Thursday, July 29, 2010

Beat The Estimates Game: K&N Buy Recommendation On HPI Resources

Do you follow the reports on Bursa's CBRS?

Link to Bursa's CBRS Research reports

I was reading through the report from K&N Kenanga on HPI Resources and since I am blogging on it, (LOL! ), I guess you can guess this posting probably isn't anything good.


On 7th August 2009: K&N had a report oneBursa: Above expectations (clickable line to CBRS pdf file) K&N had a BUY recommendation.

  • BUY RM1.30 Target Price: RM1.86
    Forecast upgraded with FY10 profit projection increased by 29.7% as we factor in a higher margins taking into account the better than expected 4Q09 numbers. We also take the opportunity to introduce our FY11 projection. Recommendation is also upgraded to a BUY from a HOLD with new target price of RM1.86 based on a 30% discount to its NTA of RM2.65.

Here's HPI earnings report then: Quarterly rpt on consolidated results for the financial period ended 31/5/2009

As you can see, based on a y-y comparison, HPI earnings jumped from 11 million to 18.8 million.

And K&N earnings 'estimates' for fy 2010 was 18.9 (no growth? :P) and fy 2011 was 19.1 million. (see page 2 of the pdf file: K&N had a report oneBursa: Above expectations )

On 28th Nov 2009, HPI reported its earnings. Here's the simple compiled table.

On 3rd Novemeber 2009: K&N's resarch report for HPI was 'Above Expectations' (CBRS pdf file link) HPI had a bonus issue then and K&N recommendation was still a BUY.

  • RM1.61 (cum bonus) RM1.29 (ex- bonus) Target Price: RM1.77 (ex- bonus)
    Forecast upgrade as we model in higher margins taking into account the better economic conditions ahead. While we maintain our revenue projections for FY2010 and FY2011, our net profit projection for FY10 is raised by 22.2% to RM23.1m and FY11 by 24.3% to RM23.8m. BUY maintained with a higher target price of RM 1.77 (ex-bonus issue) or RM2.21 on a cum basis based on 4x CY2010F. The low multiple is due to the stock’s small cap status and potential cyclical earnings.

Ok, HPI's Q1 earnings was 6.341 million and on an annualised basis, HPI's earnings could easily reach 25 million. So KN's upgrade in net profit projection was expected.

20th Jan 2010, HPI reported its Q2 earnings.

Ytd net profit already 12.467 million. Nearly half of K&N's net profit projection of 23.1 million.

K&N gave it a BUY recommendation and called it 'In Line with expectations. (CBRS pdf file link. )

  • BUY RM1.47 Target Price: RM2.21
    Forecast is maintained but target price raised to RM2.21 from RM1.77 previously, ascribing a 5x CY2010F as opposed to 4x earlier. The recent multiple expansion experienced by our driven by an improving economic outlook prompts us to use a higher multiple to value the stock. BUY maintained.

Earnings forecast for fy 2010 remained at 23.1 million.

5th April 2010, HPI reported its Q3 earnings.

Ooops... now that was a 'poor' looking quarter, yes? Now on an annualised basis, it would appear that HPI would fall a bit short of estimates, eh?

So what did K&N do and say?

K&N called it 'Disappointing' but gave HPI a HOLD recommendation. (CBRS pdf file link)

  • HOLD RM1.65 Target Price: RM1.60
    Forecast trimmed given heightening risk to profitability. While maintaining our topline forecast, margins are lowered as we factor in a tougher environment going forth. Re-pricing of its end products could lag the commodity and currency cycles in the near term. Lowering our net forecast by 22% to RM18m for FY10 and another 32% for FY11 to RM16.2m. Target price lowered to RM1.60 based on revised 5x CY10F. Recommendation also downgraded to HOLD from BUY.


Net earnings lowered back down to 18 million and most interestingly, K&N lowered the fy 2011 earnings forecast to just 16.2 million.

A couple days ago, HPI announced its earnings.

Net earnings came in at 7.244 million. That was decent, yes?

Anyway, this meant that HPI easnings for fy 2010 was 22.843 million.

But K&N had already lowered its earnings forecast to just 18 million. LOL!

And on today's report on eBursa, K&N gave HPI back a BUY call rating! (CBRS pdf file link)

( ps: HPI shares HAD ALREADY rallied ( rocketed to the orbit is a better word :P ) to some 1.84! You need to check out the chart at the bottom of the posting :P)

The first paragraph... :P

  • FY10 results were above our expectations. While 12M10 revenue of RM372.6m was in line, net profit of RM22.8m was trending 27% higher due to a strong uptick in the last quarter on the back of stronger margins. Gross margins improved by 42 basis points to 17.8% in 4Q10 from a disappointing 3Q10 after an effective cost pass-through underpinned by higher paper prices in general.

LOL! Of course it was above their expectations since the expected net earnings was revised and reduced so much lower! From 23.1 million, the earnings estimates was just lowered to 16.2 million.

Yeah... as they say... HPI beat the earnings estimates.. results were above expectations!


  • BUY RM1.84 Target Price: RM2.89
    Forecast upgrade with FY11F net profit raised by 58% mainly on the back of higher margins as sumed. We also introduce our FY12F with revenue of RM447m and net profit of RM28.8m. More engaging management with the investment community, improved transparency couple with the undemanding valuations should be positive re -rating catalysts. Dividend of 5sen (tax exempt) declared which is a pleasant surprise, yielding 2.7%. Risks remained with the volatile paper prices which accounts for 70% of its cost of production which could impact profitability depending on timing and effectiveness of any cost pass through. Upgrading call to BUY with a new target price o RM2.89 on 6x FY11F.

And K&N raised the fy 2011 estimates by 58%!!!!!


So fy 2011 estimates... from a net earnings of just 16.2 million, K&N has now raised it to 25.7 million!

No wonder the buy recommendation now comes with a very chunky target price of rm 2.89!

And apparently this is how 'the beat the earnings estimates' is being played..... worldwide. :P

ps. I dunno if this share can or not. LOL!

ps. And I dunno if K&N owns any Sotong. :P


tklaw said...

Hi Moola. Agreed...I supposed K&N owns only a Sotong to predict the financial results.

This Sotong was solely good at looking profit or EPS...too extreme. They need another Sotong to dig hidden info in balance sheet before giving any recomendation.

Highlights of financial results comparing between FY 2010 and 2009.

- Profit up 4 million to 27 million or 17%
- Revenue increase 8% from 345 million to 373 million
- Inventory up 29% from 38 million to 49 million.
- Trade Receivable surge 30% to 88 million from 68 million.
- Borrowing increase from 97 million to 127 million or 30%.

Is it the management has done a good job??? I doubt....