Sweet Saucer?

Saucer is a technical charting formation that indicates that a stock’s price has reached its low and that the downward trend has come to a close.

saucer

Saucer formations will exhibit very low volume figures at the point when the stock’s price was the lowest.

http://www.investopedia.com/terms/s/saucer.asp?layout=infini&v=5D&orig=1&adtest=5D

Let’s take a quick look at a Malaysian-based sugar producer company – whether its price trend exhibits a saucer pattern.

Company Background – MSM Malaysia Holdings Berhad (“MSM”)

articlesMSM_raw_sugar_1024x5_177115.transformed_0.jpg

MSM was incorporated on 10 March 2011, is Malaysia’s leading sugar producer. It was listed on the Main Market of Bursa Malaysia Securities Berhad on 28 June 2011. MSM operates the sugar business of Felda Global Ventures Holdings Berhad. It produces, markets and sells refined sugar products. The company conducts its business principally through two operating subsidiaries, Malayan Sugar Manufacturing Company Bhd and Kilang Gula Felda Perlis Sdn Bhd (KGFP) which were established in 1959 and 1971, respectively.

Technically Speaking

MSM_Technical

To some extent, the above chart appears to exhibit a potential saucer chart pattern. MSM’s share price has dropped from a peak RM5.40 (back in June 2015) to a bottom of RM4.55 (Dec 2015), with a declining volume towards the bottom. The 50D MA has recently crossed above the 200D MA, signalling a potential upward movement. A saucer pattern will be confirmed once there is a volume breakout (yet to materialise). Let’s look at the fundamental perspective, as MSM’s profitability will depend significantly on global sugar price.

Fundamentally Speaking

We have performed a simple regression analysis between the share price of MSM and global sugar price (in USD/lb) from year 2012 till date (20 May 2016). From a common sense perspective, we would expect a negative correlation to exist between the share price of MSM and the global sugar price as raw sugar is the main cost component of the sugar producer.

The results are summarised as follows:

MSM_regression.png

Key implications:

  1. The statistical relationship appears weak;
  2. RM4.85 appears to be the “floor value” for MSM;
  3. We did not see the “negative correlation” between share price of MSM and sugar price.

Using the above statistical relationship, MSM appears to be fairly valued at RM5.02 vs forecasted value of RM4.98, with a 95% confidence interval of between RM4.68 and RM5.28:

MSM2_ActualvsForecast_May16.png

Analysts’ Target Price

MSM_PT

Concluding Remarks

bf8573b44e18bfa52a81bedc7e23f266.png

Sugar price has trended up recently and this will impact on the profitability of MSM. Nevertheless, for the past few years, the share price of MSM has not moved significantly despite the movements in global sugar price. Technically, a saucer has not been formed for MSM unless there is a strong volume / price breakout. If MSM ever reaches RM4.65 – RM4.85, this presents a potential trading opportunity with a target exit price of RM5.28-RM5.40.

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