Share Price Prediction Models and Bursa Malaysia Value Stocks

This report delves into various models used for share price prediction, including momentum, mean reversion, and Martingales, along with the search for value investing strategies. It then applies this knowledge to identify and analyze three value stocks listed on Bursa Malaysia: Airasia Group Bhd, MBM Resources Bhd, and Poh Huat Resources Holdings Bhd. The analysis provides reasons for their selection, based on financial ratios like P/E and P/B, and market trends. Furthermore, the report discusses security analyst reports on these stocks, providing insights into their recommendations and the factors influencing their valuations. The document aims to provide a comprehensive understanding of investment analysis and share price prediction in the context of the Malaysian stock market.

Running Head: Investments Analysis & Decision Making
Running Head: Investments Analysis & Decision Making
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Investments Analysis & Decision Making
Contents
a) Discuss the different models studied to predict share price................................................................1
1) Momentum......................................................................................................................................1
2) Mean Reversion..............................................................................................................................1
3) Martingales......................................................................................................................................1
4) The Search for Value......................................................................................................................2
b) Using your knowledge of share price prediction identify 3 value stocks listed in Bursa Malaysia.
Explain your reasons for their selection..................................................................................................3
Airasia Group Bhd:..............................................................................................................................3
MBM Resources Bhd:.........................................................................................................................4
Poh Huat Resources Holdings Bhd:....................................................................................................6
c) Discuss the different security Analyst report on above stocks...........................................................9
Airasia Group Bhd:..............................................................................................................................9
MBM Resources Bhd:.........................................................................................................................9
Poh Huat Resources Holdings Bhd:....................................................................................................9
References:............................................................................................................................................11

Running Head: Investments Analysis & Decision Making
a) Discuss the different models studied to predict share price.
1) Momentum
This technical model/concept is based upon the behavioural finance (human biases leading to
irrational investment decisions). According to this model the best prediction for the future prices
movement in the stock market is in same direction as the current movement. This concept can be seen
in practice via the mutual fund inflows because these inflows grow when market returns are high and
vice-versa. The investors expect that the market will continue to move in same direction as current
movement. They make their investment decisions accordingly and that encourages more people to
make same investment decisions, hence creating a feedback loop.
In the case of individual stocks this momentum effect is strong in the short-run, which means that the
stocks that performed well in the recent time will most probably continue to outperform in the short-
term and vice-versa. But in the long run there is not much support for this model as generally
momentum reverses in the long run. So, it is expected that the stocks that have outperformed in last
few years will most probably underperform in the coming few years and vice-versa.
2) Mean Reversion
The concept of mean reversion in general is the propensity of any variable like stock price, exchange
rates, GDP growth etc. to move towards its average value over a period of time.
Many investors believe that the market evens out in long run. So, if the market has been
outperforming from quite some time then it discourages such investors from making investments as
they believe that these high prices will not sustain and the market will fall towards the equilibrium
level. Similarly, if the market has been bottoming out then these low prices will be seen as an
opportunity to invest I the market as such investors expect that over time the market will move
upwards toward its average level.
This model provides support for the decision making in the long run but there is still no concrete
evidence. Mean reversion is a very slow process and it can be observed over very long time horizon
but such reliable time series data is not available for long-term.
3) Martingales
1

Investments Analysis & Decision Making
The Martingales model is a risky technique based on statistics and probability; it states that the
investor cannot lose for ever so he should increase the investment amount after every bad trade in
anticipation of profit.
This method assumes that the past stock returns have no effect on the future stock prices. The basis
for this model is that in an efficient market all the stock information is known to the investors and
reflected in stock prices, so one should not be able to use past data to predict future prices.
According to this model stock prices are martingales and the best prediction of the future prices is the
current market price.
There is one more version of this model known as sub-martingale or random walk with upward drift.
According to this model the future prices are dependent only on the current prices but these future
prices will more probably be higher than current prices. This model also explains the historical
upward trend in the stock pricing data despite the short term price reversals. Therefore, going by this
model the best future prediction of stock price is current price plus small gradual increase. So, the
investor’s attention should be focused more towards the risk management of the volatile trades rather
than finding past trends: momentum/mean-reversion.
4) The Search for Value
The basis for this fundamental approach is that some stocks trade at prices lower than their intrinsic
value or book value due to market inefficiencies: overreaction to the bad and good news, inadequate
coverage etc. Investors can predict that the prices of these stocks will increase and will return back to
its mean value. By purchasing such securities at discounted price and holding them for long period,
investors can make profit when there is reversion of stock prices its fundamental value. The
determination of the intrinsic value of stock is complex and difficult so margin of safety concept is
used to reduce risk from wrong assumptions and calculation issues.
The parameters that are used to find undervalued stocks are price to book ratio (P/B) and price to
earnings ratio (P/E). Value companies have below average P/E and P/B multiples. So, the investors
buy these cheap stocks to earn profit from future price increase. There is enough evidence that low
P/B and P/E stocks have generated higher returns in past but there is not much evidence about the real
reason for this higher return. One factor may be the additional risk the investors take by investing in
the value companies if there is some real reason behind their low price that is still unknown to the
investor.

