More on TransMile

My Dearest InvestBullbear,

You wrote the following.

......there is speculation that management was perhaps under pressure to keep its numbers high to please investors and possibly facilitate a placement of shares completed in November last year that was largely taken up by foreigners.

Extracted from the Edge this week:

• Extracted from the Edge this week:
  
  On Monday, May 7, while the counter was suspended, it announced that the unaudited results showing a pre-tax profit of RM 206.734 million for last year were unreliable.
  
  The clues for solving Transmile’s mystery lie in the company’s announcement, particularly in the part where the auditors state that “they have not been able to get hold of supporting documents from the management on certain transactions relating to trade receivables and related sales and additions to property, plant and equipment”.
  
  What exactly is the “accounting relation between trade receivables and related sales, and additions to property, plant and equipment” that the company is talking about?
  
  “Some amount of trade receivables was paid not in cash, but in the form of property, plant and equipment where the documents are not available. That is the problem,” a source says.
  
  The said amount is about RM 50 million.
  
  An accounting official says there could be a related party transaction with Transmile, for example, in which it provided a service to the related party. The payment for the service may have been made later in the form of property, plant and equipment. However, the absence of proper documentation to substantiate the transaction could have prompted the auditors to refuse to sign off the accounts.
  
  This begs the question: Are the accounting woes of Transmile simply a matter of poor record-keeping or a scheme to obliterate the paper trail, which could raise doubts about the legality of those transactions?
  
  There is also another view that the problem could have started in FY2005, which explains why the documents cannot be found.
  
  More importantly, is the amount so big that it will impact Transmile significantly?
  
  To get an idea of the quantum of the amount in dispute, analysts are looking at Transmile’s trade receivables, which ballooned to RM381 million in FY2006 from RM111 million the previous year. This is despite an 80% increase in revenue to RM 989.2 million in FY2006 from RM550.1 million the previous year.
  
  The point to note here is that the receivables accounted for much of the company’s sales growth. Hence, if a large part of the figures has to be provided for, Transmile’s net profit of RM157.5 could be revised down significantly.
  
  With no guidance from the company on the worst-case scenario, analysts are looking at a complete wipe-out of Transmile’s profits for FY2006 amounting to RM157.5 million.
  
  JP Morgan’s Lucius Chong believes that a 5% restatement of Transmile’s earnings is the best- case scenario.
  
  In FY2006, Transmile’s cash and bank balance almost doubled to RM417.7 million from RM261.2 million in the previous year. Its property, plant and equipment figures showed a slight decrease to RM 1.55 billion from RM1.57 billion a year ago.
  
  But in FY2005, Transmile’s property, plant and equipment revealed an increase of RM1 billion due mainly to the purchase of aircraft, parts and equipment. (In May 2005, Transmile took delivery of four MD11 aircraft. In the same year, it also acquired two Boeing 727 aircraft, which were supposedly delivered in 2006.)
  
  The facts and figures are at the disposal of investors. Still, it may not be easy to detect any discrepancies due to the lack of information on the accounts.
  
  Another point to note is that if it is a matter of unsubstantiated transactions, how can the appointment of another accounting firm help solve the matter in about a month?

In all honesty, all I can do is speculate what has had happened. And most of it is based on quoted stuff from news.

Which is really not intelligent at all.

Which is why the main grouse so far is perhaps best said by the Spore Btimes reporter saying why had the management not saying anything at all. And why had Bursa and SC remained silent?

That it had dragged on for so long indicates something was wrong in their accounts.

Right now, the issue would be, two things.

1. How badly stated was their account?
   
2. Was there intent?

Now those two issues would have a huge barring.

1. Transmile has had been priced for a growth stock. If their accounts were badly overstated then would it mean that the status of it being a growth stock is tarnished? And if so, then Transmile would probably not command the higher price earnings multiple it had enjoyed previously. And as noted, Transmile had done several placement issues in recent times. The POS placement was done around 30% and several various form of placement has been done. All of which will have an impact if one were to use the pe multiple as an indicator.

2. The issue of intent. This is by far more serious. The fact that Transmile went limit down on the first day and as mentioned by the press, foreign funds sold out. Damage has been done. If the allegations of intent were proven, I would seriously believe that these foreign funds would avoid Transmile like plague. So how much can our kampung fund do? And also, a lot of other investors would avoid this stock simply because it makes no sense to be an investor of a company whose owner/manager has been proven guilty in an attempt to cook their books. The issue of trust is but gone.

And if one adopts the rational approach, perhaps it simply makes no sense trying to be a hero in a hard place. Market is hot. Perhaps there is much better investment around for our hard earned money.

And what is the flipside of such a safer approach? Well one missed an opportunity, that's all.

Does it hurt?

Nope.

The Market is always there, my friend. Other much better opportunities will arise in the future.

rgds,





**** this blog posting is reproduced from a Sahamas posting. please feel free to voice your opinions. ****