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Monday, 10 March 2008

When analysts are way off the mark

By CONRAD RAJ

WHILE most analysts provide invaluable advice to investors, there are some who are not only extremely sloppy in their work but do a disservice to the industry.

For example, take a recent report from CIMB on Hersing, the local franchise holder for property broker ERA and remittance agency Western Union.

In its report of Feb 27, CIMB downgraded the stock to 'underperform' and reduced its target price by more than half, from 79 cents a share to 36 cents. That day the stock closed at 52 cents apiece.

This was based on the weaker outlook for the property brokerage business and on 'investors' lower risk appetite and poor trading liquidity'. But the report also contained a couple of glaring errors, including a claim that Hersing had posted a pretax loss of $8.5 million on the remittance business and that it had declared a final dividend of only a cent.

Next day, Hersing shares fell.

On Feb 29, CIMB issued another report on the company saying: 'In a recent discussion, Hersing clarified with us a number of things.'

This time CIMB said that it had 'erroneously stated' that Hersing had lost money on its remittance business and that even after stripping out the sale of 49 per cent of Western Union Global Network to its US parent on Oct 10 last year, the company had turned in pretax profits of $2.02 million for the second half of 2007 and $3.04 million for the full year.

CIMB then went on to add: 'The business (remittance) remains healthy, and with the active participation of WU (Western Union), Hersing's management expects the business to thrive in FY08, given an influx of blue-collar workers in Singapore on the back of the current construction boom.'

It also noted that Hersing had proposed a special dividend of three cents a share which, together with the final and interim dividend of one cent respectively, took the total dividends for the year to five cents.

CIMB, however, continued to maintain its 'underperform' rating on 'unattractive valuations' but set a new target price of 40 cents a share, saying that the impact of a weaker real estate brokerage business should be alleviated by growth in Hersing's remittance and self-storage businesses.

There was not a single word of apology from CIMB despite the fact that Hersing's release to Masnet had contained all the information of WU's profitability and the special dividend.

What worries me more is that some investors could have dumped their holdings in Hersing on the basis of the earlier report. What recourse do they have?

For Hersing's founder and controlling shareholder Harry Chua, the price decline appears to have provided an opportunity to pick up shares on the cheap. Over the last few days, he bought about 3.36 million shares from the open market and transferred another five million shares from his deemed interest holdings through Hong Leong Finance to his direct stake in Hersing.

Sometimes you also wonder how analysts set their price targets for a particular stock. Rarely do you see a price range. So precise are their forecasts that they are often a cause of astonishment to me and my colleagues.

On Jan 14, Kim Eng wrote a piece titled Trash to Treasure on Advance SCT's business of recycling scrap copper to a reusable state. The analyst in question described the stock as 'Immaculate collection at a bargain!' on the basis that there was growing demand for the metal. It recommended a 'buy' with a target price of $1.97 a share when it was trading at 90 cents apiece.

After Advance issued its results for FY07, Kim Eng - noting that they were 'highly disappointing', with net earnings falling 47 per cent to $4.2 million compared with its earlier forecast of $20.9 million - set a new price target of 60 cents a share when they were trading on the market at around 41 cents apiece.

It also cut its forecasts for FY08 and FY09 by 55-60 per cent due to higher financing and conversion costs of copper and reduced output. Maintaining the 'buy' call, Kim Eng now sees the stock as an 'opportunity to buy on weakness'.

So what happens to those who bought shares at prices higher than 60 cents, based on its earlier recommendation?

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