Investments Analysis & Decision Making
b) Using your knowledge of share price prediction identify 3 value stocks listed in
Bursa Malaysia. Explain your reasons for their selection.
The three stocks listed in Bursa Malaysia that offers great value are Airasia Group Bhd, MBM
Resources Bhd and Poh Huat Resources Holdings Bhd.
Airasia Group Bhd: It is an investment holding company based in Malaysia. The major business
of group is its low-cost airline carrier AirAsia in Malaysia, Indonesia, the Philippines, Thailand,
Indonesia, the Philippines, Japan and India. Other group holdings include tour operating companies,
investment holding companies, aircraft leasing companies and financial services companies
(Bloomberg, n.d.).
The company with the trailing twelve months PE ratio of 9.9 is way cheaper than the industry (42.27)
and sector (23.28). Its price to book ratio of 1.11 is also quite lower than the industry (1.95) and
sector (3.44) (Reuters, n.d.).

Investments Analysis & Decision Making
The stock price has been following a downward trend from last one year (Bursa Malaysia, n.d.).
It has been a tough year for the whole Airline Industry in Malaysia due to high competition and
variable demand. Out of the seven carriers, six were unprofitable and only, Airasia generated an
operating profit but it was quite lower compared to earlier few years (CAPA, 2019).
In last two years, share of AirAsia increased as passenger traffic declined for both of its competitors
Malindo and Malaysia Airlines. The reason was the continuous domestic expansion by Airasia while
others were cutting capacity. Airasia’s share of domestic capacity has increase from 46% in 2017 to
60% in 2019. The huge market share and low cost structure put AirAsia in a strong position.
Going by the Airasia strong position and its sound fundamentals, the stock is likely to rise in future.
The mean reversion model supports the change in the trend of the stock’s price as the industry
stabilises.
It make sense to invest in this stock considering its value because its price multiples (P/E and P/B) are
too low. Hence, Airasia can generate nice long-term returns.
MBM Resources Bhd: This investment holding company is based in Malaysia. Its business
activities involve: marketing and distribution of spare parts and vehicles; manufacturing of

Investments Analysis & Decision Making
automotive components; vehicle repairing; lease financing; maintaining and developing of properties
(Bloomberg, n.d.).
The company with the TTM PE ratio of 6.18 is way cheaper than the industry (15.38) and sector
(19.14). Its price to book ratio of 0.7 is also quite lower than the industry (1.7) and sector (15.92)
(Reuters, n.d.).
The stock price followed a horizontal trend for last two years but the trend changed after touching a
low point in the end of 2018. In 2019, the stock price has been moving upwards. So, the technical
analysis based on the momentum effect tells that the stock will continue to rise in coming time (Bursa
Malaysia, n.d.).

Investments Analysis & Decision Making
The valuation of the company is very low because of some factors like volatile operating margins,
poor performance of the alloy tyre business and collapse of the purchase offer from UMW Holdings
Bhd (The Star, 2018).
The direct exposure of MBM to Perodua, which is the market leader in auto industry strengthen the
company’s position. Perodua’s market share increased from 40.3% to 42.6% in 2018 that supports
MBM stock (Lye, 2019).
Its ROA of 9.85 is higher in comparison to the industry and its ROE of 11.94 of is very close to the
Industry ROE (Reuters, n.d.).
So, investment in MBM stock can result in high returns going by the stock’s upward momentum and
low price-multiples.
Poh Huat Resources Holdings Bhd: It is an investment holding company based in Malaysia. The
main business of the company is manufacturing, retailing and wholesaling of home and office
furniture. The company is also involved in property business. The company sells products in the local
as well as international markets including Malaysia, North America, the UK, India and the Middle
East (Bloomberg, n.d.).
The company with the TTM PE ratio of 7.64 is way cheaper than the industry (23.79) and sector
(19.34). Its price to book ratio of 1.49 is also quite lower than the industry (5.22) and sector (2.49)
(Reuters, n.d.).

