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This write-up was reproduced with permission from Ray’s Estate Clinic, written by Founder, Raymond Chng. Please refer to the below for more information on Raymond.

After much hesitation in publishing this article, I was persuaded by clients to share my views about the next big location to buy real estate. So much hype has been in locations like Marine Parade and Jurong. For those who are familiar with the investment logic –“be fearful when others are greedy”, I am cautious over buying properties in areas with hype. Buying a property is easy but selecting the right property is not.

When large real estate funds like blackstone and GIC Real estate decide on an investment, they spend a rather substantial period of time to research and analyse the deal. Of course, some of you might say, such research may not be required to buy a residential property in Singapore. However, my view is because we are in a different investment environment compared to 10 or even 20 years ago. Asset prices have risen a great amount and Singapore has experienced tremendous growth into a cosmopolitan city it is today. Property selection is crucial for property buyers who want their property value to be able to hold well in the long term, even for home buyers. Now that I have gotten this out of the way, let’s proceed to the main topic, which property cluster am I referring to.

This property cluster is Tanjong Rhu.

Source: Raymond Chng / Image: Tanjong Rhu Aerial View

Tanjong Rhu is now undergoing regeneration with the upcoming Tanjong Rhu MRT, part of Kampong Bugis growth area as well as the future commercial developments under the URA masterplan.

1.Upcoming Thomson-East Coast Line (TEL)

As seen in the below image, Tanjong Rhu MRT that will be completed by 2023/2024 will benefit the private residential developments within the the area. By being only 4 MRT stops from Marina Bay, the added convinience for residents in the area will increase tremendously. Currently, residents of this part of Tanjong Rhu have to take either a bus or take a 12 min walk to Stadium MRT. The TEL will also be linked to Changi Airport MRT and Woodlands where the future RTS to Malaysia will eventually be built. This will likely increase tenant base due to the increase connectivity.

Source: Streetdirectory / Image 1 – Tanjong Rhu MRT Location

Source: LTA / Image 2: Thomson East Coast Line Stations

2.Kampong Bugis Growth Plan

In the 2013 URA Masterplan, it was announced that Kampong Bugis is a growth area, and a car-lite district will be developed. This includes exploring the use of water taxi as a transport option. While Kampong Bugis is not Tanjong Rhu, it will subsequently be closely linked via water taxi if the government proceeds with their plans. Tanjong Rhu has access to the Kallang Basin which would enable residents to benefit from the alternate transporation into the CBD.

While there has been no concrete plans for water taxi yet, the development of Kampong Bugis will alter the skyline across the kallang basin from Tanjong Rhu and will change the views, feel and environment for residents of Tanjong Rhu

Source: Straitstimes / Image 3: URA Masterplan for Kampong Bugis

3.Future Commercial Developments in Tanjong Rhu

The URA Masterplan can provide clues to future developments, what is interesting is that there are 3 commercial sites in Tanjong Rhu that is not built yet. 2 of which are along the kallang basin waterfront. This is interesting as there will potentially be waterfront dining, retail and perhaps water sport amenities added to this side of the kallang basin. Future water taxi services can also be part of these commercial sites, if the government proceeds with such transport alternatives as highlighted in the 2013 URA Masterplan. Such commercial developments will benefit residents of Tanjong Rhu and potentially the demand for housing here.

Source: URA Masteplan / Image 4: Masterplan for Tanjong Rhu

4.Future Developments and moving of MBGC

The lease for Marina Bay Golf Course (MBGC) will expire in July 2024 and will not be renewed. This would free up huge amounts of space for future development. While waiting for MBGC lease to expire, the government has been preparing the surrounding land. When travelling at Fort Road, which is close proximity to Tanjong Rhu, huge cement trucks or trucks carrying sand can be seen on a daily basis. One can only wonder what kind of works are being carried out there. My best guess would be the government is preparing the land, piling, and strengthening the land for future developments. This would be the next growth phase after the Tanjong Rhu MRT is completed in 2024, and residents can look forward to another phase of regeneration of this area.

Photo by: RaysEstateClinic / Image 5: Aeriel view of MBGC area

5.Undervalued

One of the most important factor of an investment would be the price. In the Tanjong Rhu condo cluster,  prices currently average around S$1,350psf +/-. Properties are mainly 99 year leasehold.

One MRT stop away at Katong Park or Meyer Road vicinity, prices currently are at the $2,000 to $2,400psf range. While properties at Amber Road vicinity are priced at $1,800 to $2,000psf, with the latest launch of Amber Park selling for $2,500psf range. Most of the properties at Katong Park and Amber Road are freehold. However, even with a premium on freehold properties, the price gap for properties in those areas are currently too wide. My personal opinion is that the price gap will close. Below in Image 6, you can see what are the price zones in the areas surrouding Tanjong Rhu.

Source: URA / Image 6: Tanjong Rhu Surrouding Price Zone

Given that there is a huge price gap between those surrouding areas, the first question that comes to mind is why is Tanjong Rhu prices so low? A simple but yet true reason is that currently, there is a lack of amenities in terms of transport and eateries nearby. This will eventually change.

Another means of valuation that can easily be used to look at the price level of Tanjong Rhu being very attractive is that, Tanjong Rhu will be 4 mrt stops from Marina Bay. If we draw a circle of 4 MRT stops from Marina Bay, the average prices of the properties are at least $1600psf. Tanjong Rhu’s price currently is attractive.

 

Our Views

There are always opportunities if we look hard enough. Tanjong Rhu is one location that home buyers and investors can both consider looking at. This is one area that has very little risk due to the vast pipeline of growth potential. A real gem waiting for its true value to be awaken.

There are various types of units in Tanjong Rhu that investors and home owners can buy, not all units may perform well in the area. Depending on individual’s needs and situation, some unit types may be better.

Do note that this report is purely my personal view of the potential of Tanjong Rhu. For property buyers who are interested to explore more, the next step will be to look at unit selection. Unit selection is a key differentiating factor that can increase rentability and sellability of your property and is something that I facilitate property buyers who engage my services exclusively.

About the Author

Ray’s Estate Clinic (REC), founded by Raymond Chng, is a platform for Investors’ and homeowners to have a Property Portfolio Health Check by utilizing data analytics, ensuring that their portfolio remains healthy providing optimized returns.

“Health is Wealth” is what Raymond believes in, and it is not related only to your own body’s health, but it also refers to one’s financial health. Having a Property Portfolio that is not performing does not help improve an investor’s wealth. Hence, converting non-performing assets into optimized performing assets is essential to portfolio’s health improvement.

Raymond can be reached at raysestateclinic@gmail.com. Do visit his blog HERE for more information.

 

Disclaimers

Please refer to Raymond’s blog for the disclaimer HERE

Also, please refer to my disclaimer HERE

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Dear all,

With reference to my market write-up published on 29 May 2019 (click HERE), where I mentioned that the sell-off in the markets revealed interesting trading opportunities, markets coincidentally bottomed on 3 Jun 2019 and staged a strong recovery. I have already sold into strength and reduced my percentage invested in stocks from 150% in early June to 12% now. Personally, I am cautious in the market going into July.

