KN Downgrades P&O To A Hold!!

They said the stock was cheap. It was trading only at 3x earnings only.

They said the stock had potential because 'the owner was contemplating a divestment in P&O in a deal that could reap proceeds that were well above P&O’s implied stock market valuations.'

And so with all these 'right' ingredients, the stock flew up, up and away. ( Chart belows shows P&O when the posting, Regarding P&O: The Stock That Flew Into Orbit, was made on 31st July 2010)


The local media added more fuel by publishing the following article. Prudential UK eyes P&O takeover

Since then... the Prudential deal was discontinued without much explanation. ( Here's P&O announcement: Proposed divestment of an equity interest in Pacific & Orient Insurance Co. Bhd. )

And the cheapness in earnings?

KN blasted out loud that P&O could earn some 32.87 million for fy 2010, when the company was sitting on half year losses of 1.4 million. However, it did not based P&O target price based on its earnings estimate of 32.87 million but it based it on fy 2011's earnings estimates of 43.47 million!!!! And KN based the 3x earnings cheapness on that 43.47 million! ( See Regarding P&O: The Stock That Flew Into Orbit , And So P&O Earnings Are Said To Be Inline With Expectations and For which fiscal year did P&O earned more than 30 million? )

P&O reported its Q4 earnings last week. Its 2010 earnings came in at some 21 million.

KN's estimate again? 32.87 million for fy 2010 and 43.47 million for fy 2011.

So naturally, the earnings was way, way below estimates.

Meanwhile the stock....



Ahem...

How?

And not forgetting in the middle of all this.... a 10% private placement was done...

Some 'interesting' comments from KN from its reported dated 1st Dec 2010.

• Disappointing quarter with full year net profit of RM21.3m (65% of our RM32.9m estimates) due to a huge set back from unexpectedly high effective tax rate of 50% thus dragging group’s performance. During the quarter, the group took a RM8.7m reversal of it’s deferred tax assets that saw DTA down to RM5.8m from 3QFY10 of RM14.5m and hence contributed to higher than expected tax expenses. However, pretax profit of RM42.3m was inline with our forecast of RM43.8m.

Ahem... 65% of our RM32.9 estimates...

• We are taking conservative stance after a dismal FY10. FY11F is reduced 21% to RM34.6m and 28% for FY12 PAT of RM37.7m as we reduce our premium sales assumption to 6-8% from 15% previously.

Conservative stance? FY2011 is reduced 21% to rm34.6million??!!! LOL!

• Target price is reduced to RM0.84 (from RM1.15 previously) based on 6x FY11 while recommendation is also reduced to a HOLD from BUY previously. This values the group at 6x revised FY11 EPS of 14.06sen, which is at the low end of the 6-15x 2010/11 PER of Malaysian general insurers.

Target price is reduced to rm 0.84?!! LOL!

Actually, by itself, P&O performance for this year had been incredible. I have to say that. Take a look at the posting For which fiscal year did P&O earned more than 30 million? again.

P&O 2010's earnings of 21.3 million is the best ever performance from then since 2000.

But the way KN declared the cheapness in the stock was really something else.

For which fiscal year did P&O earned more than 30 million?

In the posting And So P&O Earnings Are Said To Be Inline With Expectations, I asked a very simple question.

• For which fiscal year did P&O earned more than 30 million?

Why was this question asked?

Let's roll back.

On 31st July 2010, I wrote Regarding P&O: The Stock That Flew Into Orbit and I highlighted P&O amazing buy call from Kenanga Research.

Remember, KN's buy call was based on FY11 earnings.

• 92% upside to base case valuation of RM 1.15. This values the group at an undemanding FY11 PER of 6x.

Yes we need to ask ourselves how muchie is that said earnings estimate. Answer: 43.47 million.

Why?

Because if the said earnings is too optimistic, then........ ? :P

So back to my question:

• For which fiscal year did P&O earned more than 30 million?