Investments Analysis & Decision Making
The stock price followed a downtrend from April-2017 to April-2018 but then there was a trend
reversal and the stock started moving up. Now, the momentum effect due to the continuous upward
movement supports the increased stock price in the future (Bursa Malaysia, n.d.).

Investments Analysis & Decision Making
The company’s financial performance took a hit in past year as ringgit strengthens against USD and
the company depends a lot on exports to US. This factor along with the increased raw material costs
and the company’s shift towards affordable products lowered its operating margins (The Star, 2018).
The company has nice future prospects due to sustained furniture demand in the US market and
strengthening USD. Another thing that amplifies this factor is the on-going Sino-US trade war that
led the US furniture importers to turn away from Chinese exporters. This can help the company to
increase its exports and overall market share (The Star, 2018).
ROA of the company is higher than industry and its ROE is close to industry average. So, Poh Huat
presents a nice value investing opportunity due to nice future prospects and low price multiples. The
upwards momentum in the stock price is also a positive factor.

Investments Analysis & Decision Making
c) Discuss the different security Analyst report on above stocks.
Airasia Group Bhd: According to Alphaindicator (2019), the recommendation for the stock is
hold. The report uses average score based on five indicators to give a recommendation. The high
scores mean indicators are favourable. These indicators are Earnings, Fundamental, Relative
Valuation, Risk and Price momentum. The report gives score of 6 to the stock. For the stock the
earnings indicator is 1 due to overall weakness in the airline industry and falling earnings of the
company. The fundamentals of the company get score of 7, an improvement over previous period.
This score of 7 is significantly higher than its industry average of 4.8 that shows the company
financials are strong for long term gains. The relative valuation indicator gets the score of 8 that
represents a nice opportunity to invest as its price-multiples are significantly lower than the industry
or historical values. For example, Air Asia's trailing P/E of 9.4 is at the lower end of its 5-year range
and quite lower that the industry P/E. The risk indicator of 7 is lower than the FTSE BURSA
MALAYSIA COMPOSITE index risk indicator of 9.2. It shows that the moderate volatility of the
company is higher than the market. The price momentum indicator of Air Asia is 6. This shows the
stock upside potential due to the momentum effect is weak. So, the report recommends hold rating to
the stock.
MBM Resources Bhd: According to Alphaindicator (2019), the recommendation for MBM
Resources is Buy. The average score of five investment indicators used in this report is 10. This score
put the company in its exclusive group of recommended firms with perfect investment score of 10.
The earning indicator of MBM is 8 due to its strong earnings and recent history of crossing consensus
earnings estimates. This score is higher than the industry score of 7 and overall market score of 6.1.
That shows the company has been generating higher earning relative to the market. The financial
fundamentals of the company are strong and it is represented by the high score of 10. This can be due
to the high profit margins and reduced debt levels. These fundamentals are significantly stronger that
the industry score of 6. The relative valuation indicator for the stock is 10 due to its lower price
multiples. Its valuation is quite lower than the industry as the industry average score for this indicator
is 2.4. The company’s P/E of 6.2 is at the lower end of its 5-year range of 6.2 to 18.6. The risk
indicator for this stock is 10 that represent low volatility. The price momentum indicator of stock is
10. It shows that the recent stock price movement is favourable for future increase in price. So, the
strong fundamentals, low risk, low valuation, high earnings and positive momentum led to buy
recommendation for MBM Resources Bhd.
Poh Huat Resources Holdings Bhd: According to Alphaindicator (2019), the recommendation
for PoH Huat is Buy. The average score of five investment indicators used in this report is 10. This
score put the company in its exclusive group of recommended firms with perfect investment score of
10. The earnings indicator for the stock is 5 due to mixed earnings expectations and average

Investments Analysis & Decision Making
performance. This score is still higher than the industry score of 4.8. The financial fundamentals of
the company are strong shown by high score of 10. This is due to higher gross margins and lower
debt levels. The ROE of the company has been higher than industry average in last five year period. .
The relative valuation indicator for the stock is 10 due to its lower price multiples. Its valuation is
quite lower than the industry as the market average score for this indicator is 2.4. P/E of 6.4 of Poh
Huat is 17% lower than its 5-year average PE of 7.7. The risk indicator of 8 represents low volatility.
But this volatility is higher than the market because risk indicator of the market has score of 9.2. The
price momentum of the stock is 9. It represents positive momentum for future increase in stock price.
The low valuation, strong fundamentals and positive upward momentum led to buy recommendation
for Poh Huat.