Thursday, May 31, 2007

Reviewing the events at TransMile

My dearest Moo Moo Cow,

Here is a summary of what was written on this blog on Transmile.

I first did a posting on TransMile back on Nov 18th 2005.

  • X We like Transmile for: (1) Its unique product, i.e. point-to-point express air transportation service; (2) Its ability to secure traffic rights for lucrative routes; and (3) Its EPS that is expected to grow at a CAGR of 67% between FY12/04 and FY12/07, backed by two full-fledged US-bound services. Maintain OUTPERFORM with a DCF-derived indicative fair value of RM12. In our DCF model, we apply a discount rate that is equivalent to Transmile’s WACC of 10.1% (based on a 20-year risk free rate of 6%, an equity premium risk of 7.5%, Transmile’s Beta of 1.07x, a target debt-equity ratio of 0.7x, and an average before-tax borrowing cost of 6% per annum).
A CAGR of 67% between fy12/04 and fy12/07? See how the Mile game was set back then in 2005! (This posting has an update here: Update on Transmile )

  • Note: Malaysian air cargo firm Transmile Group Bhd said on Wednesday a special accounting audit had found there may have been an overstatement in its revenue by 30 percent in 2006 and by 36 percent in 2005.
TransMile and its receivables was blown wide open here: Transmile Receivables

  • Validity of Transmile's 87 per cent higher pre-tax profit of RM206.7 million for the 12 months to December 31 2006, was questioned following the logistics group's failure to furnish its auditors with required data to substantiate the figures, Transmile told Bursa Malaysia yesterday.

Here's the 4th quarter report of the fiscal year earning, Quarterly rpt on consolidated results for the financial period ended 31/12/2006

Below is a snapshot of Transmile's balance sheet!

Fiscal year 2006 receivables were reported at 381.247 million, which is much more than the previous year fiscal year 2005 receivables of 111.113 million!


I can understand why the auditors want to see more data!

Transmile opened limit down at 9.10 this morning. It is now trading at 9.95. A crisis buying opportunity? This is really risky because at this moment we do not know how drastic this issue is!

I was then asked, How about TransMile?

  • Any chance of light for transmile?? I still like the biz model despite the recent hoopla..

Given what is happening, from an investing perspective, what I believe we have is a whole bunch of unknown factors. At this moment of time, we do not know exactly what is happening and neither do we know the extent of the troubles, if any.

So frankly, I do not see how I would want to invest in Transmile at this moment of time because there is no way I could make a rational investing decision.

But the greatest risk is if TransMile is guilty of wrong doing. IF. And if that happens, one cannot really treat TransMile as a quality stock anymore. For the issue of integrity is then gone. Ah yes, the business model will still have value. But then it becomes a case where one is forced to value a company whose integrity has been shot to pieces!

Of course, if forced to, I could speculate and I could guess but all I am doing is I am speculating what would happen.

And frankly, this is simply beyond me and it's certainly beyond me to speculate if there is a chance of light for TransMile now.

On May 14th, I did the following posting, TransMile

The following table is taken without that quarterly earnings reported on Feb 2007. Have a look.

1. Clear built up in receivables.

2. nett debt kept on increasing!

Now the most important thing I would ask is where is the wealth generated?

From 04 Q3 to 06 Q3, the company said it generated sales of 1.476 billion ringgit and it said it earned 200.881 million.

Good numbers but look at the cash position. For a company earning 200.881 million, this company went from a nett debt of 123.861 million to 680.819 million!

The following table showed the inclusion of 06 Q4 earnings.

Quarterly rpt on consolidated results for the financial period ended 31/12/2006

Profits and cash increased substantially. nett debt decreased. Somehow.. the numbers do not tally... And given such data... perhaps... an investment in transmile could be questionable!

And then I wriote this other posting More on TransMile

  • ......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.

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?


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

And then there was the question of a 50 Million Adjustment for TransMile?

So the Edge Weekly is suggesting that perhaps a 50 million adjustment is required.

Let's do some simple calculations.

The following table shows TransMile earnings.


So a 50 million adjustment could see fy 2006 earnings adjusted from rm157 mil to rm 100mil.

Now TransMile current number of shares is extremely tricky since it is ever expanding.

So as it is today, there are 270.118 million shares.

This means that TransMil eps 'could' be adjusted to a mere 37 sen, IF its earnings is adjusted by rm50 million to rm100 million.

So what PE multiple do you reckon TransMile could command after the adjustment?

Do you reckon it could command a pe multiple of 20x after this adjustment?

But if market take the adjustment poorly, TransMile could trade as low as a simple 15x multiple.

20x on an eps of 37 sen = 7.40

15x on an eps of 37 sen = 5.55!

How? Me? Honestly, I would rather not guess in such a fashion for I do not really know what is happening but a 50 million adjustment, could do some damage on TransMile in my opinion.

Last night:
  • Malaysian air cargo firm Transmile Group Bhd said on Wednesday a special accounting audit had found there may have been an overstatement in its revenue by 30 percent in 2006 and by 36 percent in 2005.
See The Full audit Statement on Transmile!

It's one terrible mess and I do not think it is advisable to hunt for value in such a stock!