In an earlier post (read this), there was a brief discussion on KLCI constituents / blue chips that could have fallen fair a bit from their historical highs. It was mentioned that the Malaysian-listed construction giant, IJM Corporation Berhad will be removed from the KLCI index starting this month (read this) as there was significant decline in its market capitalisation. Is IJM really in an oversold position?
There are different perspectives in answering this question – be it from a fundamental perspective, technical perspective, etc. Strictly for illustrative purpose – in determining whether IJM is currently in an oversold position, I intend to look at the share price of its closest industry peer which is Gamuda, another heavyweight construction firm listed on Bursa Malaysia. As both IJM and Gamuda are in the Malaysian construction sector, I tend to believe that both share price of IJM and Gamuda are highly correlated (as shown in the following graph – historical share price of both IJM and Gamuda since 1994):
Therefore, if we perform a simple regression analysis between the share price of IJM and Gamuda, we may be able to extrapolate an interesting relationship between the two counters. In addition, it may be possible to form a predictable share price range for IJM based on current share price of Gamuda.
As shown above, the relationship between IJM and Gamuda is significantly correlated, of which more than 80 percent in share price movements in IJM can be explained via share price movements in Gamuda. At Gamuda’s current share price of $4.89, the forecast share price of IJM is approximately $3.29 (which is relatively higher than the current share price of $3.09, as of 30 Nov 2017). The 95% confidence interval for forecast share price of IJM is between $2.56 and $4.02.
Nevertheless, it is important to note that although these entities are construction peers, they are two different companies with very different fundamentals. One notable difference is IJM has a plantation division whereas Gamuda does not have. As such, a simple regression analysis cannot be used on a standalone basis to determine whether a company is in an oversold or overbought (alternatively, undervalued or overvalued) position.
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