Why is this so?

 

Basis below

1) Markets jumped yesterday following the U.S. / China trade truce announced over the weekend, despite the lack of details on what was discussed over the weekend. Personally, it is likely that markets will continue to be choppy, as headline news change over the progress of U.S. China trade talks.

2) After touching an intraday high of 2,978, S&P500 closed at a record high 2,964 on 1 Jul 2019. At this level, suffice to say that at least some, if not most of the positives have been priced in. In fact, S&P500 is trading at 19.5x current PE and 3.5x P/BV, vis-a-vis its 10-year average 17.9x PE and 2.6x P/BV (See Figure 1 below). Amid such valuations, this sets a high bar and increases the likelihood of disappointment, should any of the below events happen.

Figure 1: S&P500 current valuations vs 10-year average valuations

Source: Bloomberg 2 Jul 2019

3) Personally, I see various headwinds

a) Weakening economic growth

Although we are not in a recessionary phase now, economic indicators are indeed weakening. For example, U.S. consumer confidence dropped to a 21-month low last month, as consumers grew pessimistic about labour market and business conditions. Both China PMI and China Caixin Manufacturing PMI (for smaller companies) released on Sunday and yesterday showed contraction. Yesterday, despite the trade truce, Morgan Stanley reduced its economic forecasts for 2019 and 2020 by 0.2% to 3.0% and 3.2% respectively.

b) Upcoming U.S. 2Q Corporate results and guidance to 2HFY19F

It is doubtful that U.S. 2Q corporate results will be good, especially with the U.S. / China trade tensions and Huawei’s effect on global supply chain. Furthermore, the trade tensions have cast uncertainties to companies’ capital spending and growth plans. Some companies have a practice of pre warning on their results, hence we are likely to hear more of this in July. Already, companies such as Broadcom announced on 14 Jun 2019 that the U.S. / China trade tensions and the ban on sales to Huawei may reduce their revenue by US$2b in 2019. Siltronic, a German maker of wafers used to make silicon chips, gave a second profit warning in the past couple of months on weak 2Q and such weakness may drag on to 3Q. Although President Trump said the ban on U.S. companies’ sale of products to Huawei may be lifted if they don’t infringe on national security, this is still pending decision by the U.S. commerce department.

Based on FactSet, 113 S&P500 companies have issued pre-announcements on their upcoming 2Q 2019 results. Out of 113 companies, 87 have announced negative EPS guidance, which if true, it will be the second highest number of S&P 500 companies issuing negative EPS guidance for a quarter since 2006 (See Chart 1 below). The current estimate for 2Q is an earnings decline of 2.6% year on year. If this is true, it will be the first earnings recession since 1Q & 2Q2016.

Chart 1: 2Q2019 may be the 2nd worst record for negative EPS pre-announcements

Source: FactSet

c) Unpredictability of President Trump

Besides targeting China, EU, India, he seems to be also targeting Vietnam. Furthermore, he is not happy with ECB on their monetary policy as he views that Europe is deliberating weakening their currency. In short, it is difficult to predict at times on what market moving tweets may occur the next day.

d) Potential tariffs on others

While in talks with China, President Trump is also negotiating trade deals with Japan and European Union. Should these talks turn out unfavourable, President Trump may slap tariffs on them. At the time of writing this write-up, President Trump is mulling over tariffs on an additional US$4b worth of EU goods.

e) Divergence between oil and gold don’t augur well for the market

U.S. oil price WTI plunged approximately 22% into bear market on 5 Jun 2019 from its high on 23 Apr 2019. Oil price recently appreciated and steadied at US$59. If the global economy slows and U.S. / China trade tensions worsen, oil price may weaken more, especially if U.S. continues its oil production. Furthermore, some market watchers view that the divergence between the weakening oil and strengthening gold do not warrant well for the economic and market outlook. Based on Chart 2 below, the previous two times where precious metals surge while oil plunge by the relevant quantum, it does not bode well for the stock market.

Chart 2: Oil and gold diverge – don’t augur well for the market

f) Bearish divergences seen on the chart

Despite S&P500 hitting record high, indicators such as MACD, MFI, OBV and RSI are spotting bearish divergences. Although bearish divergences are not outright sell signals, the number of indicators collectively showing bearish divergences warrants some degree of caution.

Notwithstanding the above potential headwinds, there are positives:

a) Accommodative monetary policy

Central banks such as ECB and Federal Reserve remain accommodative. Based on DBS Research, they cited consensus estimate a greater than 95% chance of 2 rate cuts and almost 65% chance of 3 cuts this year starting at July’s FOMC meeting. Based on the CME’s FedWatch, it is putting a 100% probability rate cut this month. Historically, markets perform well on insurance cuts (i.e. rate cuts which do not subsequently lead to recession) (see Chart 3 below)

Chart 3: Markets perform well on insurance rate cuts

b) Cash on the sidelines & sentiment is not showing euphoria yet

Some market watchers are saying that there is still cash on the sidelines waiting to buy on dips. Furthermore, they point to sentiment data, which is not at euphoric levels yet, a phenomenon usually associated with market tops.

 

Conclusion

In view of the above (do note the above list of both headwinds and positive factors is not exhaustive), I am approaching this month with caution. Since my market write-up published on 29 May 2019 (click HERE), where I mentioned that the sell-off in the markets revealed interesting trading opportunities, I have already reduced my percentage invested in stocks from 150% in early June to 12% now. Most stocks have run a fair bit and may be prone to profit taking, should any of the headwinds occur.

I have compiled a list of stocks sorted by total potential return, based on the simple criteria below. For the purpose of this write-up, I have put in the top 10 stocks (Table 1) and bottom 10 stocks (Table 2) sorted by total potential return. (My clients will get the full list.). Hatten Land, Alliance, SLB Development are the top three stocks sorted by total potential return. Conversely, Golden Agri, Cosco and UMS are the bottom three stocks sorted by total potential return.

Table 1: Top 10 stocks sorted by total potential return

Source: Bloomberg; Ernest’s compilations

Table 2: Bottom 10 stocks sorted by total potential return

Source: Bloomberg; Ernest’s compilations

Criteria

1. Presence of analyst target price and estimated dividend yield;

2. Market cap >=S$50m

Caveats

1. This compilation is just a first level stock screening, sorted purely by my simple criteria above. It does not necessary mean that Hatten Land is better than SIIC or Sunpower in terms of stock selection;

2. Even though I put “ave analyst target price”, some stocks may only be covered by one analyst hence may be subject to sharp changes. Also, analysts may suddenly drop coverage;

3. Analyst target prices and estimated dividend yield may be subject to change anytime, especially after results announcement or after significant news announcements;

4. For Sunpower and Yoma Strategic, I noticed that the estimated dividend yields provided by Bloomberg do not seem to be accurate and I have used the previous full year dividend divided by the last price to derive estimated dividend yield;

5. For Clearbridge’s estimated PE next year, Bloomberg shows 0 which does not seem to be correct. I have calculated Clearbridge’s estimated PE next year, based on Phillip Securities’ research report.

