A temporary rebound - europe /klci/datasonic

by **Cals** Fri 28 Jun 2013, 11:45

A temporary rebound

Business & Markets 2013

Written by Lee Cheng Hooi

Friday, 28 June 2013 11:02

European Union (EU) finance chiefs struck an agreement on how to handle failing banks — a step they said would bolster investor confidence and help overcome the eurozone financial crisis. The ministers settled on guidelines for assigning losses to private creditors and regulating public assistance. They also spelled out when governments can step in and established a role for the European Stability Mechanism (ESM), the euro area’s €500 billion (RM2.08 trillion) firewall fund. Now that the ministers have reached an agreement, they can start talks with the European parliament on a final version of the bill. The Dow rose 149.83 points to 14,910.14 on Wednesday on some better economic data

In Malaysia, the FBM KLCI traded in a narrow sideward range of 32.28 points for the week with modestly high volumes of 1.32 billion to 1.67 billion done. The index closed at 1,751.57 yesterday, up 10.81 points from the previous day as blue chip stocks like BRITISH AMERICAN TOBACCO (M) [] Bhd, HONG LEONG BANK BHD [], HONG LEONG FINANCIAL GROUP BHD [], MALAYAN BANKING BHD [] and PETRONAS GAS BHD [] caused the index to rebound on some bargain hunting activities. Markets in the Asia-Pacific region also rebounded on nibbling activities after about one month’s worth of foreign fund selling activities.

The KLCI’s recent key swings were 1,590.67 (low), 1,699.68 (high), 1,597 (low), 1,664.39 (high), 1,613.94 (low) and 1,826.22 (high). The index surged to a fresh post-GE13 all-time high of 1,826.22 on May 6. From the closing of 1,694.77 on May 3, there now exists two obvious gap-up areas of 1,712.03 and 1,718.44 on the chart. The break below the critical support of 1,764.97 (on June 13) opened up possibilities for the downward gap-filling exercise. However, the price-gap was not entirely filled with the decline to the low of 1,723.74 (June 25).

Despite the higher volumes that were churned from May 6 onwards, there will be a period of price correction to the gap-up support areas mentioned above in the next few weeks. As such, the index’s key support levels are seen at 1,712, 1,723 and 1,751, whilst the resistance at 1,754 and 1,793 as well as the all-time high of 1,826 will offer heavy selling activities.

The current rebound rally from the 801.27 low (October 2008) to the 1,826.22 all-time high represents an extended Elliott Wave “Flat” rebound in a “Pseudo-Bull” rise. Tactically, investors may liquidate on rallies due to the index’s ample long-term bearish divergence signals as well as the gap-up moves mentioned.

Continue to take profit on any price rallies, as the divergent longer term technical signals are very obvious and over-extended for 56 months now. Over-lapping support and resistance levels at 1,664.39 and 1,635.55 also indicate the “bluff” nature of this current index rise.

Its daily Stochastic indicator remains upbeat and its moving averages depict a double time frame uptrend (weekly and monthly). Despite minor positive signs, we believe investors should take a short-term investment philosophy as the index remains shaky at lofty and overbought levels for now. Its CCI, Oscillator, MACD and DMI have turned quite negative for now. The index’s trend turned bearish for its daily chart (as at June 25, 2013).

Despite the mixed tone of the KLCI, we are recommending a “buy” on Datasonic Group Bhd. It reported revenue of RM59.3 million and profit before tax (PBT) of RM17.7 million in its first quarter of 2013 financial year (1QFY13). The group’s core business is provision of ICT solutions which comprises its smart card personalisation division and customised software and hardware solutions division. The two divisions contributed approximately 61% and 37%, respectively towards Datasonic’s PBT, with the remaining revenue coming from its much smaller divisions.

The smart card personalisation division contributed increased revenue in 1QFY13, compared to the immediate preceding quarter, due to greater supply of smart cards. A bulk of the supply came from the extension of an existing contract. Its customised software and hardware solutions division reported increased revenue due to more deliveries of hardware consumables in 1QFY13, compared with last quarter.

Maybank-IB currently does not have fundamental coverage on Datasonic. A check on Bloomberg consensus reveals that no other research house currently has coverage on the stock. Datasonic is currently trading at a low price-earnings ratio of nine times with an indicative low dividend yield of 1.5%.

It’s share price made an obvious surge since its daily Wave 5 low of RM1.92 on April 19, 2013. Since that key low, Datasonic has surged on a very firm daily upward move to its recent all-time high of RM3.35 in late-June 2013.

Maybank-IB’s first chart “buy” recommendation was on June 4, 2013 at RM2.42. Since then, Datasonic has moved into daily, weekly and monthly uptrends since its recent low of RM1.92. As it broke above its recent key critical resistance level of RM2.93, look to buy Datasonic on any dips to its support areas as the moving averages depict very firm short- to long-term uptrends for this stock.

The daily and weekly indicators (like the CCI, DMI, Oscillator and Stochastic) are firmly positive and now depict the obvious indications of Datasonic’s eventual surge to much higher levels.

We expect Datasonic to remain very firm towards its support levels of RM2.93, RM3.02 and RM3.31. It will attract light selling activities at its resistance level (and all-time high) of RM3.35. Its upside targets are now located at RM3.70, RM4.08 and RM4.84.

Lee Cheng Hooi is head of retail research at Maybank Investment Bank. The views expressed in the article are the opinions of the writer and should not be construed as investment advice. Please exercise your own judgment or seek professional advice for your investment decisions. Technical report appears every Wednesday and Friday.

This article first appeared in The Edge Financial Daily, on June 28, 2013.