accounts which enabled me to prepare the quarterly segmental results below. The huge pre-tax profit from the Others segment is interesting as no details was given. Equally interesting & mysterious is the huge amount of Eliminations. What could these two items be? Are they related to the termination of the F&N agency?


Table 2: Harison's segmental results for 3Q2011 & 3Q2010.

Valuation

Harison (closed at RM3.44 today) is now trading at a current PE of 6.3 times (based on last 4 quarters' EPS of 54.57 sen). At this multiple, Harison is deemed attractive.

Technical Outlook

If we use the 10-month SMA line as the uptrend line for Harison, we can see that the stock has broken that line. This means that the stock is likely to move sideway for a while. It may even enter into a downtrend, depending on its financial performance going forward.


Chart 2: harison's monthly chart as at Nov 1, 2011 (Source: Tradesignum)

Conclusion

Based on the uncertainty regarding the financial performance & the slightly negative technical outlook, I would rate Harison as a SELL INTO STRENGTH or REDUCE.

Airasia- bottom-line weighed down by finance charges

Results Update

Airasia's net profit increased by 46% q-o-q but declined by 53% y-o-y to RM152 million while its turnover was unchanged q-o-q but increased by 10% to RM1.076 billion. The increase in net profit q-o-q was attributable to deferred tax credit of RM46.6 million which arose from a reduction of deferred tax liabilities of RM26.6 million & the recognition of deferred tax assets of RM20.0 million.


Table 1: Airasia's last 8 quarterly results

For the detailed breakdown of the Profit & Loss account, see Table 2 below. It is noted that Airaisa's Operating Profit actually increased by 17% q-o-q & 2% y-o-y to RM251 million. This is despite a drop in the seat load factor by 1% point from 78% to 77%. Nevertheless, Airasia's pre-tax profit dropped 25% q-o-q & 65% y-o-y to RM108 million due to an increase in finance costs of 170% q-o-q or 18% y-o-y to RM265 million.


Table 2: Airasia's detailed P&L for q-o-q & y-o-y comparison



Chart 2: Airasia's last 22 quarterly results (incl. profit margin & moving average lines)

Valuation

Airasia (closed at RM3.45 as at 9.30am) is now trading at a PE of 12.8 times (based on the last 4 quarters' EPS of 27 sen). Given the challenging operating environment- with high fuel costs & slacking demand, I believe Aiasia is full valued.

Technical Outlook

In the past few posts, I've commended that Airasia's technical outlook has turned bullish as it had broken above the expanding triangle (see the two diverging red line). Now, I have drawn a best fit line (in blue) that may capture the price movement in the stock over the past 4 years. That move was initially gradual (in 2008 & 2009) but it accelerated in 2010. Now, there is clear signs that it has lost a lot of momentum. I believe the stock will pull back to RM3.00-3.20 to test the support of the blue 'best-fit' line and if that support fails, it may drop to test the upside of the expanding triangle at RM2.40-2.50.


Chart 3: Airasia's weekly chart as at Nov 21, 2011 (Source: Tradesignum)

Conclusion

Based on challenging operating environment, poorer financial performance, full valuation & weakness in technical outlook, Airasia is rated as a SELL INTO STRENTH or REDUCE.

Success- yet to live up to its name

Results Update

Success's net profit remained unchanged q-o-q at RM6.7 million while its turnover inched up 3.5% to RM63.9 million. When compared to the corresponding quarter last year, its net profit increased by 27% on the back of 22%-increase in turnover. The company reported that the y-o-y improvement in bottom-line & top-line was due to overall increase in sales for all segments in general and and the process equipment segment in particular. For more on the business segments, go to an earlier post.


Table: Success's last 8 quarterly results



Chart 1: Success's last 18 quarterly results (with profit margin)

Valuation

Success (closed at RM0.865 yesterday) is now trading at a trailing PE of 3.8 times (based on last 4 quarters' EPS of 22.62 sen). At this PE multiple, Success is deemed attractive.

Technical Outlook

Success is now resting on its long-term uptrend line at RM0.85.

Chart 2: Success's weekly chart as at Nov 21, 2011 (Source: Tradesignum)

Conclusion

Based on steady financial performance, attractive valuation & good technical outlook, Success is a good stock for long-term investment.

WTHorse- bottom-line dropped on lower sales & profit margin

Results Update

For QE30/6/2011, WTHorse's net profit dropped by 16% q-o-q or 39% y-o-y to RM11.9 million while turnover declined by 6% both q-o-q & y-o-y to RM131 million. The lower net profit was attributed to lower sales (which is due to festive season) as well as lower profit margin.


Table: WTHorse's last 8 quarterly results



Chart 1: WTHorse's last 25 quarterly results (including profit margin)

Valuation

WTHorse (closed at RM1.72 yesterday) is now trading at a PE of 7.6 times (based on last 3 quarters' average EPS of 5.65 sen). At this PE multiple, WTHorse is very near its full value of RM1.80 (based on PE of 8 times).