 

Important caveat

In a nutshell, absent a crystal ball to foretell how market will unfold amid the various headwinds and positives outlined above, I choose to be cautious but nimble. Nevertheless, there is always a possibility that market may surge to the sky, if all or most of the events which I highlighted above turn out to be well. Portfolio investing is based on probability, weighted to the various scenarios, coupled with individual’s market outlook, risk tolerance, portfolio constraints, returns expectations etc. Naturally, my market outlook and trading plan are subject to change as markets develop and new information come in. My plan will likely not be suitable to most people as everybody is different. Do note that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Furthermore, I wish to emphasise that I do not know whether markets will drop or continue to rebound. However, I am acting according to my plans. In other words, my market outlook; portfolio management; actual actions are in-line with one other. Notwithstanding this, everybody is different hence readers / clients should exercise their independent judgement and carefully consider their percentage invested, returns expectation, risk profile, current market developments, personal market outlook etc. and make their own independent decisions.

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

P.S: It is noteworthy that previously, I posted an article on 23 Dec 2018 which I mentioned I have increased my percentage invested to around 131% invested on bets of a potential market rebound. Coincidentally, S&P500 posted its closing low on 24 Dec and intra-day low on 26 Dec before rebounding sharply. Click HERE for the write-up.

 

Disclaimer

Please refer to the disclaimer HERE

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Dear all

This week, Halliburton (“HAL”) caught my attention as it closed at US$21.38 on 14 Jun 2019, lowest since 1 Jun 2010 and 7 Aug 2009, amid 10-year low valuations.

Given the basis below, my personal view is that HAL may be presenting a favourable risk reward setup for a long trade.

 

Potential basis to long

a)  At US$21.38, this is the lowest close since 1 Jun 2010. At 12.5x current PE and 1.9x P/BV (see Figure 1 below), these valuations seem attractive as compared to its 10Y average PE and P/BV 29.3x and 3.2x respectively;

Figure 1: Trading at 9-year low prices amid 10-year low valuations

Source: Bloomberg 17 Jun 2019

b) In a short span of two months, HAL has fallen almost 32% from US$31.59 on 17 Apr 2019 to close US$21.38 on 14 Jun 2019. Although share price has formed a new nine year low recently, it is encouraging to see that all the indicators (which I use) such as MACD, MFI, OBV and RSI are exhibiting bullish divergence. This may arguably indicate that the recent continuous downtrend may not be sustainable;

c) Average analyst target stands at US$37.93 with 29 buys; 4 holds and no sells. If the analysts are collectively correct, this represents a potential capital upside of around 77%;

Figure 1: Ave analyst target US$37.93; potential capital upside of around 77%


Source: Bloomberg 17 Jun 2019

d) Based on Bloomberg, HAL distributes quarterly dividend of US$0.18 / share, translating to around 3.4% annualised dividend yield. Coupled with analysts’ estimated target price of US$37.93, total potential return may be in the region of around 81%;

e) Besides HAL, the oil services sector as represented by VanEck Vectors Oil Services ETF seems to be in the midst of forming a bottom (Refer to the write-up HERE), pending further price confirmation. If the oil services sector recovers in share price, HAL is likely to be benefit as it is one of the world’s largest providers of products and services to the energy industry.

 

Risks

a) Based on Chart 1 below, it is on a strong downtrend as evidenced by its death cross formations and downwards sloping EMAs. In fact, HAL has fallen 54% over the past one year;

Chart 1: Down 54% over the past one year

Source: InvestingNote 17 Jun 2019

Near term supports:  US$21.16 / 21.04 / 20.98 / 20.55 / 20.20 – 20.26 / 20.00

Near term resistances: US$22.02 / 22.44 / 22.74 / 23.18

b) I am not familiar with the company. There may be some reasons known to the market, but not to me resulting in the continuous fall in the share price;

c) Subject to oil price. Suffice to say a sustained drop in oil price is likely to weigh on HAL as it is one of the world’s largest providers of products and services to the energy industry;

d) HAL’s RSI closed at 33.0 on 14 Jun 2019. This level is not considered oversold yet which may arguably mean that there may be more potential downside.

 

Conclusion

In view of the above, there is no doubt that HAL is on a strong downtrend. However, it seems likely that near term potential downside may be limited amid the bullish divergences shown on the various indicators. I frequently trade in and out of HAL. At the time of posting this write-up on my blog, I have no positions. This write-up is a trade idea based on potential retracement and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with HAL’s business and its fundamentals) which we should be aware of. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully.

Readers who are not familiar with HAL can take a look at its company website HERE.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

P.S: It is noteworthy that this write-up is done on 17 Jun, Mon evening but I wasn’t able to post on my blog due to some website / technical issue.

 

Disclaimer

Please refer to the disclaimer HERE

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Dear readers,

Asian markets have fallen quite a bit in the past one month. For example, Hang Seng has fallen close to 2,900 points since touching a high of 30,280 on 15 Apr to trade 27,391 which is the low last seen in January.

STI has fallen almost 250 points from an intraday high of 3,415 on 29 Apr to close 3,165 today.

Looking at the indices may be deceiving as many shares have fallen a lot. For example, based on Table 1 below, most stocks have fallen at least 10%, with Sembmarine tumbling almost 17% in less than a month.

Table 1: % fall since 29 Apr vis-à-vis indices

Source: Ernest’s compilations

Note: The calculation in the % chg does not exclude dividends distributed during the above comparison period. I.e. If UOB’s $0.70 / share dividend is included, the % chg will be lesser. It is noteworthy that 29 Apr is chosen as the intraday high as this is the day which STI hit its multi-month high record.

 

My personal view – I have increased equity exposure

With reference to my write-up two months ago (click HERE), I was around 5% invested in late March. I have been trading somewhat in and out for the past two months. However, the sharp fall in specific stocks seems to create some interesting opportunities and I have recently raised my percentage invested to more than 100%.

These are my thoughts

a) Hang Seng (26,868-27,200), STI (3,150-3,160) and S&P500 (2,800-2,816) are trading at some good support region thus it lends some confidence to me to buy some shares. Having said that, I will not know for sure whether the support will definitely hold. If the support area breaks, there may be more downside. Thus do exercise your own risk management and judgement call;

b) The stocks which I enter are either at multi year low prices, or they are trading at extremely oversold levels, or they are potential turnaround plays (clients are notified of my positions);

c) For myself, I intend to trade most of the positions which I have. In other words, I am cognisant that market is jittery now hence any potential upside (if any) may not be large;

d) I was not extremely invested going into May hence I have more leeway to deploy my funds;

e) It is noteworthy that should U.S. and China trade tensions worsen, or if the technology cold war worsens, markets are likely to weaken more. Thus, I emphasise the need to do careful risk management and utilise your own judgement calls.

 

I have generated two tables for readers’ reference

I have generated two tables below and have appended the top five stocks in each category for readers. Table 2 lists the top five stocks sorted by lowest RSI. (Clients will receive the entire list of stocks sorted by RSI with RSI <=30 as the main criteria.) The five most oversold stocks are Thomson Medical, AA Group, Banyan Tree, Tee International and GSS Energy. In fact, Thomson Medical has a RSI of 4 which is pretty rare for companies with no apparent negative news except for perhaps weaker than expected results; high valuations etc.

