Portfolio Update 20/10/06-24/11/06

The Investssmart portfolio rose 3.34% for the week, outperforming the KLCI which gained 1.89%. The KLCI is now at 1060.43, its highest in a long time. On the other hand the Second Board Index is still hovering at about 90 points. It does not seem to be able to outperform even as the KLCI surges. Instead of small caps, punters seem to have preference for the more volatile call warrants. Over the week, 10 of the counters in the portfolio rose, 3 went down and 3 were unchanged.

I finally disposed IJM-WB at $2, which has been my target price since I purchased it at 44.5c. Some may say that it is still undervalued compared to its mother share but I believe IJM is worth about $6.80-$7, giving IJM-WB a target price of $2-$2.20. IJM may have surged beyond my target price but from now on, I believe upside would be limited. Despite the synergies, the takeover of ROADBLD will cause dilution of its value in the near future as it offered about 20x PE for ROADBLD.

At $2, IJM-WB will offer just about 3.6x leverage. The value of IJM will also be diluted as more warrants are converted into shares. Also do not forget that IJM will distribute 10c dividend in the near future. IJM-WB may still have some upside but I believe that there are better opportunities around. With the disposal of IJM-WB and also JTINTER, I have excess cash, which will be used to increase my stakes in MAYBULK and PETDAG.

Besides IJM-WB, ICP also rose sharply during the week. It touched a high of $1.80 before ending the week at $1.77. As I have mentioned before, my target price of ICP is $2 and I believe it should be achieved by the next quarter if ICP produces another good quarterly result. MAXIS was another top performer during the week, rising 5.29% after announcing a strong quarterly result. Pegging it a PE of 13x based on its 2007 forecast EPS of 86c will give it a target price of $11.20.

UTDPLT gained 5.9% during the week and thus, made it less painful for the sale of BKAWAN. BKAWAN has risen by 6.7% since I sold it, after announcing an impressive quarterly result despite the poor performance by KLK. At $9, UTDPLT is trading at about 11.8x its 2007 forecast EPS of 76c. This is a far cry from the top plantation companies that are trading at 16-20x PE. Despite its market cap of $1.8b, strong balance sheet, good corporate governance and track record, UTDPLT is somehow left out by many investment analysts. In my opinion, it is easily one of the best picks in the plantation sector at the moment.

On Friday, MPHB announced that it is offering $2.30 for MAGNUM, which was last traded at $2.26. To me, the offer, which is a mere 1.8% premium to its latest price, is just ridiculous. However, it is hard to predict whether it will be successful. From my experience, it will depend on whether there are other parties or fund managers willing to purchase MAGNUM at above $2.30. Should MAGNUM starts trading at above $2.30 on Monday, it will signal that the offer will not be successful. In that case, the offer price of $2.30 will become the base. Investors will not sell out because they know that the offer will fail.

On the other hand, if it fails to break the $2.30 level, it is a signal that investors are willing to cash in at below the offer price and that there is no one else interested in purchasing the shares at above $2.30. Hence, MPHB's offer will be successful. If that happens, everyone will start selling at slightly below $2.30 to exit the counter as they are not willing to wait for the payment by MPHB. Therefore, the acceptance of the offer will very much depend on whether there will be anyone else interested in purchasing MAGNUM shares at above $2.30.

My advise would be to wait for a day or two. If it is clear that MAGNUM will not breach the $2.30 mark, it is probably time to sell out since $2.30 will be the price cap. If it rises above $2.30, it will be the base price and hence, point to further upside. From past experience, offer by majority shareholders tend to succeed as seen by the takeover of JOHPORT and AMCORP, despite the dissatisfaction of certain minority shareholders.

However, one takeover that is destined to fail is that of KFC by QSR. KFC's share price has surged beyond QSR's offer at $4.94. From its disclosures, EPF, which is a substantial shareholder with about 12-13%, is even buying more KFC shares at $5, meaning that it will not accept QSR's offer of $4.94. It will not make sense to purchase the shares at $5 only to accept QSR's offer. Besides, acceptance from shareholders for the offer has been very low. Hence, in this case, QSR's offer of $4.94 will likely be the base price for KFC.

KFC's latest quarterly EPS was 13.51c, which mean that annualised EPS is 54c. Valuing it at 13x PE for its strong cash flow and steady business will give it a target price of $7, which is 40% higher than its current price of $5. In my opinion, KFC is worth buying considering that shareholders can always sell their shares to QSR at $4.94, which mean that there is hardly any downside. With little downside and upside potential of 40%, I believe KFC is a good investment. Hopefully, this will be the case for MAGNUM. Let's wait and see.

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.