Towards Financial Freedom

RH Petrogas - So No Sona, So What?

kiasutrader
Publish date: Fri, 18 Oct 2013, 10:40 AM
RHP  took  a  20%  dive  yesterday  amid  a  slew  of  trading-negative  news which had no fundamental bearing. Malaysian media reported that Sona Petroleum  is  not  taking  a  stake  in  RHP,  which  triggered  the  selloff  on top  of  traders  taking  profit  to  cover  losses  elsewhere.  RHP  is  again trading at takeover valuations. Maintain BUY, with SGD1.33 TP.
- Solid  fundamental  value.  RHP's large pool of reserves  and  resources has  a  solid  intrinsic  value.  News  that  Sona  Petroleum  is  not  taking  a stake in RHP proved to be trading-negative (media articles implied rather inaccurately  that  RHP's  rise  was  due  solely  to  rumours  of  Sona's acquisition). We believe RHP's intrinsic value stands on its own legs and needs no validation from an outsider purchase.
- We  were  right  and  wrong  simultaneously.  Yesterday,  we  said  that traders  were  selling  profitable  positions  to  cover  losses  in  Blumont/ Asiasons/ Liongold. We were right on this, but wrong on the impact. Our sources inform us that, smelling blood in the water, other traders took a short  position  on  the  stock,  causing  the  stock  price  to  fall  to  artificially-depressed levels far below what we thought was a sensible entry point.
- Placement shares begin trading today. RHP also announced that new placement  shares  will  begin  trading  today.  We  believe  the  stock's increased free float will contribute to long-term liquidity and thereby also reduce the price impact of non-fundamental-motivated trading.
- Back at takeover levels. With its price collapsing to less than half of our conservatively-estimated  TP,  RHP  is  again  trading  at  takeover  levels. We firmly believe that the margin of safety at this level is extremely wide and  that  longer-term  investors  who  can  ride  out  the  volatility  stand  to reap supernormal gains.
- Maintain  BUY,  with  SGD1.33  TP.  We  reiterate  our  BUY recommendation with an unchanged SGD1.33 TP, based on parity to our net present value (NPV)-and-risking model.
Source: RHB
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