In addition, it is noteworthy that Thomson Medical and GSS Energy are trading at prices lower, or just around the prices before their major announcements. For example, Thomson Medical was also trading around S$0.05+ before its acquisition of Thomson Medical & TMC Life Sciences Berhad and GSS Energy was also trading around $0.07 before it was awarded the KSO for Trembul fields. Naturally, some readers may argue that their acquisitions, or their major announcements may not have added value to shareholders. This is a personal judgement call and I guess we can only tell over the long term.

Table 2: Most oversold stocks sorted by RSI

Source: Bloomberg 28 May 2019

Table 3 lists the Top 5 stocks by total potential return. (As usual, clients will receive the entire list of stocks) Sunpower, SIIC, OUE, Yoma Strategic and Banyan Tree rank as top 5 stocks sorted by total potential return. Please refer to Table 3 and the important notes below.

Table 3: Top 5 stocks by total potential return

Source: Bloomberg 28 May 2019

 

Criteria

1. Presence of analyst target price and estimated dividend yield;

2. Market cap >=S$200m

Caveats

1. This compilation is just a first level stock screening, sorted purely by my simple criteria above. It does not necessary mean that Sunpower is definitely better than SIIC or OUE in terms of stock selection.

2. Even though I put “ave analyst target price”, some stocks may only be covered by one analyst hence may be subject to sharp changes. Also, analysts may suddenly drop coverage;

3. Analyst target prices and estimated dividend yield may be subject to change anytime, especially after results announcement or after significant news announcements;

4. For Sunpower and Yoma Strategic, I noticed that the estimated dividend yields provided by Bloomberg do not seem to be accurate and I have used the previous full year dividend divided by the last price to derive estimated dividend yield.

Important caveat

Naturally, my market outlook and trading plan are subject to change as charts develop. My plan will likely not be suitable to most people as everybody is different. Do note that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Furthermore, I wish to emphasise that I do not know whether markets will definitely rebound or continue to drop. However, I am acting according to my plans. In other words, my market outlook; portfolio management; actual actions are in-line with one other. Notwithstanding this, everybody is different hence readers / clients should exercise their independent judgement and carefully consider their percentage invested, returns expectation, risk profile, current market developments, personal market outlook etc. and make their own independent decisions.

Also, please note that at the time of this write-up, among the aforementioned stocks, I have positions in Sunpower, GSS Energy and Thomson Medical.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

Disclaimer

Please refer to the disclaimer HERE

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Dear all

This week, our National Carrier SIA caught my attention with its 10% fall in the past three months to close $9.17. At $9.17, it has fallen to close to the lows last seen in Oct 2018 and May 2009. In fact, when I informed my clients on SIA on 23-24 May, it was trading around $9.10-9.11 which is the lowest last seen in the past 10 years!

Given the basis below, my personal view is that SIA may be presenting a favourable risk reward setup for a long trade. Do take a look at the basis and more importantly, the risks inherent in such trades.

 

My personal basis

a) Analysts are positive with an average target price $10.94

Based on Figure 1 below, average analyst target stands at $10.94 with 10 buys; 7 holds and no sells. This represents a potential capital upside of around 19%. Coupled with an estimated dividend yield of 4.1%, total potential return is around 23% if consensus is correct. Readers can refer to SIA’s analyst reports HERE.

Figure 1: Average analyst target $10.94; potential capital upside 19%

Source: Bloomberg 24 May 2019

b) Attractive valuations vis-à-vis its 10-year average

At $9.17, SIA is trading at approximately 15.8 current PE and 0.8x P/BV. Based on Figure 2 below, these valuations seem attractive as compared to its 10Y average PE and P/BV of 27.3x and 1.0x respectively. NAV / share is around $11.23. According to DBS Research, SIA’s 0.8x P/BV is approximately -1.5 standard deviation (“SD”) against its 10-year average and nearly -2 SD against its 5-year average. In other words, barring any unforeseen major catastrophe or market downturn, such low valuations can arguably cap any sharp downside risk.

Figure 2: Trading at 0.8x P/BV vs its 10-year average of 1.0x

Source: Bloomberg 24 May 2019

c) Dividend boost

SIA is going to XD $0.22 / share on 1 Aug 2019, translating to approximately 2.4%. For the full year, analysts estimate SIA’s FY19F dividend yield to be around 4.1%.

d) Historical support region around $9.08 – 9.20 seems strong

Based on SIA’s chart, whenever SIA falls to around $9.08 – 9.20, a subsequent share price recovery is observed. This can be seen from the lows seen in Jan 2019; Nov 2018; Oct 2018; Feb 2014; Aug – Sep 2013 and May 2009 where share price subsequently recovers. Although past share price performance does not guarantee future performance, the multiple successful tests of the support region $9.08 – 9.20 increases the probability of this support region holding in the future (barring major market downturns).

e) Indicators are oversold

SIA has fallen approximately 10% fall in the past three months to close $9.17. Indicators such as RSI and MACD closed at oversold levels at 24.5 and -0.15.

As usual, with any trading or investment idea, there are always risks. The list below is not exhaustive.

 

Risks

a) A sustained break below the strong support region $9.08-9.20 may fuel further selling

There is no rule that SIA cannot break below the strong support region $9.08-9.20. If this happens with volume expansion and on a sustained basis, it may fuel further selling. However, on the balance of probability, it is less likely that SIA can break below this strong support region coupled with 10-year low valuations, barring major market downturns.

b) Not familiar with the company

As this basis is based primarily on its chart and valuations, I am not extremely familiar with SIA’s business and its underlying fundamentals. There may arguably be some reasons known to the market but not to me resulting in the continuous fall in the share price. Readers are encouraged to do your own due diligence.

c) May also be affected by oil price

According to DBS Research, fuel costs comprise of approximately 33% of SIA’s operating costs. Notwithstanding that SIA has hedged approximately 69% of its FY20F fuel costs, any sharp increase in oil prices may still affect SIA’s earnings to some extent.

d) Not extremely oversold yet

At $9.17, SIA’s RSI closed at 24.6 with 10-year low RSI level at 13.4. Since 2000, there are 45 occasions with RSI lower than 24.6. Thus, even though RSI is oversold, it is not at an extreme oversold level yet.

e) Strong downtrend

Based on Chart 1 below, it is on a strong downtrend as evidenced by its death cross formations and downwards sloping EMAs. Thus, readers have to be cognisant that any rebound is unlikely to be a sharp V shape recovery.

Near term supports:  $9.08 – 9.10 / 9.05 / 9.00 / 8.91

Near term resistances: 9.20 / 9.27 / 9.41 – 9.44 / 9.50

Chart 1: Entrenched in a strong downtrend

Source: InvestingNote 24 May 2019

f) Susceptible to weak economy or / and disease outbreak

SIA’s business may be affected if economies continue to weaken (perhaps due to on-going trade tensions between U.S. & China or U.S vs Europe etc) and due to outbreak of infectious diseases.

