Thursday, February 21, 2019

CIMB's downward revision on Bumi Armada is weird

Since my purchase of Bumi Armada two days ago, CIMB came out with a downward revision of the target price of Armada from 70 sen to 30 sen. If the summary that TheStar is made correctly, I feel that it is weird that CIMB has taken the probability of a right issue to be called by Armada at 70% and it will stay status quo at 30%. Hence, based on that probability the analyst downgraded the call to 30sen.

First of all, if ever Bumi Armada is doing a cash call through rights issue, there should not be a revision in target price as a rights is a new call altogether. It should not affect the price unless, he is really looking at short term and not fundamentals. Secondly, as seen from his detailed analysis, he did a very thorough sum of parts analysis on the company identifying and valuing all the projects - after which he put a discount to the value - which to me is correct. However to put a weightage on the rights call probability and reduce the target based on that does not come from the "valuation book". There's no CFA that teaches that.

It additionally says that because Armada is contemplating to bid for new projects, hence it will need rights issue call. Again, the fact that Armada is looking at expansion by itself is not a bad thing, in fact it is a good thing.

2 comments:

Multi Bagger said...

Looks like expected value based on probability to me. But i supposed the 13 sen rights price estimated should not be a value to be used in the equation.

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