Wednesday, June 30, 2010

Have You Taken A Look At MEMS lately?

It was October 2009 that I last wrote on Mems: MEMS Told To Correct Its Financial Statements!

Key issue pointed by the news article was the following..

  • In a statement issued yesterday, the SC said it viewed MEMS' non-compliance with the FRS118 "Revenue" "very seriously".

    On August 4 this year, the SC directed MEMS to rectify and reissue its accounts for the financial years ended 2007 and 2008. MEMS was also to rectify and announce to Bursa Malaysia its unaudited condensed consolidated income statements for the six months ended January 31 2009.

    MEMS was to rectify the financial statements by excluding RM49.183 million from its revenue for all the three financial statements.

    The basis of the SC's directive was that the amount was derived from transactions that never took place in the respective financial years and period.

    Investigations by the SC revealed that the group's revenue of RM53.699 million reported in the 2007 financial statement contained bogus sales of RM13.007 million,
    while the revenue of RM71.994 million reported in 2008 contained RM24.161 million sales which did not take place.

    For the six months ended January 31 2009, MEMS reported revenue of RM37.366 million, of which RM12.015 million sales had not been transacted.
Transactions that NEVER took place according to SC!!

Yeah. That bad.

Last night Mems reported its quarterly earnings. Its review of performance was interesting for me.

  • For the quarter under review, the Group generated revenue of RM0.29 million, representing a decrease of 98.50% from the revenue of RM19.27 million recorded in the corresponding period of the previous year. The Group posted a loss before tax (“LBT”) of RM3.17 million for the quarter ending 30 April 2010 representing a decline of 489.68% against a profit before tax (“PBT”) of RM0.81 million for the corresponding period of the previous year.

    The Company provided full impairment of assets in its Penang plant as the management do not intend to resume operations after its cessation in September 2009. The Group has resumed operations of its Johor and Singapore plants albeit at a substantially reduced scale pending the restructuring of the Group.

The full impairment of assets issue was rather interesting.

You see, many investors like to find 'value'. Yeah, everything has some sort of value. Good or bad, there's some sort of value. As long as one buy cheap enough, one can make.

Well, I don't totally disagree. Take a broken laptop. As badly broken itself, if you can find someone offering some money for it. Not a lot but some, maybe 10 or 20 bucks! (I am not too sure ok, so don't take that statement as the holy grail because conditions do vary!)

So for stocks, good or bad, there is some sort of value in the stock. Heck, some even dare say that the listing status could be sold if the company is lucky and manage to find a kind buyer.

So some people invest in stocks using yardsticks like NTA or RNAV.

Now back to Mems. Mems is now saying it has provided full impairment of assets for its Penang plant.

Now if one look at Mems most recent 5 quarterly announcements, one would find a very interesting read. (10 Q3 earnings was reported last night)

Here are my comments on the numbers

1. Sales. Company's most recent quarterly sales is now only 29 thousand!!!!! Holy cow!!!

And this is a listed entity? A stock? And yeah.. during its peak, Mems had a traded market value of over 530 million! I wonder how much did the 'transactions that NEVER took place' helped the stock to trade so highly!

2. Earnings. 4 quarters of losses. Even without the write down, sales is only 29 thousand. How much profit can Mems make in the future with such sales revenue?

3. Cash. 288 thousand????

4. Debtors or Trade receivables. 09 Q4 and 10 Q1 saw the company write off the bulk of their high trade receivables. Again point to note that when trade receivables soars too high, sooner rather than later, it will be written off as bad debts. And the company will suffer losses! And the losses could be really huge if the debts to be written off is huge!

4. Plants.

Yes... that's the most glaring thing now.. the assets!

Look at the last column, Plants or plant and machinery stated in Mems 09 Q3 earnings was worth 90.265 million. Now since the company said it did not intend to resume operations since its cessation in Sep 2009, by logical reasoning, the plants and machinery is certainly worthless! Which means, the company has to write off the plants and machinery! Yup impairment of assets.

The bottom line? The assets of its plant and machinery stated in its 09 Q3 earnings was 90.265 million. Today, Mems plant and machinery is only worth 28.925 million!

The chunk of impairment made on its assets was rather drastic, yes?

And this is where the potential risk/danger in investing based solely on NTA. Yes, on one hand, to know the company has tons of assets is certainly a plus. However, sometimes, in rotten cases (remember Megan? loans taken to buy non existent factories and plants?), the assets can be written down big time!