 

Conclusion

In view of the above, there is no doubt that SIA is on a strong downtrend. However, it seems likely that near term potential downside may be capped, as oversold pressures escalate and as SIA approaches its strong support region $9.08-9.20. I have initiated a long position in this stock via CFDs, with the aim of getting a couple of bids of potential profit if any. This is a trade based on potential retracement and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with SIA’s business and its fundamentals) which we should be aware of. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully. Readers who are not familiar with SIA can take a look at its company website HERE.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

P.S: I have mentioned to my clients on SIA on 23-24 May 2019 when it was trading around $9.10-9.11.

 

Disclaimer

Please refer to the disclaimer HERE

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Previously, I have done a write-up (click HERE) on ISOTeam (“ISO”) after interviewing Anthony, CEO and Richard, GM on an exclusive basis in Dec 2018. I have bought in at that time and have taken profit in Jan 2019. Since Apr, I have been accumulating ISO, as its chart seems to portend a potential upside breakout after a lengthy potential double bottom formation. ISO closed at $0.230 on 21 May 2019. Let’s take a look at its investment merits and more importantly, its investment risks below.

 

Investment merits

a) Potential bullish break from a double bottom formation

Since 2017, ISO has experienced a protracted downturn in its share price. For the past five months, it has been consolidating between $0.191 – 0.225. At the time of doing this write-up, ISO seems to be on the verge of staging a bullish break after a lengthy potential 5-month double bottom formation. Neckline is around $0.225. Since 29 Apr 2019, except for two trading days, volume has been increasing and has been above its 30D average volume, as it approaches the resistance region $0.225. Indicators such as MACD, OBV and RSI are generally strengthening in line with the recent up-move. Amid positively placed directional indicators, ADX has been rising from 8.5 on 12 Feb 2019 to close 35.3 on 21 May 2019, indicative of a trend. Except for 200D SMA and 200D EMA, other short term EMAs (20D,50D,100D) are rising. A sustained upside breakout above $0.225 with volume expansion points to an eventual technical measured target $0.260. Conversely, a sustained breakdown from $0.191 with volume expansion points to an eventual technical measured target $0.157. Based on the current chart development, a bullish upside breakout scenario is more likely.

Near term supports: $0.215 / 0.205 / 0.195 / 0.191

Near term resistances: $0.225 / 0.240 / 0.250 / 0.275

Chart 1: ISO on the verge of breaking out from a lengthy potential double bottom formation


Source: InvestingNote 21 May 2019

b) C&O segment may have interesting development in the next few months

ISO has an interesting business segment called Eco-friendly solutions. In this segment, ISO has a cockroach and odour removal (“C&O”) segment which is undergoing tests with the relevant authorities for use in rubbish chutes. According to an article in Today dated Mar 2017 (click HERE), this is a targeted, odourless, environmentally friendly and more effective in reducing cockroaches. A beneficial side effect of this C&O solution is that it helps to reduce methane level in rubbish chutes (high levels of methane is one of the main causes of rubbish fire). Based on my personal guess, we are likely to hear more updates on this segment in the next few months.

c) Contract wins remain strong

Since Nov 2018, ISO has been winning contracts on a furious pace with a cumulative amount $94m awarded. It is noteworthy that FY18 and FY17 revenue amounted to $83.8m and $82.9m respectively. According to ISO’s 3QFY19 financial statements, management is optimistic about the overall sentiment and outlook for their business and they will continue to leverage on their strengths to win more contracts.

d) CY2020 may be interesting years

Calendar year 2020 (note financial year ends in June) may be an interesting year for ISO. Firstly, there may be potential disposal gains, as management plans to unlock value by selling two properties at Kaki Bukit and Serangoon. Such sales if materialise, may result in an approximate $3m gain. Secondly ISO has invested $5m into Sunseap via its Series C preference shares in May 2017. Should Sunseap IPO in 2019 – 2020, ISO may be able to get good returns from its investment. Thirdly, as a normal course of business, ISO is on the lookout for potential earnings accretive merger and acquisition opportunities. Fourthly, ISO’s SG bike seems to be the only company left with the full licence after OFO’s licence was cancelled by LTA on 22 Apr 2019. Separately, Mobike indicated in Mar 2019 that it has applied to surrender its bicycle-sharing licence. Thus, SG bike may be able to perform better in the next few years amid a reduction in competition.

e) Investment community seems to be finally taking note in ISO

ISO is slowly getting the attention of the investment community and media. For example, Straits Times has published two articles this month in relation to ISO, either directly or indirectly. On 4 May 2019, Sunseap was featured on Straits Times (click HERE) as the builder of one of the world’s first and largest sea water floating solar platform along the Straits of Johor, north of Woodlands Waterfront Park. For those who do not follow ISO, it is noteworthy that ISO is the installer for this project (see announcement HERE). On 19 May 2019, ISOTeam was featured in Straits Times with the tag line “ISOTeam building on its capabilities for greater growth” (click HERE).

Its turnaround is also catching the attention of RHB analyst who is the only rated broker covering ISO. Last week, RHB upgraded ISO to buy and increased his target price from $0.230 to $0.290 (click HERE). He also projects S$2.0m net profit in 4QFY19F. If this materialises, it will be ISO’s fourth consecutive quarter on quarter growth in net profit since 4QFY18!

f) Valuations seem attractive on a historical basis

Based on RHB’s report, if ISO can report FY19F net profit of around S$5.8m, at its last price of $0.230, it is trading at 11.3x FY19F PE. This compares favourably to its 5-year average PE of around 21.6x. In addition, on a P/BV ratio, ISO is trading around 1.0x P/BV vis-a-vis its 5-year average P/BV of around 1.9x. Thus, valuations look attractive on a historical basis.

 

Investment risks

Please take a look at my write-up on ISO (click HERE) for the risks. Some of the pertinent risks are

a) Chart reading is extremely subjective

Chart reading is subjective and is likely to be less accurate for small mid cap stocks, especially those with low volume.

b) Ultra-illiquid company

Ave 30D volume amounts to 157K shares only. This is not a liquid company where investors can enter or exit quickly. Amid the current volatile market conditions due to ongoing trade tensions, ISO may swing quite a bit if there are sudden sellers.

c) Results must catch up à which seems to be happening

Notwithstanding its contract wins of approximately $94m over the past six months which is already more than its FY18 revenue of $83.8m, earnings have to catch up. It is noteworthy that gross margins have dropped from 17.8% in FY18 to 14.0% in 1HFY19. This is a conscious effort by the management to reduce their margins for R&R contracts in order to get more volume of contracts. Other new projects which they are doing in CY2019 such as the $46.5m contract win from a leading integrated resort group and the floating solar platform from Sunseap should yield higher margins.

In view of the above, I have deliberately waited for ISO’s 3QFY19 results before completing this write-up. It is encouraging that ISO announced a S$1.7m net profit in its 3QFY19 results last week, amid strong recovery across all segments. It is noteworthy that ISO’s 9MFY19 gross margin has edged up to 14.4%, from 14.0% in 1HFY19. Furthermore, based on Table 1 below, ISO reported its second highest quarterly profit in 3QFY19 since 3QFY17! This is also the third consecutive quarter on quarter growth in net profit since 4QFY18. Thus, results may be finally catching up with contract wins.

