Symphony Again

Last year I wrote the following post. eResearch, Symphony and HLG

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How do you rate Bursa's eResearch program ?

Good? Bad? Or a waste of time? ( see this posting last month: Research Reports Good For Stocks?? )

I was organising my personal stock notes when I came upon this old issue on Symphony House write-up done by HLG Research under Bursa eReseach program.

On Sept 7th 2005, HLG initiated their coverage on Symphony. ( click here for the report ).

Symphony was trading at 0.415 when the article was written.

Here is the snippet of recommendation.

• There is no pure comparison to pit Symphony against, due to its diversified earnings base. While its IT peers are trading at 7.2x, there are no listed BPO companies. Consequently we have derived a fair PER of 12x for Symphony. Based on 12x FY06 EPS, the stock is valued at RM0.57. This provides 37% upside for the stock from current levels.

The stock is considered cheap because based on 12x FY 2006 EPS, the stock's potential value is 0.57.

Fair statement. But point for me, is how realistic is HLG's projection of Symphony's earnings?

Firstly, it was known that Symphony's 2nd quarterly earnings (announced in Aug 2005) was poor.

Symphony announced that ...

• For the six months to June, net profit fell 48.6 pct to 5.18 mln rgt from 10.1 mln a year earlier and pretax profit also declined 42 pct to 7.96 mln, despite a 65 pct jump in revenue to 88.31 mln.

So..

1. Symphony made only 5.185 million for the first 2 quarters of fy 2005.
2. HLG is projecting a net profit of 25.7 million for fy 2005. (see page 4 of that pdf file)
3. HLG is projecting a net profit of 31.3 million for fy 2006. (see page 4 of that pdf file)

So do you think HLG projection of 31.3 million for Symphony's FY 2006 earnings is realistic or not?

In Nov 2005, Symphony announced their 3rd quarter earnings.

Quarterly rpt on consolidated results for the financial period ended 30/9/2005

Symphony made a net profit of 2.679 million. Which means for the first 3 quarters of fy 2005, Symphony only earned 7.864 million (do note, last fiscal year 2004 Symphony made 14.849 million!)

Now... 7.864 million very far from HLG's rosy earnings projections of 25.7 million!
HLG made another write-up on 24th Nov.

• Symphony reported a 9-month net profit of RM7.1m (-56.9% yoy) on the back of revenue of RM130.7m (+42.3% yoy). Operating margin was significantly lower at 6.2% vs. 23.4% a year ago largely due to the growth of its managed services division which normally carries lower margins compared to its higher margin IT business. Annualis ed net profit was 59% short of our full year net profit forecast.


• The variance against our forecast was due to lower revenue recognition from its IT division. 9-month revenue for its IT division was RM70.9m, or only 57% of our full year forecast. We suspect that this could be due to some delays in the start up of certain projects as well as timing of recognition due to its lumpy nature, as the group has some RM150m of IT solution contracts in hand. Contribution from its managed services division was in line with our expectations. Besides the higher effective tax rate of 31.9% vs our forecast of 27% was another factor.


• We are downgrading our forecast to take into account the delays in recognition of its IT contracts, and therefore lowering our net profit estimates by 37.2% for FY05 and 19.8% for FY06. Consequently, FY05 net earnings is expected to register a decline of 19.9% over FY04.

Waa... lowering their net profit estimates by 37.2% for fy05 and 19.8% for fy 06.
Which means...

1. Symphony made only 7.864 million for the first 3 quarters of fy 2005.
2. HLG is projecting a net profit of 16.1 million for fy 2005. (Waa...25.7 -> 16.1 !!!)
3. HLG is projecting a net profit of 25.1 million for fy 2006. (Waa...31.3 -> 25.1!!!)

Huge adjustments, eh?

Symphony's price now is 0.335 (down from 0.415).

So when you downgrade the earnings by so much, what do you think should be the logical recommendation?

Well... here is HLG recommendation:

• Despite the downgrade, we are keeping our BUY recommendation on Symphony. We believe that there is no change in fundamentals for the stock and only a problem of timing for recognition of earnings. Although FY06 PER valuations at 8.8x are on par with its IT peers, this has yet to take into account the strong growth potential from its Business Process Outsourcing. (BPO). Bear in mind that the Asia BPO business is expected to be worth some USD110bn by 2008.

Now this is extremely puzzling for me. If you downgrade by so much, why is it still worth a BUY? And secondly, it there is no change in fundamentals, then why did Symphony missed their earnings projection by so much???

A couple of weeks ago, on Feb 8th 2005, HLG did another company update on Symphony

• Earnings Outlook
  FY05 net profit likely to be within expectations. For the 9-mths of FY05, Symphony has achieved 64.8% of our full year revenue forecast and 44.1% of FY05 net profit. Despite that, we believe full year FY05 earnings should fall within our expectations, as this will be underpinned by the commencement in major IT contracts from EPF and MCMC, worth some RM115m, which were previously delayed. These contracts should also arrest the declining EBIT margin trend for its IT division (14% 1Q05; 9% 2QFY05; -7% 3QFY05). Its FY05 result is expected to be released later this month.




• Valuation & Recommendation
  More expensive than peers, but premium justified Symphony is currently trading at FY06 PER of 9.1x while its peers are trading at an average PER of 7.8x. Despite that, we think that Symphony deserves to trade at a premium as its peers are mere IT firms with more volatile earnings (and hence earnings risk) whereas Symphony has an edge with its exposure into the steady and growing global BPO market. As of 3QFY05, the contribution of BPO business to Symphony’s overall EBIT has increased to 41%, rising from 26% over the same period in FY04. We maintain our BUY rating on Symphony, but with a lowered target price of RM0.41 vs RM0.57 previously, based on a reduced assigned fair PER of 11x. (a 20% discount to our fair KLCI PER of 13.9x). Share price is at its all time low, pricing in the delay in the IT contracts rollout and under-delivered unit - Global Impact.

Ahem... so.....

1. Symphony made only 7.864 million for the first 3 quarters of fy 2005.
2. HLG is still expecting Symphony to earn a net profit of 16.1 million for fy 2005.
Amazing isn't it? This means that despite all the data, HLG is still insisting that Symphony will make some 16.1 million for their fy 2005. Since Symphony's 3 quarters total earnings for fy 2005 is at 7.864 million, HLG is expecting Symphony to make 8.24 million for its 4th quarter fy 2005.

Which means ... err.. symphony's quarterly net earnings is to jump from 2.679 million (fy 2005 q3) to 8.24 million (fy 2005 q4)! Er... excuse me Doc but isn't this a bit way too optimistic?

Oh... and did i not mention that Symphony price is around its all time low? :p

So back to Burs eResearch thingy.

Yes, it's great to see more companies given coverage by the local analysts but on the other hand, what good is the coverage to the investor if the recommendations are written in such a rosy and optmistic manner?

Oh... of course this issue is more complicated than this... for example, for whom are these analyst writing for? Who are their targeted audience? etc etc... but for me... I'm mumbling form an investor point of view!

ps...
Symphony should be announcing their earnings sometime this month... so do stay tuned!


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Update: 21st May 2007

So how did Symphony do for it's fy 2006? Have a look, Quarterly rpt on consolidated results for the financial period ended 31/12/2006. It lost 4.607 million for the quarter and made only 2.116 for fy 2006!

Symphony just announced its earnings. Any better?

Have a look ....