Investing the Smarty Way
Is Heng Yuan Q4 17 within expectation?
According to the weak form efficient market hypothesis (EMH), current market price of a security incorporates all information contained in the price history and no extra profits can be made after allowing for transaction costs. It concludes technical analysis (TA) cannot yield excess returns. TA is a method of forecasting future stock market prices based solely on historical prices and volumes. TA includes charting (recognizing patterns such as support/resistance, Head and Shoulders, Cup and Handle) and technical indicators (such as MACD crossing, RSI).
The semi-strong form of EMH assumes that current market price adjusts rapidly to the release of all new public information. Therefore, it concludes that fundamental analysis (FA) cannot yield excess returns. FA relates to the analysis of balance sheet, income statement, cash flow statement to predict future performance.
The strong-form EMH assumes that current market price fully reflects all public and private information. It concludes that market, non-market and inside information has all been incorporated into the current market price. It assumes perfect market and concludes that it is impossible to earn excess returns by doing any fundamental or technical analysis.
In the context of Bursa, I believe it could be somewhere between weak-form and semi-strong form EMH, or not even weak-form efficient. It is not uncommon to hear that bursa players can make small profits by using technical analysis (can be as simple as momentum contra play- when a share shoots up, you quickly buy and sell off in a short time). There are also many FA gurus charging few thousands for their services and analysis. Dynaquest by Neoh Soon Kean is one of those offering FA services and many investors swear that FA services such as this have good track records of giving good returns.
However I wish to point out that even though Bursa is nowhere near strong-form EMH, we see that many counters would have already stopped uptrend before so-so QR is released, or would have dropped before a bad QR is released. In other words, the current share price of Bursa counters have already incorporated insider information. Well it is not hard for certain fund-managers to pay someone working on the accounts some fees to get first-hand info.
Many had been wondering why Heng Yuan retraced from a high of 19.20 when it was uptrend after such good Q3 17 release. Some blamed the warrant issuers for playing tricks. I think the issuers did push down the price to certain degree. Some blamed that insiders were selling and upcoming Q4 had to be so-so. Now the latter seems to be true.
So if you ask my opinion, what is the right market price for Heng Yuan?
Q4 17 Revenue increased to 3.1b, a record level compared to other Qs in 2017 and 2016. Q4 net profit was reduced 64m due to taxation compared to no taxation in Q3. These two come in within our expectation. Q4 Operating expenses increased 34m from Q3 due to some “regulatory-driven projects”. So I must say the Q4 financials are rather impressive. Comparing EPS alone might give investors the impression that QoQ has decreased when the business is improving.
HY Annual EPS = 61.18 + 120.59 + 28.14 + 93.16 = 303.07
Let's be realistic that HengYuan is a refinery business in a developing country so I will aim for a mere PE 7. Therefore my target price is 7 x RM 3.037 = RM 21.26
Ok some will argue that the 120.59 was due to unplanned outages at Gulf of Mexico and no taxation.
Now I will just assume a simple 60 EPS per quarter, taking a PE 7 our target price is 7 x 4 x 0.60 = RM 16.80. I think this TP of RM16.80 is extremely fair, given there are few factors reducing the EPS this quarter.
What about the RM 0.02 dividend?
This is not very attractive. However, I believe that the management gives quarterly dividend to attract funds to hold HY shares long-term.
Therefore taking 4 x 0.02/16.80, ~0.5% dividend yield. This is a very good start by the Chinamen to show that they can also practise dividend policy to attract big fund players.
What will happen to HY share price ?
As everyone predicted, it will likely gap down at opening. Major reason is that many retail players who don't play like funds will run, laughing at the 2c dividend. Moreover many articles surfaced lately, presenting their longwinded theories on how crack spread will boost earnings to new heights. These articles indirectly created illusions of high EPS expectations for retailers and now they are disappointed. The price drop from RM19.20 told a different story, that is big funds with limited private info were already selling down HY. I say limited because normally insiders won’t be able to leak the exact figure but they know it would be so-so. Therefore I think the current HY market price has already incorporated Q417 results and whoever sold down from 19.20 could have expected much worse.
