My Dearest Moo Moo Cow,
Someone passed me this research report on Megan Media.
- Megan Media Holdings
Recommendation: STRONG SELL
MMHB MK Price: MYR0.455 12-Month Target Price: MYR0.26 Date: May 9, 2007
Summary: The Megan Group was set up in 1994 as a provider of plastic injection service to the electronics and automotive industry. It later diversified into the media storage business and became the first licensed local CD-R/DVD-R manufacturer in Malaysia.
Analyst: Robert Lin
Recent Developments
• On May 4, Megan announced that two of its 100%-owned subsidiaries defaulted on MYR47.3 mln trade facilities and indicated both companies would be unable to meet other repayments. This is due to an exceptional build-up of its trade debtors, according to the announcement. Megan will decide whether it will go into bankruptcy within three business days.
• Based on the available information, we estimate that the group’s total exposure to its subsidiaries amounts to MYR465 mln, comprising a US$40 mln loan that was extended by the parent company to a subsidiary (source: FY06 annual report), and an issue of Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with guarantee from the parent company (source: FY06 annual report).
Earnings Outlook
• We have slashed our earnings forecasts for Megan. We now forecast Megan to record net losses of MYR101.9 mln (from net profit of MYR54.7 mln) and MYR6.1 mln (from net profit of MYR64.0 mln) in FY07 and FY08. Our revised forecasts are based on (i) the write-off of the US$40 mln loan extended by the parent company, and (ii) higher interest expenses.
Recommendation & Investment Risks
• We downgrade our recommendation on Megan to Strong Sell (from Hold) after cutting our 12-month target price to MYR0.26 (from MYR0.70), which is derived from ascribing 0.15x (from 0.25x) to our revised FY08 BVPS estimate.
• We believe the group is technically insolvent, with total borrowings of MYR888 mln vs. total shareholders’ funds of MYR507 mln by end 3QFY07. Given the potential bankruptcy and related liabilities that may exceed our estimate, we believe there is significant downside for Megan.
• We have picked a target P/B multiple of 0.15x, suggesting a 40% discount to the trough P/B of Taiwanese optical disc manufacturers.
Nevertheless, we view this is a benchmark as opposed to a fair value for Megan, as the financial health of the group is highly uncertain.
• Risks to our recommendation and target price include a higher-thanexpected proceeds from the disposal of the group’s assets. In addition, an extension of debt obligations and lower-than-expected interest rates proposed by lenders will enable Megan continue its operations without being liquidated.
How?
Do NOTE that the analyst has not touch the issue of receivables at all!
And if a chunk of that were to be classified as bad debts, the losses would simply be devastating!
A target of rm0.26? That is simply too generous!
Still want to sit on paper losses ( Good posting, my dearest Moo Moo Cow! )?
Still want to average down on? Isn't this like trying to average down on one's mistakes? Denying that one is wrong?
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1 comments:
Dear Moola,
I am a newbie investor, just wonder to ask few questions regarding Megan.
1st, everyone knows that Megan is having financial difficulties right now, but one thing to say is that Megan still remained profitable in the past 4 years even though they have incurred lots financial expenses. As they disclosed, the difficulties arised because of big bulk of receivables, is this really an issue? If it is not collectible, why the auditor nor the finance department did not write off the debts? Does it mean it is still collectible? If yes, although the current ratio is not healthy but it's still acceptable.
2nd, The long term debt is really incredible but even so, long term debt can be recovered by years earning isn't it?(Provided cash inflow from debtors)
3rd, 211mil of deposit is paid for future expansion, for purchasing land and plant(Extracted from 06 report),I don't understand why the management decide to do this when they know they will be having financial difficulties, one explanation is that they should be able to service the loan to overcome today's problem. Please be reminded that they still having a capital commitment of over 10mil.
4th, The industry is estimated to be going downside, but as i know, none of the product can replace or substitute DVD-R, at least for now.
5th, This is not a good investment simply because of the capital structure? Or because of the future prospects? Capital structure looks unhealthy because of huge long term debts, but lenders are not stupid, i believe lenders will assess the credit rating before they lend the money to Megan, so, should we believe it's credit although current issue is exposing?
6th, Although there are excessive selling of shares from their directors but i actually found that a person called BRAHMAL A/L VASUDEVAN acquired more than 10mil of share in March 06'. I can't get any explanation of this, can Moola help me?
These are the questions i really wonder to know about. Thanks Moola.
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