Here's my complied table (from Bursa website - pls feel free to verify data cos I could always make a mistake. :D )

Now I could have used data from 2000. That would have been a sufficient guide. And my answer for that question would have been P&O have never earned more than 30 million this decade. Yes, since 2000, P&O have never earned more than 30 million!

Yes.. past data does not guarantee that the future would be the same but.... some serious consideration have to be taken into account, which is P&O has not earned more than 30 million since 2000. And here is K&N, telling the investing public that P&O is cheap because it can earn some 43.47 million.

oO

!!!!!

Exactly!

And yes, to be fair, P&O did earn some 68.325 for its fy 1999. That was the only time P&O earned more than 30 million, as per the earnings report on Bursa website. That's one year in a span of 12 years that P&O earned more than 30 mil!

How?

And yes, I am aware that ..... sometimes... there are days when earnings and fundamentals just doesn't matter. :D

And yeah, some would quickly correct my flawed ways by saying... P&O rally won't be based on earnings.

It's all about the potential M&A.

Ah... yes... potential M&A's makes stocks very interesting.

Stocks won't be valued in the shambolic ketam way using low PE earnings valuations like when the owners turn priate and privatised their listed stocks. In fact most of the time, they used the 'premium over current traded price' as the valuation method.

No sir!

M&A are so very the special.

They are priced to whatever best possible valuation they could think off.

Hey... willing buyer, willing seller. :D

Hey look at the other ketam stock. They went into collaboration talks only. And the share price doubled! LOL! Love the market yo!


Past postings:

1. 31 July 2010: Regarding P&O: The Stock That Flew Into Orbit
2. 2 Aug 2010: P&O: And The Flying Stock Soars Even Higher!
3. 21 Aug 2010: And So P&O Reported Its Earnings
4. 25 Aug 2010: And So P&O Earnings Are Said To Be Inline With Expectations
   

And So P&O Earnings Are Said To Be Inline With Expectations

And so I said the following in the blog posting And So P&O Reported Its Earnings

• P&O announced its earnings last night. It said it made some 11.072 million. Earlier in the posting on P&O: Regarding P&O: The Stock That Flew Into Orbit, I noted that P&O had a half year losses of 1.417 million, which means P&O's total 3 quarters earnings for current fiscal year is 9.66 million.
  
  K&N estimates for current fiscal year is 32.87 million!
  
  LOL!
  
  Which means P&O have to double their earnings for the last quarter of this fiscal year to 23.2 million 'JUST' to be in-line with K&N's estimates!
  
  WakaWaka! Huhu!

And since K&N had been the champion for the stock, I guess it's only fair I highlight what they are saying.

• P&O’s 3QFY10 results were inline with our expectations. Overall sales were relatively strong and claims were modest.

Inline within their expectations? Their fy 2010 expectations was 32.87 million. P&O only did 11.072 million for 3 quarters.

Like this also they BOLDLY claim that P&O earnings were inline with their expectations??

LOL!

Good or what! :P

I then held my breath and continued.

K&N then claimed that P&O earnings were actually lower... because ... of the absence of the write back of allowance for diminution in value of earnings. LOL!

• 3QFY10 revenue of RM109.7m was up by +22% YoY vs. 3QFY09 of RM89.6m. YTD, the group has achieved total sales of RM360.1m or 25.6% YoY. We believe both increases were mainly attributable to higher gross premium recorded and continued capture market share in motorcycle segment. Lower net profit of RM11.1m (-56.9% Yoy) was mainly attributable to the absence of write back of allowance for diminution in value of investments in the current quarter.

And then K&N recognise that they are way behind its earning estimates for P&O.

• Despite 9M’s profit of RM9.7m at only 29.4% of our forecast, we understand that the annual net profit would only be known by final quarter after the actuary testing on IBNR reserve in 4Q. Based on our estimates and guidance, it is highly likely that the group will be able to exceed our FY10 net profit forecast of RM32.9m.

