Thursday, July 01, 2010

What's The Potential Of Coveright Surfaces To Analabs Resources?

Received the following comments from grahamsmun in the posting: Update On Analabs Earnings

  • Coveright is a superb buy !
    An investment of Rm 32m giving a return in investment of Rm 11m a return of 34% p.a.
    We hard the find such buy giving such a good return.
    On top of this analabs still got Rm 9m cash and Rm 12m of securities with no borrowings !
    Tribute should be given to Analab's management increasing dividend to Rm 0.05 tax exempt also !
Grahamsmun, long time!

Ok, let me say this without twisting and turning. Yes, Coveright Surfaces, and the resin impregnated business does have its potential. No doubt.

However, I reckon I deserve the right to pass judgement because it is still way too early to pass judgement.

But if you would indulge in me, let me share why...

Now Analabs acquisition of Coveright Surfaces is described in this pdf file posted on Bursa website.

Now one of the obvious way to gauge an investment is obviously the return of investment. Yeah, this type of stuff, no need to say for it's common sense. :D

Anyway, what I was interested in is the financial track record of Coveright Surfaces.

Here's my comments on those numbers.

1. It's always about profitability. No profits for Coveright means most likely this would be a poor return of investment for Analabs Resources.

Look at the numbers. The last two fiscal year, 2007 and fy 2008, the earnings are DECLINING, yes?

2. The net assets. Compare 2004 and fy 2008. Why the decline?

I then put these numbers into my worksheet.

What do I see? I see declining profit margins!

Am I impressed? Are you?

Now Coveright have only contributed 3 quarterly earnings to Analabs results. Taking the numbers from the segmental results, I have compiled it and placed it right below. This way we can see Coveright performance before and after.

Oh.. Coveright 2009 numbers... missing. :( :(

Yeah.. don't ask me... I cannot seem to find it.

Here's my flawed interpretation.

1. It's like I am looking at two different companies. The one in yellow was less profitable. (Ok, we are missing 2009 numbers). The one in yellow was Coveright performance before it was acquired by Analabs.

Ok.. perhaps I am being overly cautious and there could be a logical reason why the business economics had changed for the better. For example, a better selling price for their products could be a reasoning. ( Now if I am seriously an interested investor, I reckon it would not hurt me to find out more. LOL! Yes.. get out of my lazy chair, move it move it! Stop staring at Shakira and her Wakaka! friends kicking and diving and play acting while chasing one round ball! :P )

2. Q4 numbers (ie Coveright earnings) dropped substantially versus Q3. Sales dropped. Earnings and its margins also slumped. Why?

And this is where it's tricky.

Is it seasonal? Is it a temporary factor?


I stick to the easiest solution. LOL! LOL! Which is to say 'its way too early to pass judgement!! :P

But of course... for the really, really, really cynical bugger... the bugger would be thrashing out the conspiracy theories and indicates the extreme goodness of the numbers.


Yes, the numbers were too good to be true. :P

What do we have? 11.054 million profit from a sales revenue of 69.827 million was contributed to Analabs earnings this fiscal year.

And how much did Analabs paid for it? 32 million!

Of course, it's indeed a superb buy!

But then the really, really, really cynical bugger would be asking is the owner of Coveright Surfaces silly or what? :P

Yes... if the company does make 11 million from a sales revenue of 70 million, or a profit margin of 15%, why on earth did the owner sold this business for a mere 32 million???? Something smelly?


And needless to say, if it's indeed so good, why should Analabs minorities complain? They be rather silly if they did, yes?



solomon said...

First I thought the deal is valued at RM40mil??

If we clawed back to the proposal posted in Bursa dated 22/7/09, I am a bit concerned with a company net asset per shares decreased when it make money and capital remains....this may explain some uncomfort either more liabilities (eg taking up of loan) or outflow of cash??

The net margin for the company also shows some sign of lethargy over the 5 years (2004-2008)??

Hey why not take note with the key management risk and 5 year technical agreement on a strategic viewpoint? This could be a downside risk here.

Maybe Grahamsmun is right, I am flawed as well again??

NK Blog said...

No 2009 figures available as they change their fy to coinicide with Analabs i.e. 30 April

BTW, the purchase price is RM40m and not RM32m.

Moolah said...

NK Blog: Yes, in the initial proposal to buy Coveright, Analabs said it was 40 million.

But from the cash flow statement from Analabs quarterly earnings, see blog posting in March 2010,A Look At Analabs Earnings, Analabs recorded the acquistion as 32 million in its cash flow statement.

See screen shot here

Me? I would just use the cash flow statement acquisition amount as point of reference.

NK Blog said...

The cashflow shows a net of cash position i.e. they have netted off the 8m cash in Coveright BS. The cost of purchase is 40m.

Moolah said...

NK Blog: Well, if you have checked it in detail, then I shall take your word for it that the purchase is indeed 40 million.

And thanks for the clarification.


tklaw said...

I was puzzled over the good profit generated by Coveright for the past 3 quarters.

When comparing the latest results announced figures with the first consolidated accounts on 31 Jul 2009, I found

- Receiveable increased 2.5 million
- Inventory increased 1 million

The figures are suspicious but amount is not significant to justify the profit of 11 million generated from bogus sales or inaccurate inventory.

tklaw said...

The early signs of risks are normally associated with longer cash conversion cycle result from surging inventory, Trade Receiveable and increasing borrowing to off set the hidden losses.

ie, Trade Receivable of Kenmark had been increasing from 164 million (FY 31-3-2009 )to 249 million in third quarter results ended Dec 2009, before the annoucement of audited accounts.

Moolah said...

tklaw: many thanks for sharing your views. Appreciate it.

Anyway, as mentioned in the posting, I still reckon it's way too early to pass judegment on Coveright Surfaces to Analabs Resources.