Monday, July 24, 2006

Diminishing Flower Power
IRIS Has Left The Building

Since coming back from being designated, Iris has rallied again above the RM1.30 level. FYI, Iris has collapsed from RM1.20 to today's closing price of RM0.51 on huge volumes. That down trend and volume was similar for the past 3 trading days. Bearing that in mind, it might be worth a review of comments made by the MD of Iris just a few weeks ago, right after the stock was designated:

As reported in The Edge via an interview:

The only people who have suffered from the designation of Iris Corp Bhd are the small individual investors. Institutional funds have not sold down their Iris shares and in fact are buying more of the stock,” says Datuk Tan Say Jim, co-founder and managing director of the company.

Iris is perhaps the most talked about stock by far this year. After achieving a surprising rise in its share price, the stock was then rumoured to be a syndicated play. The authorities had issued a few trading warnings on the stock and finally designated it on May 11 on the basis of “excessive speculation” and unusual trading patterns. Since Jan 3, Iris’ share price had risen about 871%, from 14 sen to RM1.36 on May 11. After the designation, Iris hovered around the 70 sen to 80 sen level. Since the designation was lifted, the stock has once again charged up on huge volumes to retest the RM1.30 level. Alas, the wheels seem to have finally come off now....

But in an exclusive interview with The Edge, Tan shares his views on why there is nothing out of the ordinary in the increase in Iris’ share price, citing the company’s strong growth fundamentals. “This company is only now beginning to do big business. The need for e-passports is estimated to be in excess of 100 million pieces a year and we are bound to get some of that. This year alone, we secured three deals for e-passports and will be announcing another deal soon,” says Tan. Tan believes Iris is the world leader in “covert security in national-type documents”, because it was the first to do an e-passport in the world for Malaysia, seven years ago.

Ratings Agency Malaysia Bhd (RAM) downgraded Iris on the basis that the company may not have the ability to meet its debt obligations, given its heavier dependence on overseas projects. And that was because the overseas projects posed execution risks and low margins. Last year, Iris recorded impressive sales worth RM300 million but net profit was only RM7.4 million. Standard & Poor’s and AmResearch presently have “sell” calls on Iris, both with a target price of 40 sen. AmResearch also cites poor earnings visibility from the overseas contracts as a key concern.

But Tan says Iris is not understood well by local research houses. “Foreign investors see the potential of this company. It’s all about the growth potential.” He may be right. Big-name investors have appeared to buy into Iris. For example, as at May 10, Morgan Stanley & Co International held close to 40 million shares. Credit Suisse held 9.6 million shares and HSBC Private Bank (Suisse) held four million shares. I think the bulk of foreign investors have waved bye-bye for now.

Tan says Iris had gone on a roadshow to Singapore, Hong Kong and Taiwan and investors had received the company well. “I told investors that if they were looking to invest in Iris based on its RM7 million profit last year, then they should not bother with this stock. There are many other more profitable companies to invest in. Iris is a growth story and the world’s best company in e-passports,” says Tan. It is understood that Iris had called off a global roadshow to Europe and the US because of the designation. Meanwhile, Tan says Iris is working on some breakthrough technologies in the area of renewable energy and high technology farming. “Iris is an incubator of new technologies. We are not just a smart card company as perceived by many,” he says. However, Tan says he is disappointed by the reaction of some Malaysian investors when shown the new technologies. “I showed several bankers a prototype of some of the new stuff we’re working on but they wanted proof that it worked on a big scale. They also hold the opinion that if this technology is so good, how come it has not been invented in the West? So I was forced to put one of my projects in India [instead of Malaysia] because of funding issues.” He found a Middle East investor for the Indian project. “These are people who are prepared to put money in technology just based on a concept.”

Still, Iris has a long way to go to shed the negative stigma which has come to be associated with it. One is that the stock is a syndicated play and its share price, manipulated. But retorts Tan: “Please explain to me what syndicated means.” When told that syndicates in Malaysia tend to “borrow” the shares of major shareholders to manipulate the share price of the counter, Tan says: “I don’t see how this applies to Iris. You can track the shares of the four founding members of Iris, including me. We collectively own 36% of the company. And these shares are where they are supposed to be. They can all be traced. So by this definition, what syndication are you talking about?”

Mr. Tan, syndicated means a group of investors conspiring to manpulate the share price higher, with a view to controlling free float with major shareholders, to lure public buying, and hopefully place out as much shares as possible at higher levels, hopefully to split the profits with the controlling shareholders - once task is complete, the share price should dive back to normalised levels. While this is in no way implicating Iris as a syndicated stock, the share price and volume patterns do match closely - I mean from below RM0.30 sen a few months back to above RM1.30, and now from RM1.30 to RM0.51 in 3 days .... even your own mother would say the stock is syndicated!

Implications - Iris downfall has hit several trading stocks very hard, especially those linked to the same group of people. Hence the play might also be over for stocks like Polytower, Oilcorp, Versatile, Satang and MTDInfra. However, other trading stocks which held up relative well would be worth bottom fishing once the blood-letting stops at Iris - they include Mulpha, Tebrau, UEM Bldr and UEM World. Generally the deflating of Iris has not affected the public, the only fear is if it impacted on any smaller brokers. Otherwise, the other blue chips and institutional stocks have held up very well. A temporary shft onto institutional stocks is likely.

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