Market Talk: ICP

DJ MARKET TALK: S&P Cuts ICP To Hold; Ups Target By 40 Sen
21/11/2006 05:08:00 AM

0508 GMT [Dow Jones] STOCK CALL: S&P Equity Research cuts Industrial Concrete Products (6829.KU) to Hold from Buy after recent share price strength; raises target price by 40 sen to MYR1.80 after earnings upgrade. 2Q net profit beat expectations on higher-than-expected sales of piles, EBIT margin; thus ups FY07 profit forecast by 36% to MYR54 million. "ICP's share price has risen 15% following the announcement of the 2Q results; the share's current valuations fairly reflect the company's growth potential." Stock up 1.8% at MYR1.70 in moderate trade.(ECH)

Investssmart: This is a classic example of how the analyst got it all 'correct' but yet those who read the reports hardly earn a cent. The analyst's recommendations for the last few months were as follow:

2nd Aug: HOLD; Share price: $1.23; Target price: $1.30
18th Aug: BUY; Share price: $1.21; Target price: $1.40
17th Nov: HOLD; Share price: $1.64; Target price: $1.80

The first recommendation was to HOLD and it was correct because ICP's share price did not move until its second recommendation. Those who followed the second recommendation would have made some money purchasing at $1.21 and selling at $1.40. The third recommendation is also correct because ICP is now trading at about $1.70. So what is wrong?

Firstly, the upside during the second recommendation was only 15.7%, which is far too low to recommend a BUY. Who would buy a small-medium cap for just 15.7% upside in one year? The target given is a 12-month target. Foreign currency fixed deposit can give annual returns of up to 6-7% for the Australia or New Zealand currency. Why take the risk earning that little bit more when there is quite a risk investing in small-medium cap?

There are heaps of counters with 15% potential upside. It would be very naive to invest in a small-medium cap for such a small upside. For such counters, I believe anything below 20% is not worth buying. I personally purchase small-medium caps only if I think the upside is at least 30%. The potential high return is required to migitate the risk. For blue chips like PBBANK or MAXIS, a 15% may be good enough but definitely not the small-medium caps.

The last recommendation is meaningless because those who followed the analyst earlier would have sold ICP when it was $1.40. What these analysts are doing is merely to save their asses. They try to get the recommendations correct to boost their track record. They won't put high target prices so that they dont look so stupid in case the share price moves the other way. In other words, most of them are not there to help you make money. They churn out research reports because they are required to do so.

Do these fund managers really put the money where their mouths are? OSK research is calling a BUY on CRESBLD with a target price of $1.70 when it is only trading at $1.03, meaning that there is an upside of 65%! Since it is so bullish, we can expect the OSK-UOB Fund to purchase CRESBLD like crazy but I can tell you that it is highly unlikely. There is no such value. There is a higher likelihood that they will dispose the shares to you even at $1.50 if they hold some.

Some of these research analysts can change their recommendations just because of one quarterly result. Many are changing their view on PLENITU because of its latest quarterly result which was not the best. EPS was 7.28c compared to about 10c in the previous quarters. They cited the fact that the property market is slowing. Is that something new that investors dont know? In fact, we all know that quite some time ago.

The property market is slowing but PLENITU should be able to ride it out. It is in a net cash position with lots of land to develop. It can afford to wait for the market to recover. In the event that the property market crashes, the one that should go down the drain is CRESBLD! CRESBLD has a net debt of $90m with annual profit of about $25m and net profit margin of about 8% only. Simple common sense will tell you that PLENITU is superior to CRESBLD but these analyst are so short sighted that they base their recommendation mostly on one quarter's earnings.

It is a fact that there are few good local research houses in Malaysia. One good one I can recommend is Icapital.Biz. Those who follow its recommendation should be able to make money. In the mean time, the other research houses can still claim they are always correct. If ICP post another similar quarterly result next quarter, it is highly likely that its share price will reach $2 and you will notice S&P upgrading its share price to about $2 with another HOLD. They never get it wrong do they? But the big question is - how do they expect investors to make money following such recommendations?

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.