Technical Outlook

WTHorse broke its long-term uptrend line at RM1.85 in August. Its immediate support is at the horizontal line at RM1.70.


Chart 2: WTHorse's weekly chart as at Nov 18, 2011_plotted on log scale (Source: Tradesignum)

Conclusion

Based on weaker financial performance, limited upside in share price & bearish technical outlook, the rating for WTHorse remain SELL or REDUCE.

MEGB- keeps sliding away

Results Update

MEGB's net profit dropped by 52% q-o-q or 79% y-o-y to RM5.5 million while its turnover dropped by 7% q-o-q or 24% y-o-y to RM61 million. The drop in top-line is due to more stringent entry requirement while bottom-line suffered due to lower turnover as well as higher staff cost & depreciation charges.


Table: MEGB's last 10 quarterly results



Chart 1: MEGB's last 10 quarterly results (with profit margin)

Valuation

MRGB (closed at RM1.15 as at end of morning session) is now trading at a trailing PE of 14.4 times (based on average quarterly EPS of 2 sen from the past 2 quarters). With the contraction in the top-line 7 bottom-line, MEGB should trade at lower PE multiple than 14.4 times. I would not be surprised if it trades at a PE multiple of 10-12 times in the near future.

Technical outlook

MEGB has broken below its short-term uptrend line at RM1.30 (coinciding with the 20-day SMA line). It may continue its prior downtrend & revisit its recent low at RM1.08.


Chart 2: MEGB's daily chart as at Nov 18, 2011 (Source: Tradesignum)

Conclusion

Based on poor financial performance & technical outlook, MEGB is rated as a SELL.

Allianz's profit dipped slightly

Results Update

Allianz's net profit dropped by 25% q-o-q or 21% y-o-y to RM27.5 million while turnover increased by 2% q-o-q or 13% y-o-y to RM687 million. Top-line increased due to higher gross premium earned from the general insurance business while bottom-line decline due mainly to an out-of-court settlement of a legal suit.


Table: Allianz's last 8 quarterly results



Chart 1: Allianz's last 23 quarterly results

Valuation

In the last 4 quarters, Allianz reported gross EPS of 91 sen or diluted EPS of 40 sen. Based on its closing price of RM4.55 on last Friday, Allianz is now trading at a diluted PE of 11.4 times. For a company with such a strong growth track record, it could command a higher PE of 13-15 tines.

Technical Outlook

Allianz is now resting on its long-term uptrend line (SS) at RM4.50. This coincides with the horizontal line at RM4.50.


Chart 3: Allianz's weekly chart as at Nov 18, 2011 (Source: Tradesignum)

Conclusion

Based on good financial performance, undemanding valuation & still-positive technical outlook, I would rate Allianz as a good stock for long-term investment.

Market Outlook as at November 21, 2011

I have posted a few days earlier that our market is on the verge of completing the bear rally (here). In that post, I compare the rally which started in October this year to another rally in 2008. The triggers for the completion of the bear rally are:

1) FBMKLCI dropping below its 20 & 40-day SMA lines at 1462 & 1456; and
2) Indicators, such as MACD, RSI and ADX, turning negative.

We can see from the chart below that these two triggers or conditions have been met. FBMKLCI is at 1442 as at 9.30am.

In line with this, I believe the bear rally is over & the bear market downtrend is likely to resume. You are advised to avoid taking long position in the market.


Chart: FBMKLCI's daily chart as at Nov 21, 2011_9.30am (Source: Quickcharts)

US 30-year Treasury Bond yield revisiting its 2008 low

There are plenty of negative reports on the European sovereign debt problem. If you want to read about them, just go to Clusterstock or Pragmatic Capitalism. I just want to point out the the rally for some safe haven assets, especially the US 30-year Treasury Bond could be signaling that the financial market is expecting a blow-up in Europe any time now. The last time, TYX (or 30-year Treasury Bond yield) dropped to such a low level was during the US Sub-prime Crisis. Investors are now worry about return of capital, not return on capital!

Be careful out there!


Chart: TYX's weekly chart as at Nov 18, 2011 (Source: Yahoo Finance)

Kossan's profit margin starting to recover

Results Update

Kossan's net profit increased by 13% q-o-q to RM23.6 million on the back of a marginal 1%-increase in turnover to RM279 million. When compared to the corresponding quarter last year, Kossan's net profit dropped 17% on the back of a marginal 1%-increase in turnover.


Table: Kossan's last 8 quarterly results

Kossan's bottom-line has finally begun to inch up in QE30/9/2011 due to improvement in profit margin.