Table 1: Second highest quarterly profit since 3QFY17

Source: Company; Ernest’s personal compilations

The above list of risks is not exhaustive

To keep my write-up concise and due to severe time constraints, the above list of risks is not exhaustive. Readers are advised to refer to the analyst reports HERE; ISO’s website HERE; ISO’s latest 3QFY19 financial results (click HERE); and my more detailed write-up (click HERE). You can also refer to ISO’s prospectus for more information on the risks etc. In addition, you can also contact ISO’s investor relation August Consulting if you have any queries regarding the company.

 

Conclusion

In conclusion, ISO continues to be interesting to me based on its chart (possible upside break from a potential bullish double bottom formation) and its business developments.  Nevertheless, readers must be cognisant of (just to cite a few) illiquidity risk, risks relating to chart reading etc. Let’s see how it goes in the next few months.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

P.S: I have mentioned to my clients to relook into ISO on 7 May 2019 when it was trading around $0.215. This write-up was delayed due to severe time constraints and as I’m waiting for ISO’s 3QFY19 results.

 

Disclaimer

Please refer to the disclaimer HERE

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Dear all

This week, Sinopec (00386.HK) caught my attention with its 33% fall since 21 May 2018. With its sharp fall, it has become extremely oversold with RSI at 15.1.

Given the basis below, my personal view is that Sinopec may be presenting a favourable risk reward setup for a long trade. Do take a look at the basis and more importantly, the risks inherent in such trades.

 

My personal basis

a) Attractive valuations

At HKD5.63, Sinopec is trading at approximately 10.3x current PE and 0.8x P/BV. These valuations are attractive as compared to its 10-year average PE and P/BV 11.2x and 1.1x respectively.

b) Extremely oversold RSI

Sinopec has fallen 33% from an intraday high of HKD8.35 on 21 May 2018 to close HKD5.63 on 14 May 2019. RSI closed at an oversold level 15.1. At 15.1, there is only one occasion since late 2000 where RSI is lower than current level with the lowest RSI at 14.2.

c) Dividend boost

Sinopec is going to XD RMB0.26 on 31 May 2019. Given an indicative rate RMBHKD:1.14, this translates to HKD0.296 dividend, approximately 5.3% yield. For the full year, analysts estimate Sinopec’s FY19F dividend yield to be around 8.0%.

d) Analysts are positive with an average target price HKD7.31

Average analyst target stands at HKD7.31 with 30 buys; 3 holds and no sells. This represents a potential capital upside of around 56%. See Figure 1 below for more details.

Figure 1: Average analyst target HKD7.31; potential capital upside 33%

Source: Bloomberg 14 May 2019

As usual, with any trading or investment idea, there are always risks. The list below is not exhaustive.

 

Risks

a) Strong downtrend

Based on Chart 1 below, it is on a strong downtrend as evidenced by its death cross formations and downwards sloping EMAs.

Near term supports:  HKD5.58 -5.60 / 5.50 / 5.37 – 5.40 / 5.30

Near term resistances: HKD5.80 / 5.86 / 5.91 / 6.00

Chart 1: Entrenched in a strong downtrend

Source: InvestingNote 14 May 2019

b) Not familiar with the company

As this basis is based primarily on its technical oversold level, I am not familiar with Sinopec’s business and the underlying fundamentals. There may arguably be some reasons known to the market but not to me resulting in the continuous fall in the share price. Readers are encouraged to do your own due diligence.

c) Chart reading is subjective; no rule that RSI will not go below 15

There is no rule that RSI cannot go below 15, or even 10. However, on the balance of probability, it is less likely that Sinopec can keep on dropping without some form of bounce, as oversold pressures escalate.

 

Conclusion

In view of the above, there is no doubt that Sinopec is on a strong downtrend. However, it seems likely that near term potential downside may be capped, as oversold pressures escalate. I have initiated a long position in this stock via CFDs, with the aim of getting a couple of bids of potential profit if any. This is a trade based on potential retracement, as oversold pressures escalate and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with Sinopec’s business and its fundamentals) which we should be aware of. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully.

Readers who are not familiar with Sinopec can take a look at its company website HERE.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

Disclaimer

Please refer to the disclaimer HERE

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Dear all,

This week, Sembcorp marine (“SMM”) caught my attention amid positive industry reports and its strengthening chart. I have started to accumulate SMM with my usual take profit target of a few bids, if any.

Let’s look at the basis, and importantly, the investment risks.

 

Basis

a) Analysts are turning positive

Based on Figure 1 below, average analyst target price for SMM is around $1.93, representing a potential capital appreciation of around 12% from the current price $1.72. It is noteworthy that JP Morgan has turned positive on SMM last month with a target price of $2.10, after six years of underweighting SMM.

Figure 1: Ave analyst target $1.93

Source: Bloomberg 26 Apr 19

b) Chart is supportive

Based on Chart 1 below, SMM breached its trading range $1.60 – 1.72 on 23 Apr 2019 and touched an intra-day high of $1.81 on 24 Apr 2019. With the recent up-move, it has closed above its 200D EMA (currently around $1.73) for three consecutive trading days, a feat which did not occur since Oct 2018. It is now pulling back to its support region $1.67-1.73. ADX has been rising and last trades at 32.0 on 29 Apr 2019, amid positively placed DIs (indicative of a trend). This, coupled with almost all the moving averages (which I use) are rising (except for 200D SMA), this seems to indicate an uptrend. OBV has also broken on the upside which looks positive, especially when it is in tandem with the upside break of $1.60-1.72. OBV is now testing its own support area.

Near term supports: $1.73 / 1.71 / 1.67

Near term resistances: $1.81-1.82 / 1.89 – 1.91 / 1.95 – 1.96

Chart 1: SMM testing its support on pullback, amid light volumes

Source: InvestingNote 29 Apr 19

c) Industry seems to be turning around

Oil and gas industry seems to be turning around which can be seen from various aspects. Firstly, based on a Business times article dated 17 Apr 2019 (click HERE), SMM’s chairman Mohd Hassan Marican was quoted at its recent annual general meeting (“AGM”) that SMM may be approaching the bottom of “a very long downcycle”. Recovery could be as soon as later this year or in 2020. Secondly, according to a DBS Research article dated 12 Apr 2019, DBS believes spending on exploration related activities is likely to increase 24% y/y in 2019. Thirdly, management from various large oil related companies are sounding more positive. For example, Haliburton sees national oil companies (“NOC”) continue to focus on mature oil fields and such activity is likely to increase via greater investments by NOC. Given the above developments, SMM may win more orders in the next couple of years.

d) Oil price seems to be supported

Based on a DBS Research article dated 25 Apr 2019, it has just increased its oil price forecast by US$5/bbl. to US$70-75/bbl. for 2019 / 2020. It cites tighter supply demand dynamics and believes any OPEC’s decision to increase production is likely to be moderate. A strong oil price is likely to bode well for companies like SMM’s in terms of business and its share price movement with the latter showing a strong correlation to oil price movement.