I do hope you and I read it correctly. :D

Despite 9m profit of 9.7m at only 29.4% of their forecast, K&N remains positive and they feel it is highly likely P&O will able to exceed their FY 2010 net profit forecast of 32.9 million.

And K&N's earnings valuation of P&O. (ah.. this is important... cos if the Prudential talks does not turn out... this is what you are left with.)

• We maintain our base case valuation of RM1.15. This values the group at an undemanding FY11 PER of 6x, which is at the low end of the 6-15x 2010/11 PER of Malaysian general insurers.

ROFLOL!

See this is where and how the 'beat the expectation' games is played.

As can be seen, K&N admits that P&O's CURRENT earnings is way behind its expectations. It's only 29.4% of its expectation.

29.4%.

And its expectation is already 32.9 million.

Which is rather high, yes?

But... but.... but.... K&N is NOT using this set of numbers!

YES!

K&N is not even using 32.9 million!

K&N's valuation is based on fy 2011 numbers!

And as pointed out in the posting Regarding P&O: The Stock That Flew Into Orbit, K&N's earnings estimate for P&O fy 2011 is ................................................ 43.47 million!!!!!!

oO

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

LOL!

Yup, as it is... P&O is only 29.4% of K&N's earnings estimate of 32.9 million.

And the fair value of P&O is 1.15. This is based on earnings valuations on the assumption that P&O can earning a whopping 43.47 million!!!

yes, my dearest, this is how the beat the earnings estimate game is played!

ps: Here's a question: For which fiscal year did P&O earned more than 30 million?

Past postings:

• Regarding P&O: The Stock That Flew Into Orbit
• And So P&O Reported Its Earnings

P&O: And The Flying Stock Soars Even Higher!

What a circus!

K&N writes on P&O, based on hugely questionable reasoning, as explained in the posting Regarding P&O: The Stock That Flew Into Orbit.

Stock flies to the orbit.

Star Business highlights what K&N writes and throws in a seduceable name, Prudential UK, but the name is based on 'market talk'. Yeah it is believed, so said Star Business.

And what does K&N do today?

They published another report based on Star Business' Prudential UK eyes P&O takeover

Absolutely brilliant.

And needless to say the stock soared.... up a whopping 22%!

Life is great! :D



And to spice things up further... P&O made the following announcement today..

• On 29 July 2010, Pacific & Orient Berhad had written to Bank Negara Malaysia to seek their approval to begin preliminary discussions for the potential divestment of an equity interest in Pacific & Orient Insurance Co. Bhd. to Prudential Holdings Limited.

Oh .... they wrote to Bank Negara on 29th July, eh?

And oh... what irony because when Star Business published the article on Saturday, Star Business specifically said "P&O declined to comment on the matter."

Regarding P&O: The Stock That Flew Into Orbit

Saw the following article on Star Business: Prudential UK eyes P&O takeover

Now before I read what the article was saying, I was aware that K&N had dona a stock analysis (initiated coverage) on the stock back on 22nd July 2010 and I was well aware that the stock literally flew into the orbit.

Yeah... you know and I know... if you are reading this right now... LOL!... you are rather LATE into the party.

Don't believe?

Think I am being nasty and so black hearted and I am attempting to stop you from seeking next week's fortunes in the stock market? Well take a look...

The stock was just 0.585 sen on 21 Jul 2010. The stock last traded at 0.925 on Friday. (ps: K&N initiated coverage on P&O when the stock was trading at 63 sen. Target price stated was 1.65!! :D)

And so after the stock is well into orbit, the local media is only promoting the stock now.

How?

Could it go much higher?

And how high?

:D

I then proceeded to read what the mighty pen from our local press has to write...

• PETALING JAYA: Prudential UK is believed to have submitted an application to Bank Negara to commence talks on the potential acquisition of local general insurance company, Pacific & Orient Bhd (P&O).
  
  However, the details of the potential merger and acquisition (M&A) exercise between the two parties were still unclear....

'Is believed'? LOL! Who is believing this? And yeah... details of the M&A is... STILL UNCLEAR!

