Background

SEG International Bhd ('SEG') is one of the top performer in our market for the past six months. It rose from RM0.95 (as at 31/12/2009) to a recent high of RM4.75 (on June 24)- chalking up a gain of 500% over a 6-month period!! See Chart 1 below.


Chart 1: SEG's weekly chart as at July 6, 2010 (Source: Tradesignum)

Historical, Recent & Projected Financial Results

What would justify the sharp rise in SEG? A quick look at its last quarterly result for QE31/3/2010 shows a decent improvement in its top-line & bottom-line. Its net profit increased by 42% y-o-y to RM9.5 million on the back of a 35%-increase in turnover to RM55 million. A q-o-q comparison is quite meaningless since SEG is involved in a seasonal business.


Table: SEG's quarterly result for QE31/3/2010 compared

If you assumed that turnover & profits for FY2010 is 35% & 40% higher than that of FY2009, the 10 years financial track record from FY2001-2010 can be tabulated below.


Chart 2: SEG's Actual & Projected Financial Performance for FY2001-2010

Valuation

Based on projected EPS of 17 sen for FY2010, SEG (closed at RM4.52 at the end of the morning session) is now trading at a PER of 27 times. At this PER, SEG is grossly over-valued.

Proposed Share Split, Bonus Issue & Rights Issue of Warrant

SEG has proposed a 1-to 2 Share Split and thereafter a 2-for-5 Bonus Issue. The ex-date for this exercise is on July 12. At this moment, it is not clear whether it will still proceed with the proposed warrant issue (on the basis of 1-for-2 shares held after the Share Split and Bonus Issue). For more, go here. I believe this proposed exercise is the reason why the share price of SEG has been rising so sharply.

Conclusion

Based on high valuation, SEG is expected to underperform in the medium to longer term (after the completion of the Proposed Share Split, Bonus Issue & Rights Issue of Warrant). As such, it would be a good idea to take profit on this stock now.