Chart 1: Kossan's last 21 quarterly results



Chart 2: Kossan's profit margin for last 21 quarterly results

Valuation

Kossan (closed at RM3.07 yesterday) is now trading at a trailing PE of 10 times (based on last 4 quarters' EPS of 30.3 sen). At that PE multiple, Kossan is deemed fairly priced, with 5-10% upside.

Technical Outlook

Kossan may have broken above its downtrend line at RM2.90-3.00. Its immediate resisatnce is at RM3.30.


Chart 3: Kossan's weekly chart as at Nov 18, 2011_11.30am (Source: Quickcharts)

Conclusion

Based on improving financial performance & cautiously positive technical outlook, Kossan could be a good stock for medium-term investment. However, its upside potential may be limited to 5-10% based on the current valuation.

Iris may show the way?

A few clients inquired what would happen to Harvest going forward. To be sure, no one knows. Let's look at what happened to the last stock that was designated- Iris in 2006.

Iris had a strong run-up from RM0.14 in early January 2006 to a high of RM1.38 on May 11, 2006 (Thursday). At the end of that trading day, Iris- which closed at RM1.36- was suspended & designated. Trading recommenced on May 16 (Tuesday) with a drop to a low of RM0.65 before it closed at RM1.00. Iris tested the low of RM0.65 again on May 22. This means that Iris retraced 59% of its gain of RM1.24 (from a low of RM0.14 to a high of RM1.38). When the designation was lifted on June 22 (Thursday), Iris rallied to revisit its recent high. In fact, it surpassed the earlier high by 1 sen (to make a new high of RM1.39). On hindsight, we now know that Iris had made a double top on the re-test of the high.


Chart 1: Iris's daily chart from Dec 1, 2005 to Sep 30, 2006, Overlaid with Fibonacci Retracement (Source: Quickcharts)

On the way down, Iris found support at the 50-day SMA line at RM1.10 on July 14. From here, it staged a small rebound which fizzled out after two days. The drop continued & it broke its uptrend line at RM0.85-0.87 on July 20. By September 8, Iris had declined nearly back to where it started. It closed at RM0.16 that day.


Chart 2: Iris's daily chart from Dec 1, 2005 to Sep 30, 2006 (Source: Quickcharts)

On reading this post, the optimists would say "Let's take a punt on Harvest". In fact, the stock did a decent rebound to close at RM1.20 at the end of the morning session. The warrant has also risen to close at RM0.955. The pessimists would however see the danger in trading this stock as it may drop back to where it started from- RM0.08!

The thing that may set Harvest apart from Iris is timing. Iris's sharp drop & equally sharp rebound coincided with the start of the 2006-2007 bull run. Harvest's current rally happened after the 2009-2011 bull run. Would the current speculative play among the 2nd & 3rd liner stocks help the sentiment for Harvest now? Or, would the designation of Harvest jeopardize the speculative play among the 2nd & 3rd liner stocks? Only time will tell.

Amway announces a bumper dividend (amended)

Results Update

Amway's net profit increased by 36% q-o-q or 20% y-o-y to RM26 million while turnover increased by 25% q-o-q or 10% y-o-y to RM212 million. The higher net profit was due to higher sales, which in turn was attributed to higher distributor productivity driven by sales & marketing program implemented previously.


Table: Amway's last 8 quarterly results

There are a few things to note:
1) The 3rd Quarter is seasonally the best quarter for Amway (see Chart 1).
2) Amway's profit margin has been sliding for the past 3 years, due probably to competition from other MLM operators (see Chart 2).
3) Amway which sources some of its products from the US muat have benefited from the favorable trend for USD-MYR cross rate. As USD-MYR has now reversed, Amway's imported products would have to be adjusted higher. How would this impact Amway?


Chart 1: Amway's last 17 quarterly results



Chart 2: Amway's profit for the last 17 quarterly results

Bumper Dividend announced as expected in my previous post.


Chart 3: Amway's dividend payout for the last 17 quarterly results

Valuation

Amway (traded at RM9.21 as at 10.00am) is trading at a trailing PE of 18 times (based on last 4 quarters' EPS of 51 sen). At this PE multiple, Amway is deemed expensive. However, Amway has a good dividend payout which gives a yield of 7.2% (earlier incorrectly stated as 10.7%).

(Note: Hat tip to reader, Chong Kong Hui for highlighting the error in the computation of the Dividend Yield.)

Technical Outlook

Amway broke above its medium-term downtrend line at RM9.00 yesterday. Its next resistance is at RM9.20. Thereafter it may re-test its recent high at RM9.65-9.66.


Chart 4: Amway's daily chart as at Nov 17, 2011_9.30am (Source: Quickcharts)

Conclusion

Based on good financial performance & high dividend yield, Amway is a good stock for long-term investment, especially for income purpose. However, the stock's upside potential is limited as it is now trading at a trailing PE of 18 times. As such, I would rate Amway a 'Sell into strength' as it approach the RM9.50-9.60 mark.