e) Merger of shipyards

Whenever SMM drops to a low enough price, this rumour on its takeover or privatisation will rekindle. According to DBS Research, they believe that a merger of our Singapore ship yards may make sense on a business aspect. This is because there may be synergies and eliminate competition in the medium term.

f) Securitisation of S$1.1b receivables for SMM’s borr rigs

If SMM is successful in securitisation of S$1.1b receivables for its borr rigs, this will alleviate its stretched balance sheet to a significant extent.

g) Significant cost savings of S$48m per annum from FY20F

Based on an article on Seatrade Maritime (click HERE), SMM plans to move all operations from its Tanjong Kling yard its integrated Tuas Boulevard Yard by end-2019, four years ahead of schedule. This move is expected to generate annual cost savings of around S$48m.

h) Valuations are relatively low

With reference to Figure 2 below, SMM trades at 1.6x P/BV vs its 10-year average range 2.9x. PE basis is not used as SMM reported a net loss for FY18.

Figure 2: Valuations are relatively low on a P/BV basis

Source: Bloomberg 26 Apr 19

With any investment, there is bound to be some risks. The list of risks below is not exhaustive.

Investment risks

a) Cost over-run from new projects

SMM has gradually shifted from fabrication and pure construction work to gradually becoming a marine engineering solutions provider, with a bias towards gas solutions. Projects which are new in nature (i.e. different from SMM’s bread and butter business) may (more likely) incur cost over-runs which may affect its margins.

b) Drop in oil price

A drop in oil price over a sustained period may affect rig count and new building activities which may affect SMM.

c) Implications from its stretched balance sheet

Its stretched balance sheet with net gearing of around 1.4x limits its ability to secure new sizeable contract wins as it juggles between working capital constraints, capex requirements and securing contract wins. Furthermore, to alleviate its stretched balance sheet, there may be possibility of share issuance.

d) Order book replenishment and potential order cancellations

According to SMM’s recent AGM, the challenge is to replenish its order books as they actively “digest” the order books won till date. In addition, there is always a risk that orders awarded, may be cancelled by their customers.

e) Potential short-term selling pressure from contra players

Today is T+4 of the sharp up-move on 23 Apr 2019. i.e. Contra players may be forced to exit as their contra period nears.

f) Results – a potential event risk

It is going to report results on 3 May before market opens. As with any results, the results and guidance should beat analyst expectation for it to continue moving higher. If their results, or / and guidance disappoint the market, share price is likely to weaken. Based on CGS-CIMB report, SMM is likely to recognise accelerated depreciation worth S$60m over the past five quarters from 4QFY18. Although this is non cash in nature, it is likely to affect reported profit to some extent.

g) Risks from corruption allegations in Brazil

There seems to be no new information from the corruption allegations in Brazil since 2018 based on my searches online. Nevertheless, if SMM is found guilty, this can lead to reputation and financial loss.

 

Conclusion

In view of the above, SMM looks interesting amid the buoyant oil price and as the industry recovers from its multi-year down cycle. However, it is noteworthy that there are several risks, such as equity issuance, order cancellations, results etc. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully.

Readers who are not familiar with SMM can take a look at the analyst reports HERE.

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

Disclaimer

Please refer to the disclaimer HERE

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Dear readers,

This week, Qualcomm caught my attention as it has appreciated approximately 74% from US$49.10 to trade at US$85.62 in less than 3 months. This is due in part to the favourable announcement that Qualcomm and Apple have reached a multi-year settlement agreement (click HERE for more information)

 

Why is it interesting?

Personally, I think Qualcomm may be a potential short target with a favourable risk to reward proposition with a take profit of a few bids, base mainly on a technical perspective.

 

Basis to short

a) With reference to Chart 1 below, Qualcomm is on a strong uptrend evidenced by its rising exponential moving averages and golden cross formations. However, due to its relentless rally, it is extremely overbought. Most indicators are stretched. RSI last trades at 92.0 on 23 Apr 2019 which is the highest since 2000! ADX last trades at 48.5 on 23 Apr 2019 amid sharply positive placed directional indicators. MACD last trades at 6.3, ten-year high levels;

Near term supports: US$83.68 / 82.50 / 79.84 / 78.70 / 76.52 / 75.00

Near term resistances: US$86.00 / 87.50 / 88.00

Chart 1: Qualcomm’s strong up-move since end Jan 2019

Source: InvestingNote 23 Apr 19

b) Based on this website https://www.marketbeat.com/stocks/NASDAQ/QCOM/insider-trades/, it seems like insider is taking the recent rally to lighten their exposure. For example, Cristiano R Amon, President of Qualcomm sold 13,466 Qualcomm shares at US$60.00 on 16 Apr 2019. James H Thompson, EVP of Qualcomm sold 40,000 Qualcomm shares at US$50.75 on 11 Feb 2019;

c) Based on Figure 1 below, Qualcomm’s valuations are not cheap. Qualcomm trades at 26.0x current PE (note this is based on 22 Apr 2019 closing price US$81.97; last done price is US$85.62) vis-à-vis its 10-year average PE of around 18.7x. Other metrics such as P/BV and P/CF are significantly above its 10-year average.

Figure 1: Valuations are high on a relative basis

Source: Bloomberg 23 Apr 19

As usual, it is necessary to consider the potential risks to have a balance view. Some of the risks include (but not limited to):

a) Qualcomm’s average true range amounts to US$2.71. This is a volatile stock and its volatility needs to be taken into consideration for position sizing;

b) I am not familiar with Qualcomm’s fundamentals. This is my first time looking at this stock. There may be other reasons for the sharp up-move (known to the market but unknown to me), besides its settlement with Apple announced this month;

c) Some analysts continue to raise their target price for Qualcomm. With reference to Figure 2 below, it is noteworthy that the highest target price is around US$100. Average analyst target is US$82.41;

Figure 2: Average analyst target US$82.41, already above current price US$85.62

Source: Bloomberg 23 Apr 19

d) There is no rule that RSI cannot go above 92 or even 95. However, on the balance of probability, it is less likely that Qualcomm can keep on rising without some form of pullback as overbought pressures escalate;

e) Intel reports results on 25 Apr 2019 and Qualcomm reports results on 2nd May 2019 before market. Results are typically an event risk.

 

Conclusion

In view of the above, there is no doubt that Qualcomm is on a strong uptrend. However, it seems likely that near term potential upside may be capped, as overbought pressures escalate. I have initiated a small short position in this stock via CFDs, with the aim of getting a couple of bids of potential profit if any. This is a trade based on potential retracement, as overbought pressures escalate and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with Qualcomm’s business and its fundamentals) which we should be aware of. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully.

