• Building a base above 100-d SMA post shares split. After hitting a 52-week low of RM1.63 on 4 Aug 15, SIGN’s s hare prices tumbled to a low of RM0.79 on 21 Jan 16 before steadily trending higher to end at RM1.04 last Friday, driven by a mild recovery in 2QFY16 results, aggressive share buyback program (1.13m shares YTD, boosting its cumulative treasury shares to 1.73m which can potentially be paid out as share dividends in the future) as well as positive sentiment driven by recent completion of its share split & bonus warrant on 18 Apr (i.e. subdivision of 1 share into 2 shares, followed by proposed bonus issue of warrant on the basis of 1 warrant for every 4 subdivided shares). Overall, management remained cautiously optimistic of its medium to long term outlook on the back of healthy orderbook of ~RM150m (end Feb) and its ongoing bidding for a few major projects. These include Country Garden’s Is kandar project (contract worth around RM150m) and UK’s Battersea Phas es 2 and 3 (projects worth about RM200m).
• Solid balance sheet after land sale. Balance sheet remained solid with net cash of RM6m as at end Dec 15 and is likely to soar at least RM85m or 35sen per share following the company’s acceptance of compensation of RM80m (on 3 Mar) for its disposal of 3.3 acres in Kota Damansara (KD) to the Selangor government to build the Damansara-Shah Alam Elevated Expressway (DASH).
• Special dividend in the pipeline? To minimize production disruptions, management is expected to incur ~RM20m capex for relocation, building new warehouse and acquisition of a small factory. Assuming another RM20m for repayment of term loans, Signature will still end up with a netcash of RM45m or 18.8sen/share, which could be utilize for special dividend.
• The rebound still has legs. After hitting YTD high of RM1.16 on 26 Apr, share prices fell 14.2% to a low of RM0.995 on 3 May before closing at RM1.04 last Friday. Technically, share prices are building a solid base above 100-d SMA (now at RM0.95). A decisive breakout above RM1.08 (200-d SMA) is likely to spur prices higher towards the RM1.16 and our long term objective of RM1.28 (76.4% FR) levels. Key supports are RM0.995 (0.5 sen below its ESOS price at RM1.00) and RM0.95. Cut loss at RM0.945.

• Attractive risk to reward ratio with 23.1% upside against 9.1% downside. All in, we see an attractive risk to reward ratio for investor with a theoretical entry price of RM1.04 given that the downside to the cut loss zone of RM0.945 is 9.5 sen (-9.1%) while the upside to the LT price objective of RM1.28 is 24 sen (+23.1%).

Source: Hong Leong Investment Bank Research - 9 May 2016