Once in a while, a research report came to your attention and made you sit up. Recently, Kenanga Research issued such a report. It's the initial report on Pacific & Orient Bhd ('P&O'). The gist of the report is as follows:

1) P&O will take pole position in the market for motorcycle insurance business.
2) It's extremely cheap, trading at a PE of 3 times FY2011 earning or 0.55 times its book value.
3) Based on (2), its base case valuation is about RM1.15- giving an upside of 92% from its then close of RM0.63.
4) There is potential for M&A as the general insurance sector is quite fragmented & the owner is contemplating divesting his shares in P&O. Based on Price to Book of 4.2 times, P&O's M&A valuation could be about RM1.65.

While P&O's valuation is very undemanding, I found it very hard to get excited about a company that is so dependent on motorcycle business. A quick look at the chart (plotted on logarithmic scale) made me reconsider my skepticism. The stock looks set to break above its long-term downtrend line at RM0.75. As at 3.00pm, P&O was trading at RM0.79- gaining 8 sen above its close of RM0.71 yesterday.


Chart: P&O's monthly chart as at July 5, 2010 (Source: Tradesignum)

Based on cheap valuation & bullish technical outlook, P&O could be both a trading BUY & a long-term BUY.