Friday, April 15, 2011

What Do You Look For In A Research Report?

Here's a simple question, what do you look for in a research report?

Do you hear folks moaning that the research report is written with a mission? And do you here folks moaning that they were duped into buy a stock just because of the seducing research report? But this is extremely subjective. The winners, those who made money in the stock, would argue that if not for the report, the stock would not have moved and if the stock did not move, they would not have made money.

That's really so true and it could not been highlighted any better than the recent example. KN published the report when the stock was 63 sen on July 2010. And it gave it a target of 1.65.

Buyers of stock around that price or even less than 70 sen, were laughing all the way to the bank. There is simply NO chance at all that they would come out and say that research reports are lousy!! Less than one month after the report the stock reached a high of 1.20+. It was marvelous. Sweetness! Heaven sent!

On the other hand, stock chasers at the price above 1.10. Are they happy? How could they be? P&O fell to as low as 0.71 sen last month! ( Yeah the stock has recovered a bit and it last traded at 0.82 sen. They would not have been a happy camper cos they claimed that KN said the target price was 1.65! At 1.10 plus, they argued that there is still a chance that they could be rewarded. Curses!


But incredibly, as you would notice, what's most important to the market and its players is HOW THE STOCK performed.

Forget the reasoning. It doesn't matter. Yes, dump the reasoning!

What matters MOST is how the stock reacts to the research report!!!!

Seriously? That's the truth.


Isn't that the sad truth?

Nobody cares what the pen wrote. All everyone cares about is how powderful the pen is!!

And all that matters for is how it had performed.

It did not matter a bit that earnings performance was miles behind what the research report had insinuated. Yes, it did not matter that the company earned much less.

And it certainly did not matter a single bit that the suggested possible takeover did NOT happen. (Some say, it could still happen! Me? LOL! I have no idea!)

Yes, sadly it did not matter one single bit.

What's most important is how the stock moved!

So are research reports useless? Is this posting even useless? LOLOLOL!

Ok, let's make the big ass out of you and me, and ASS-U-ME that it's not so.

So what do you look for? Let me share some flawed thinking of mine.

And oh, I do need to remind that I possess no power and certainly no magic powder. I own NO Voodoo Stick that can be used to move a stock up or down. Please get over it. If the stock moves up, don't blame. And if the stock thanks, err... Dec 25th is a long way from today.

Ok, babe?


Date of the reports are so important dude and dudettes!

Reasoning is simple.

Time changes. What is good back then might not be good today. And needless to say vice versa!

So don't ever let an outdated report make a fool out of you and your money!


Let me tell an old story told a couple of times before.

it was in 2006 or is it 2005, a forum member emailed me and asked me about a stock pick. It appeared written in a 'local pro' manner. But I recognised the style of the writing. It belonged to OSK Research!

And apparently there was this is so-called sifoo who recommended my friend to buy the stock.

And one of classical reason used to buy the stock was that the stock was trading at a low PE multiple.

But I knew INSTANTLY something was amiss for that said company was NOT doing well.

I knew that for a fact cos of the earnings reported at Bursa website.

But here it was, this so-called sifoo telling people the stock was BUY based on his LOW PE method.

Which was a complete flawed set of reasoning because the stock was doing badly financially.

And then... I noted....the DATE of the research report from OSK.


Incredible! That so-called LOW PE stock master, used an OUTDATED report to justify his LOW PE claim.

And naturally the stock did poorly.

Ya... low PE.

So do note the date of the report. Relying on target price set on outdated reports could really, really make your money outdated too!


Are the reports consistent on the stock? Perhaps a past example would explain it clearly why this is important. 22nd July 2009, I posted Featured Report: OSK Research On Axiata Look at the end of the posting. It tracks the recent Recommendation history and price target for the stock.

  • 24th Dec 2008. Axiata 3.58. Maintain Neutral at 4.20.

  • 08th Jan 2009. Axiata 3.60. Maintain Neutral at 4.20.

  • 06th Feb 2009. Axiata 3.18. Maintain Neutral at 4.20.

  • 19th Feb 2009. Axiata 3.36. Maintain Neutral at 4.20.

  • 28th Feb 2009. Axiata 3.06. Maintain Neutral. TP lowered to 3.00.

  • 25th Mar 2009. Axiata 2.61. Take profit. Downgrade. TP lowered to 2.50.

  • 30th Mar 2009. Axiata 2.38. Upgrade to Neutral. TP at 2.50.

  • 28th Apr 2009. Axiata 2.10. Take profit. Downgrade. TP lowered to 1.73.

  • 20th May 2009. Axiata 2.32. Upgrade to trading buy! TP at 2.70.

  • 18th Jun 2009. Axiata 2.28. Trading buy maintained. TP at 2.70.

  • 08th Jul 2009. Axiata 2.42. Trading buy maintained. TP at 2.70.

  • 21st Jul 2009. Axiata 2.98. BUY upgrade. TP at 3.40.

On Dec 2009, OSK reckoned that Axiata was worth 4.20. It had a neutral call on it. Come Feb 2009, Axiata was worth only 3.00! Yeah, it's call is neutral! (LOLOLOL!). Then in April, Axiata is even valued worst. The call was TAKE PROFIT! ( YEAH... this is where everyone should scream their lungs out and shout O-M-G !!! What profit was there to take? It was just in Dec OSK said the stock was a neutral with a fair value of 4.20. It's now April and its a bloody TAKE PROFIT with a fair value of 1.73? Look the screenshots. This was not made up!) And a month later, Axiata value suddenly jumped from 1.73 to 2.70!!!! ( O-M-G!!!! Exactly!)

So how was that?

Unreal yes?

