Business Times Malaysia

 

 

May 7 2007

APART from the bullish catalyst from the rally in the US Dow Jones Industrial Average and regional stock markets to new records, the generous general offer for blue-chip heavyweight Maxis Communications’ outstanding shares, at a 20 per cent premium to the stock’s pre-suspension price of RM13 a share by owner Ananda Krishnan (AK) provided the added fuel required to sustain the bullish breakout on Bursa Malaysia last week. In fact, news of this privatisation proposal lifted share prices of top-tier telcos, which contributed 43.4 per cent to the benchmark index’s surge last week.

The privatisation news of Maxis came as a surprise, hot on the heels of a similar announcement by Permodalan Nasional Berhad’s proposal to take Island & Peninsular and Petaling Garden private, and opened the floodgates to more speculation on which company will be taken private next.

The speculation is not confined to companies under AK’s stable alone (notably Astro and Tanjong) but includes companies like YTL Power, IOI Properties, Magnum, Nestle and Amway.

Short-term impact from privatisation is positive for the local bourse as most of the time the minority shareholders get a golden handshake in the form of a good premium over the last traded price and this money has to be invested in other counters.

Among the abovementioned potential privatisation candidates, Astro and YTL Power still provide some good capital appreciation based on their target price of RM6.10 and RM2.74 respectively. Astro has just announced a revision in subscription packages which will enhance the average revenue per user by 7.7 per cent and the net profit is expected to grow by 60.6 per cent in fiscal year 2008 (FY08) after contracting last year.

YTL Power has been an underperformer in the recent rally despite being the top M&A pick in the sector. It is currently bidding for several power plant projects in Sabah, South Africa and India, and has a huge cash reserve of RM6.2 billion. Earnings growth in FY08 will also stem from the 7 per cent tariff hike at Wessex Water. Moreover, with Malakoff shareholders expected to receive the cheques for the RM9.3 billion capital repayment on May 30 2007, interest may pick up in other power players and index-linked counters as well. Tenaga is on the top most list of undervalued power players based on its target price of RM15.50.

Meanwhile, the price trends in palm oil futures are indicating a prolonged bullish period for the sector with some industry experts predicting the crude palm oil price to break pass RM2,500 a tonne this year. This is positive for plantation companies, which have seen some softening in share prices lately on worries of potential imposition of a windfall tax or a cooking oil price stabilisation tax by the Government to subsidise the escalating cost of producing palm-oil based cooking oil. The impact of these taxes is negligible when CPO prices are on the rise and investors should view this as a good opportunity to pick up some laggards in the sector like United Malacca.

As for the broader market, the above factors and the underlying bullish tone should render a positive outlook for KLCI this week. The immediate risk would be the performance of the US markets after a long winning streak and China, especially after the holidays.

Technical outlook

Despite the three-day holiday shortened week, the benchmark Kuala Lumpur Composite Index (KLCI) surged 38.63 points, or 2.9 percent higher to close at a new record high of 1,363.40, but average daily traded volume moderated to 1.45 billion shares, compared to the 1.56 billion shares average in the previous week.

The KLCI eased to an intra-day low of 1,313.66 on Monday morning, in line with softer regional markets after China’s central bank raised the reserve requirement of commercial banks to prevent an overheating economy. However, the benchmark exploded upwards after returning from a two-day holiday break, boosted by record breaking rallies on the Dow due to strong corporate earnings and M&As, lifting the blue-chip index for a bullish breakout to close at a new record high by Friday.

However, lower liners were relatively benign as retailers stayed mostly sidelined and cautious given the extended holiday break, while blue chips dominated the gainers list. The Second Board Index (SBI) was up 1.12 points, or 1.1 per cent week-on-week to close at 104.14, but the Mesdaq Composite Index (MCI) eased 0.46 point, or 0.3 per cent to settle last Friday at 140.61.

The daily slow stochastics indicator for the KLCI extended higher towards the initial overbought region following a buy signal on the previous week, but the weekly indicator sustained its bullish ascent into the overbought zone. The 14-day Relative Strength Index (RSI) indicator also extended higher to neutralise an earlier bearish divergence signal, while the 14-week RSI continued rising into the overbought zone.

Despite the overbought readings on momentum indicators, the daily Moving Average Convergence Divergence (MACD) trend indicator has turned bullish with a fresh buy signal triggered following last week’s strong breakout rally, which will negate a bearish divergence signal against the daily KLCI price chart. The daily parabolic Stop-And-Reverse (SAR) indicator has sparked a buy signal, reinforcing the buy signal on the weekly parabolic SAR which should promote further upside bias.

Conclusion

As correctly anticipated last week, a bullish breakout did emerge to fuel upside for a rally extension to new record highs on the KLCI. For the coming week, daily trading volumes should improve as more investors and retailers return from their holidays to participate in the local market’s bullish run, hopefully to the region of above the two-billion-share mark. The anticipation that more listed companies may be taken private by major shareholders should drive a wave of buying frenzy on undervalued companies in the immediate term.

With the recent record high of 1,334 (IS) broken last week, this level will provide the critical immediate resistance-turn-support level on any near-term profit-taking dips. A stronger support platform is available at the psychological 1,300 (S1) level, while 1,285 (SL), the previous significant peak of February 26, will act as the stop-loss level in the very unlikely event of a sharp correction. On the upside, immediate resistance is revised higher to 1,380 (IR), with 1,400 (R1) as the next psychological hurdle. Going forward, higher upside targets of 1,440 (R2) and 1,480 (R3) are likely to be achieved in coming months.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.

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