To conclude, HY EPS is within major funds expectation. The price will likely gap down slightly at opening (the sellers being disappointed retailers expecting 150 EPS and goreng funds who bought in for short-term play without doing any studies. I bet that many don’t realise there was no tax in Q3), and slowly rise to RM16 - 22 range as long-term fund players and retail players who do their studies will join the game.
P.S. the ~ RM 20 TP that I give is extremely fair and has taken into account the potential shutdown. If I shout for a Pe10 now (rm30) you know that I am not telling the truth. If you simply compare counters like myeg (Pe 40+, dividend yield 0.6%) then you know funds like counters with dividends.
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Discussions
1 person likes this. Showing 25 of 25 comments
No need to talk 2017 la.. px oredi peak.. talk about 2018''' can maintain 2017 superb profit ka
2018-02-28 07:29
talk is easy la, after result out all talk 3 talk 4 like expert. before that all said good this good that. pe low la...bullshiy
2018-02-28 07:34
Reasonable analysis. Believe the management has incorporated extra staff benefits in view of the good results hence the higher operating cost this quarter.
60 sen a quarter is more sustainable. The dividend suggests HY's commitment to institutional funds in term of return.
2018-02-28 08:12
Agreed. A panic sell from retailer and the big fish is collecting... Afternoon might be going up
2018-02-28 13:28
below 10, start to buy some.
below 8, start to accumulate.
below 6, top up even more.
below 4, sell all other shares and all in.
below 2, sell everything and all in.
should be no below 0, i guess.
2018-02-28 20:52
You don't apply the strength of the EMH to a market i.e Bursa without taking into account the timeframe. As an example, during extreme end of greed and fear, where homogeneity of the market breaks down, EMH obviously is extremely weak, but during normal period, the market on aggregate is likely to be semi to fully efficient (ignoring the obvious case where collectively doesn't always apply to individual stock)
2018-03-01 08:36
Back of envelope calculation of PE of Hengyuan
FY 2017
Normalised earnings
PBT 973 million
Tax @24% 233.52 m
PAT 739.5m
Capex 800m
Owner's earnings
PAT 739.5m
D&A 189.4m
______________
CFO 928.9m
Capex 800m
--------------
FCF 128.9m
At price of 13.00
No of shares 300 m
Market cap = 13 x 300 = 3,900 million
P/E = 3,900 / 739.5 = 5.27
FCF/Market cap = FCF yield = 3.3%
Risk free interest rate is about 3.5% to 4.0%.
[Therefore, Hengyuan's low PE does not mean it is undervalued. You get better return from your FD risk free interest rate than from investing into Hengyuan.]
MOEWOVER, 2017 was an exceptional year for Hengyuan. Going forward, its earnings are not going to be those of 2017, which was unsustainable. I estimate its normalised earnings to be about 350 million per year. However, due to its high capex, its FCF will be even lower.
2018-03-01 09:55
A broad view is that crack spread will be depressed because oil prices have stablised. With depressed crack spread, its earnings will be mediocre from here on.
2018-03-01 11:50
good article except
....sure high 2H 2017 earnings repeatable?
don't you know high earnings because no depreciation?
what about business sense and outlook years ahead?
FYI , this is untested management iro of minority rights issues and 2 sen dividend lol
2018-03-01 17:08
hi, if within expectations there is no sell down from 15 to 12 lar.
pe 4 is not low, if share price now 6 with eps 300 and pe2, that is undervalue
but insiders know already thats why they push above 10 to make it 4 !
2018-03-03 09:43
Wil dead cat rebound but it wil drop back cos will miss expectation again yoy in may 2018
2018-03-03 10:19
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Cakap,saje senang... can,hy beat q1 of 2017? ,I think it is,an uphill task
2018-02-27 23:28