Readers who are not familiar with Qualcomm can take a look at Wikipedia’s concise description HERE.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

Disclaimer

Please refer to the disclaimer HERE

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With reference to my 19 Sep 2018 write-up (click HERE), Best World has appreciated approximately 147% from $1.35 on 19 Sep 2018 to touch an intra-day high of $3.33 on 13 Feb 2019. At that time, Best World has dropped out of my watchlist after its incredible rally. However, with its recent 47% tumble from its all-time intra-day high $3.33 on 13 Feb 2019 to trade $1.76 on 12 Apr 2019, it seems interesting again. Is this a buying opportunity or falling knife?

 

Why is it interesting?

a) Valuations are more attractive now

Based on Bloomberg (see Table 1), Best World trades at 10.8x and 11.3x FY19F and FY20F earnings respectively. This compares favourably with the sector average of 17.1x and 14.2x FY19F and FY20F earnings respectively. Its 10.8x FY19F earnings is also low vis-à-vis its 10-year average PE of around 28.2x. Furthermore, Best World trades at 3.6% FY19F dividend yield as compared to its sector average of 2.8%.

It is noteworthy that Best World’s FY20F PE is higher than its FY19F PE. This may be attributed to CLSA’s expectation that Best World’s earnings may drop in 2020. (Please refer to CLSA’s report for more information)

Table 1: Best World’s peer comparison

Source: Bloomberg 12 Apr 19

b) Independent reviewer report should allay market concerns to some extent

Quoting from company’s announcements, the Independent Reviewer’s review shall focus on the Franchise Model adopted by the Company in China in 2018 with the following objectives:

  • To verify the existence of the franchisees as at 31 December 2018.
  • To validate the sales to and cash received from sales to significant franchisees.
  • To identify and make appropriate recommendations on any internal control weaknesses and breaches of the Listing Manual of the Main Board of the SGX-ST, regulations or local laws, as applicable. Where breaches have been identified, to identify the responsible parties if possible.

My personal view is that this report should help to alleviate concerns on their franchise business model and increase corporate transparency.

c) 1QFY19F should be strong on y/y comparison

Based on its 4QFY18 financial statements, management mentioned that there will be a full year contribution from its Franchise model in FY19, as opposed to zero contribution from this segment in 1HFY18. In FY18 statements, management mentioned that they are cautiously optimistic on stronger profit and revenue growth in FY19 vs FY18. Besides the Franchise segment in China contributing an entire year of contribution this year, management also expects underlying demand for its products to increase Taiwan, Indonesia, Singapore and certain other markets.

d) Final dividend of $0.05 / share – full FY18 dividend amounts to S$0.074 / share;

Company has proposed a final dividend of $0.05 / share to be ex in May after the approval in AGM. For the entire FY18, Best World has distributed / proposed a total dividend of $0.074 / share, translating to 56% pay-out ratio and 4.2% dividend yield at current price $1.76. It is noteworthy that total dividend distribution since IPO amounted to S$115.3m.

e) Constant share purchases from management instills confidence

Management has been frequently buying back their own shares, especially on share price dips. The recent share purchases by management after the Business times article and CLSA report and before the release of its independent report and its upcoming 1QFY19F instils confidence (at least to me).

 

Risks

a) Analysts have mixed views

Based on Figure 1 below, it is evident that analysts have mixed views on Best World. CLSA maintains its sell report on Best World with an upwards revision in its target price from $1.29 to $1.75. It is concerned about Best World’s sales in China which may be unsustainable and may drop from FY2020F onwards. Its basis is that its online search on Best World’s Dr Secret products yields a lower online ranking than their peers. To this, Best World has elaborated on their digital marketing in China (click HERE) for more information where it emphasises that digital marketing is only one of several means to attract customers to purchase its products.

On the contrary, RHB maintains its buy call with an upwards revision in its target price from $2.13 to $2.95 after Best World’s 4QFY18 results.

Average analyst target is around $2.38, representing a 35% potential capital upside.

Figure 1: Compilation of analysts’ target prices

Source: Bloomberg 12 Apr 19

b) Chart is weak but oversold pressures build

Based on Chart 1 below, Best World’s chart seems to be on a short to medium term downtrend with short- and medium-term moving averages (“MA”) moving lower. For the long-term averages 200D exponential MA is flattening. Amid negatively placed DIs, ADX has started to rise and it last trades at 38.2. RSI last trades 27.1 on 12 Apr 2019. It is noteworthy that Best World typically rebounds when its RSI reach between 24 – 26.7. Indicators are weakening with RSI, MACD, MFI, OBV all trending lower. There is strong volume today and it is good to see whether the selling pressure will exhaust itself soon. On balance, chart looks weak but oversold pressures are building. A sustained close below its 200D SMA (currently around $1.96) with volume expansion is bearish.

Near term supports: $1.80 – 1.82 / 1.75 / 1.71 / 1.66

Near term resistances: $1.84 / 1.90 / 1.96 / 2.00 – 2.01 / 2.10 / 2.20

Chart 1: Seems to be on a short to medium downtrend; oversold for now

Source: InvestingNote (12 Apr 19)

c) Not extremely familiar with its business

As per what I have highlighted in my Sep 2018 article, I am not extremely familiar with Best World’s business, especially when it operates in various overseas markets. Furthermore, I have no direct access to management. Readers who wish to know more about Best World can click the link HERE for the analyst reports.

d) Regulation risk

Best World operates in several countries; thus, it is subjected to regulatory risks in those countries that it operates in.

e) Restrictions from online transactions by brokerage houses

Some brokerage houses such as CGS-CIMB Securities, OCBC Securities, Philip Securities etc. have online restrictions on Best World. This means clients who wish to trade Best World must contact their brokers to execute. For CGS-CIMB Securities, clients who wish to buy in excess of S$100,000 have to put in cash upfront. To a certain extent, such restrictions undoubtedly contribute to weak sentiment in Best World.

f) Sentiment remains shaky

It is noteworthy that Business times has published an article on Best World on 18 Feb 2019 where it raised some questions on Best World (Best World fell 16.6% on the day the article was published). Best World has answered the points raised by the Business times article via a detailed write-up. It has also appointed an independent reviewer (as mentioned above). However, sentiment in Best World continues to be shaky, possibly compounded by the recent sell report by CLSA.

g) Volatile stock price swings – Not for the faint hearted

Best World is an extremely volatile stock. 52 week high and low are $3.33 and $1.14 respectively. Thus, its volatility has to be taken into consideration for position sizing and may not be suitable for most people.

h) I usually avoid buying before the annual report is out

I usually avoid initiating long positions in non-blue chip stocks before their annual reports are published, as auditors may sometimes have queries after auditing the full year results. With the recent insider purchases and company buybacks, I (I may be wrong) am willing to take this calculated risk.

 

Conclusion

Best World seems interesting on a risk reward perspective, especially with the recent share price weakness. The independent reviewer report, its 1QFY19F and upcoming dividend are some of the things to watch out for. However, readers should note the aforementioned risks (such as volatile share price, shaky sentiment, weak chart etc.)

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

 

P.S: I am vested in Best World and have highlighted it to my clients yesterday early afternoon. Do note that as I am a full time remisier, I can change my trading plan and trade in and out to capitalize on the markets’ movements.

 

Disclaimer

Please refer to the disclaimer HERE

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