So I think it's good that we take a look at past recommendation history and price target for the stock. It's good to understand if the research house has been flip flopping heir recommendation on the stock. OSK example on Axiata is something we seriously want to avoid. That's junk. How could a stock value swing up and down in a 7 month period? Totally unreal!

But... that's all the past.

Can we have a real, present day example?

Fair. Let's look at RHB take on IJM Land. The report was out YESTERDAY. First, a habit of mine is, I like to take a simple look at the current one year chart of the stock. Just a habit.

The RHB report.

The next two shows the previous two reports on IJM Land.

How? What do you see?

The recommendation is still the same. It's still an OUTPERFORM but the outperform target price is now lowered to 3.28.

Sadly, RHB did not mention this (Target Price lowered) at all. And in fact what and how they said it was rather misleading (if you ask for my flawed opinion)

  • Reiterate Outperform. IJMLD is also our top pick besides Mah Sing. We maintain our Outperform call with a higher FV of RM3.28 (from RM3.18), at its RNAV/share, accounting for the higher GDV estimate for the Canal City land as well as a larger share base.

The screenshot...

Here's what RHB said on Feb 2011.

Notice the difference? The 3.50 is based on 15% 10% PREMIUM to RNAV.

And the interesting thing for me in RHB's report on IJM Land yesterday was the following.

  • Imminent conversion of RCULS – what’s the rationale? From our recent conversation with the management, we understand that the parent company IJM Corp will be converting its RM400m 10-year 3% RCULS soon. To recall, the RCULS arises from the reverse take-over (RTO) of RB Land in 2007, as part of the consideration. Post conversion, IJM Corp will have an additional 230m shares in IJMLD, raising its shareholding to 68-69%, from the current 61.6%. We are uncertain on the rationale of the conversion as this could be read positively or negatively. On a positive note, there could be some corporate exercise plan in the pipeline, such as privatisation of IJMLD given higher shareholding of the parent after conversion. On the other hand, the conversion of RCULS would result in dilution in earnings and shareholding of other shareholders. Barring any corporate exercise plan, we will not discount the possibility that IJM Corp may place out some shares subsequently so that its free float is kept at a reasonable level. Note that, our earnings forecasts for FY12-13 are adjusted for the larger share base as well as the interest savings on coupon payment (for the RCULS).

Ooo... !!! IJM Land shares will see another increase of 230 million shares and these shares will be granted listing on Monday, 18th April 2011.

  • The longer-term picture. If it is not because of potential corporate exercise, we think investors may not like the parent’s upcoming move to convert the RCULS, as ROE, earnings and RNAV will be diluted over the short term. Having said that, we think the long-term positive earnings contribution from two upcoming big projects – Canal City and Sebana Cove, will be able to offset the impact when they come onstream from 2H2012. In fact, the higher GDV estimate from the Canal City is big enough to offset the impact of the larger share base arising from the RCULS conversion (shareholders’ equity is also adjusted) on RNAV. Our fair value, which is based on RNAV/share, is raised to RM3.28 (from RM3.18). Maintain Outperform.

Yes, they no longer use a 10% premium and in fact, the RNAV is incredibly raised from 3.18 to 3.28!!

Here's the screenshot.

Now the interesting thing for me is the ENLARGED share base.

Come Monday, including all the possible conversions of IJM Land warrants, the conversion of RCUL into shares will see IJM Land to have a share base of 1,560 million shares. In the earlier table from RHB's report on Feb 2011, IJM Land 'only' have 1,330 million shares.

The 'possible' conversion of warrants.

For the 'investors' who reckons that 'per share' is an important issue, then they should be aware of any possible dilution of 'per share' values. Simplicity? More means less share of the cake!

If one clicks on Bursa website and take a peep on IJM historical announcements, this is what they will see.

Now that's a fair bit of conversions, yes?

So if one is an investor, surely one wants to account for all these conversion of warrants.

Using the stock info from my stock quotes, this is the info on IJM Land.

And this is the info on IJM Land warrants.

Yes, present day, IJM Land 'only' have 1124 million shares and at present day, there are 205.8 million warrants. And warrants are constantly being converted to ordinary shares.

And on Monday, another 229 million 'new' shares will be listed.

That's a lot of conversion eh?

Take RHB's estimate earnings for IJM Land. It excludes the 59 million, one time disposal gain. For 2011, RHB estimate that IJM Land should earn around 140 million. Using the new possible share base of 1560 million, IJM Land eps based on an earnings estimate of 140 million is only 9 sen eps. See the huge dilution in eps?


Obviously, I could go on and on. I could be asking if the RNAV calculation is even fair etc etc but for this example, the additional listing of 229 million stocks is a massive issue. Dilution of per share value would be significant.


snowball said...

Haha..if you have a sticky post place like bullbear blog, this one should be your sticky post. It teach people how to read a research report and sadly most of us do not know how to read it.

Most sell-side research takes half-steps. When it is a hold, you should already consider selling cause they can't just go from buy---> sell immediately. Look at the disclosure too, sometimes, the stock they cover is own by the firm, not necessary conflict of interest as it is different division, but, we will never know.

Lastly, never trust those report fully, always use your brain to think. If not, why god give you a brain. I think the easiest part to ignore is the valuation, just look at what management tell them and value the stock ourself. But, sadly, most people take the valuation as the most important part. Sell-side research is good because it tells us things that normal investor has no access to, not their valuation.

Moolah said...

Making a sticky is not difficult.

All I need to do is highlight the link to the posting I want to highlight on the side bar.


TK said...

Thanks for sharing.

PS. I couldn't stop laughing at the "TAKE PROFIT" call by OSK on Axiata. LOL