LOL!

• This has added fuel to recent market talk that P&O had emerged on the radar of potential buyers.

Well? This Star 'financial' news article is sure adding the fuel! :D

• According to Kenanga Research, the owner was contemplating a divestment in P&O in a deal that could reap proceeds that were well above P&O’s implied stock market valuations.
  
  Chan Thye Seng, the managing director and chief executive officer of P&O, holds a 51.4% stake in the company.
  
  When contacted, P&O declined to comment on the matter.
  
  When contacted, a spokesperson from Prudential Malaysia said it did not comment on market speculation.

Ah.. the K&N article ( let's see that later ) ... but ... how ironic... here we have a stock that is flying off into the orbit... and the two parties speculated to be involved in a M&A is declining to comment on the..... market speculation.

LOL!

• “Having undergone a massive change in business direction over the last two years, P&O has engineered a major turnaround in profitability,” said Kenanga in a recent report.
  P&O returned to the black in the previous financial year ended Sept 30, 2009, with a net profit of RM14.9mil compared with a net loss of RM32.6mil the year before.
  
  But, for the first six months of the current financial year, P&O slipped back into the red with a net loss of RM1.4mil compared with a net loss of RM6.1mil in the previous corresponding period.

Ah... A turnaround stock... but ... but... but... it's conflicting... :P

Look at what K&N is saying... 2008 it was losing money.. 2009 it returned to the black.. BUT.. the first half of the year... P&O is losing money again.

How would you define it?

Me?

I see a possible turnaround.. but...with P&O losing money again the first half of the current fiscal year.. I reckon it would be best that I not used that word 'turnaround'... and I would certainly not boldly call it 'a “ major turnaround in profitability” like how K&N did.

• As at March 30, 2010, its net asset per share was RM1.34.
  P&O’s main focus is on two core areas – financial services and information technology (IT).

Huhu!

Net asset per share was rm 1.34 as at 30th March 2010?? LOL! K&N Target price is 1.65! More than the net asset per share! No wonder this stock is so 'powderful' the past couple of days. :D

(ps: buy on rumours? Sell on news? :P )

Time to dig out that K&N report... (ps: this is a 15 page report. The longer the better eh? :P )

• Extremely cheap valuations. P&O is trading at 3x FY11 PER and 0.55x P/BV. There could be upside to our profit forecasts as our investment assumptions of 2.5% Fixed Deposit yields are fairly prudent to account for its RM900m near cash holding.

Huhu!

rm900 million near cash holding??????

Where are all the 'value investors'?

Time to check out some announcements on Bursa website.. ( ahh.. recently.. a stock split Entitlement - Others )

Here's P&O quarterly earnings reported in May 2010: Quarterly rpt on consolidated results for the financial period ended 31/3/2010

Here's a screenshot of its balance sheet asset...

hmm.. maybe I cannot understand K&N's statement "There could be upside to our profit forecasts as our investment assumptions of 2.5% Fixed Deposit yields are fairly prudent to account for its RM900m near cash holding." since I cannot find where the 900 million...

Let's look at the extremely 'cheap' reasoning from K&N again.

• Extremely cheap valuations. P&O is trading at 3x FY11 PER and 0.55x P/BV

Now... let me say again... of course I believe that a company should be valued based on what it can earn in the future. Yes... future earnings are very important...

But... but.... this is where it gets tricky.. and this is where the investing public can be fed with the incredible sky high earnings estimates... which inadvertently does make a stock appear extremely cheap. :P

Here's K&N estimates...

You need to click on the image to see a clearer and bigger view. :D

Anyway.. from the table... KN said P&O is projected to earn some 32.87 million for this current fiscal year 2010.

Well.. remember the Star Business article earlier? K&N acknowledged that for the first half of the current fiscal year, P&O have a current net lost of 1.4 million.

Now let's look at P&O announcements on Bursa website.

