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.
