Monday, August 10, 2009

The Million Dollar Question .....

It had to happen, and it did when Mr. Ooi asked the question that everyone in the financial markets industry dreaded.

Ooi Beng Hooi has left a new comment on your post "Buy Side Vs Sell Side Analysts":

I fail to understand why the calls made by various analysts are so different.

For example, after released of Public Bank quarterly result, some of the calls made by various analysts:

CIMB: Outperform, target price RM 11.10
AMResearch: Buy, target price RM 10.00
Inter-Pacific: Outperform, target price RM 9.75
Kenanga Research: Buy, target price RM 9.30
OSK: Buy, target price RM 8.60
Mayban Investment Bank: Sell, target price RM 7.60
Credit Suisse: Underperform, target price RM 7.50
UOB KayHian: Hold, target price RM 6.88
Citigroup: Sell, target price RM 5.77

Some have "BUY" calls, some have opposite calls and one have neutral position.

Even though Public Bank is considered a transparent listed company with high disclosure of corporate information compared to others, I am a bit surprised to see such wide range of target price, with the highest one almost double the lowest target price.

How can they be so different?


Financial markets are like economics, its a lot of bullshitting and a small amount of substance. You put 10 economists in a room to come out with a paper on why and how the current global crisis came about, you will probably get a few people killed and still no conclusion at the end of a week.

Put the same issue to a group of scientists, and they will explore the various theories and categorise them accordingly. They will then set up the various testing hypotheses, hopefully they can result in some for of data, hopefully then they can regress the data into some for of equation, hopefully once they have the equation then they can draw a fucking line on a chart, and make the conclusions from the fucking chart. Gawd save them if they cannot get solid data, gawd help them if the data is all over the place, gawd save them if they can cluster the data into a regressed equation, no equation = no formula = no result, no no equation cannot draw line on chart = fucking hopeless study = watse of time.

The difference is if you give financial markets issues to a group of scientists, they will throw their papers and binders in the air after a few months and conclude that the "truth" is nowhere to be found, that you cannot conclusively determine anything from an empirical type of study or testing. Still, the economists, analysts and experts will continue shouting their views and opinions to each other - because in bull shitting you do not need substance, evidence or credibility.

Put 10 analysts in a room to analyse Public Bank, thats what you get. Its a hopeless profession that happens to pay well. Never has so much pay been given to so many for so little contribution!!! Parents now don't want their children to be doctors or lawyers... go be an analyst or fund manager and make 5x times more than the smartest kid who went to study medicine.

Analysts' views will almost always be different because their assumptions are not the same. Some may assume a NPL of 6% over the next 12 months, some just 4% while others may see it at 11%, and that will work its way into your earnings model and risk assumptions. There are many other important assumptions that one has to make in order to do projections: it could be growth, margins compression, staffing cost, local interest rates in 6 months time, in 18 months time, ..etc.

Then you have to make the more important arguments, which are more 'philosophical' and big picture: has Public Bank gone past the "easy growth" era; can Public Bank translate the "winning strategy" in other countries; what will happen after Teh Hiong Piau; are foreign funds holding too much of Public Bank (which means they can only be selling in the future, not buying more); etc...

I have mentioned this time and time again, look for consistency of results in the analysts and house strategy. Follow those who have argued well in the past, look for those who are focused on the more important factors correctly. And... always try to get hold of the extremes, in this case get a hold of: CIMB's which has a new outrageous TP of RM14.10, OSK's which has a TP of RM11.00 and the Citigroup sell which has the TP at RM5.77, and the UOB Kay Hian TP of RM6.88.

They all are different because they have chosen on different ways of interpreting what is good value, what is fair value, and which prevailing FACTORS will be dominating the share price going forward. OSK has held on to the notion that PB's strong loans and deposit growth and superior asset quality will be the focal points for the stock, thus allowing PB's to retain its premium rating and performance.

CIMB's outrageous TP basically affirms that no matter what the management is solid enough to counter and withstand any succession issues. CIMB thinks that earnings growth momentum will remain strong, supported by PB' superior ROE in the 20s, greater contribution from China and new avenue in bancassurance.

Maybank Investment has since upgraded the TP from RM7.60 to RM9.00, but still lagging the rest. They are negative because they see valuations having run ahead of fundamentals. They think that long term ROEs will be in the 15%-18% range rather than the 20s as was predicted by CIMB. The team also felt that beyond the present market rally, the economic recovery remains hazy.

If you ask me, I think CIMB is too fuzzy and trigger happy, all caught up with the partying mode. PB's current valuations have run way ahead. I am not seeing much upside at all, in fact I see it settling between RM8.50-RM10.50 for the next 12 months. The valuations and impressions I get is that it has "no room" for disappointment. It trades at a ridiculously high 80% premium in proice-to-book valuations against its peers - whether justified or not, it clearly show very little upside, unless you think it will trade at 120% premiums??!! My final say on PB, is that its not a stock you want to be holding in a market rally!!! Its a stock you want to be holding in a flat or negative market, its a fucking defensive stock.

So, Mr. Ooi, hope that clears it up a bit, not a defence by any means but hey... we have to remember that accounting is a modern day creation, so too is a stock market, we did not have both 150 years ago (I think). When its a man made thing (and not a natural science like physiscs or biology), it is very very hard to nail down what is the truth at any point in time. It becomes who can bullshit better.

p/s photos: Kristy Yeung Kung Yu


HC said...

interesting article. i have to agree that it is the most overpaid and undeserving industry in the world. People getting paid for bullshiting even when they are underperforming the benchmark (as long as fund size is large enough to generate management fees). Not to forget analyst factors performed very poorly during the post lehman period. Anyway, they would probably perform well now due to herd effect and public's reliance on stock recommendations by analysts.

soonyeah said...

Hi Dali, wondering what is your view on the market now ? Any change from your earlier pessimistic view ??

Ooi Beng Hooi said...

Thanks for the elaborated explanation

Martin said...

Wah. Sound like sour grapes. A simple answer would be - people have different expectations, therefore different price targets. If everyone thinks alike, there will be no market.


I like the candor. Brought a smile to my face.