1. May 2010: Quarterly rpt on consolidated results for the financial period ended 31/3/2010 - P&O made 3.247 million for the quarter. - Current half year losses were 1.417 million. (as stated by K&N)
2. Feb 2010: Quarterly rpt on consolidated results for the financial period ended 31/12/2009 - P&O stated it lost 21.352 million for the quarter!

Now this is where I am so lost ( Yeah.. what to do since I am not an accounting expert. :P ) and confused. Q1 in Feb 2010, P&O said it lost some 21.352 million. Q2 it said it made some 3.247 million. But.. it's half year total losses was only 1.417 million.

Me? I am so lost. :P

Anway... here's a couple more quarterly earnings from P&O.

1. Nov 2009: Quarterly rpt on consolidated results for the financial period ended 30/9/2009
2. Aug 2009: Quarterly rpt on consolidated results for the financial period ended 30/6/2009

Now using the current 2010 half year net loss of reference, K&N had estimated P&O earnings for fy 2010 to be 32.87 million.

Now I know, earnings projections and estimates, are incredibly difficult. More so for me, since I am not a Sotong. :P

But... an earnings estimates of 32.87 million when the company is sitting on half year losses of 1.4 million???

Surely that's a bit too optimistic, yes?

yeah... from K&N earnings estimate table.. we see K&N using a PAT (profit after tax) growth estimate of 120%!!!

a 120% growth estimate!

huhu!

Rather incredible eh? Considering the fact P&O made 14.9 million and current half year it is losing 1.4 million. But yet, K&N states it can achieve an earnings growth of 120%!!!

huhu!

But... KN did NOT say P&O is cheap based on 2010 figures!

Instead K&N states P&O is cheap based on 2011 figures!

And what is K&N earning estimates for P&O again? 43.47 million!!!!

huhu!

Wiki Wiki!

And as stated in the earnings estimate table... this is an PAT growth estimate of 32%!

How?

Yeah babe. K&N is saying P&O is cheap based on this 2011 earnings. Only trading at 3x PE multiple based on 2011 earnings!!!

I just love how they do it.

:D

K&N report continues...

• 92% upside to base case valuation of RM 1.15. This values the group at an undemanding FY11 PER of 6x, which is at the low end of the 6-15x 2010/11 PER of Malaysian general insurers.
• M&As valuation of RM 1.65 (translating to 4.2x). Although there is already substantial price upside to our base case valuation, the stock is worth even more on M&As basis. Our M&As values P&O’s in range of 1.5-2.0x FY11 P/B V, which is in comparison with first phase consolidation of Malaysian banking sector.

waa.... two type of valuations. Base case valuation of rm 1.15 and M&A valuation of rm 1.65!

Terror la!

:P

Then I reminded myself that K&N report is a 15 page report! oO

Do I want to go thru it all?

Nah....

so how?

Would P&O continue its fly up, up and away?

Seriously? I do not know.

----------------

ADDUM:

regarding the 900 million near cash holding... on page 10 of the report.

• Investment Gain. However, in view of the group’s potential earnings volatility, we have factored in some prudent investment yield assumptions in our forecasts.
  
  For example, the yield for the group’s investment portfolio could be higher than we have assumed of 2.4% which attached to only 6-months Fixed Deposit rates. Its RM900m near cash/ all cash position, may generate bigger profits if increase equity exposure in any market dips rather than the small profit that we are projecting. In addition, our projected rise 2.4% yield to its RM900m cash for FY11 could prove conservative, as it is slightly lower than market expectation.

Hmm... let me look at May's earnings again: Quarterly rpt on consolidated results for the financial period ended 31/3/2010

How?

Oh.. ps: P&O does do some money lending business too. :P

• Pursuant to paragraph 8.23(2)(e) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad, the Company wishes to announce the moneylending activities (as part of the ordinary course of business) of its wholly-owned subsidiary, P & O Capital Sdn Bhd for the second quarter ended 31 March 2010, as set out in the attachment.
  
  POB~POC (2Q 2010).doc