Saturday, January 08, 2011

Reply To Comments On MaeMode

I did not feel like replying to hng's Belated Comments on Malaysia AE Model (MaeMode). I felt that the ton of postings I had written before was sufficient and it was just best to highlight hng's comments.

However, I thought about it. It would do no justice to hng and it would be extremely snobbish not to reply.

So here goes. I hope my reply is not offending for sometimes my fingers type what is needed to be typed.

  • Hi, i've look into your research on Malaysia AE model, which you have highlight its growing receivable and incur high borrowing cost in its balance sheet. Despite Maemode have recent proposed 1 for 3 warrant, but it will only raise less than 500k for its working capital etc..

Yes, I did made this fact clear. On 9 Sep 2010, in the posting MaeMode Wants Your Money Again!, I wrote the following..

  1. MaeMode last traded yesterday at 50 cents.
    Exercise price is fixed at rm1 per MAE share?????
  2. some extra food for thought.
    a.) 2005, MaeMode had a rights issue. That raised some 31.7 million.
    b.) 2008, MaeMode had a 10% placement. That raised some 13.245 million.
    2010... we have rights issue of warrants. :D
    And yeah... MaeMode would generate some little money for their working capital.
    A huge 518 thousand would be generated from this attractive rights issue of warrants.

So just to let it be known, the 518 thousand was raised from this rights issue of warrants. And yeah, let it be known again that the exercise price is at rm 1.00 per share.

  • I'm agree with your concern on Maemode, but i do understand its business nature in which Maemode once secure project, it have to pay upfront cost and there is no progression billing until the whole project is almost complete or already hit certain portion of the entire project, then only the billing will be kick in.

Let me state I do not understand MaeMode's business. What I had commented was based on MaeMode's own earnings notes which showed the incredible ( I had used the word insane if I am not mistaken on it before!) increment in MaeMode's receivables and borrowings each year.

Yeah, comments were based on numbers and not the actual understanding of the business. This I do not deny.

Now I am willing to give you the benefit of a doubt and I am willing to assume that you are correct.

And if so, what do we have?

Hope my understanding of what you had written is not wrong but you are suggesting that MaeMode's can only bill the customers once the job is finished and whatever cost incurred is covered by MaeMode?

Errr .... sorry but does this sound like a good business? Seriously, if you asked me, this sounds like a rotten business to be in. and what about collection? Does this mean that after the job is completed, after the bill is submitted, then MaeMode can only seek collection?


Assuming it is like this... my next simple questions are:

  1. Does the customer pay in time?
  2. What if there is a default in payment?

Ok, I do understand that in general, collection of business is an issue in general Malaysian business. Not saying all are bad paymaster but there are more business that do not pay their amount due promptly.

That means .... time is needed.

And in MaeMode's 'special' case, where it completes it jobs first before billing, that would mean that MaeMode's collection of its money is much longer than other business.

Again, the question, does this represent a good solid business to be an investor?

( ps: do remember, I usually blog based on an investing/business perspective. I take no consideration about the market.)

And then ... the issue of the possibility of default of payment.

Here's MaeMode track record SINCE 2002.

It operates on thin margins (ie below 10%) and in recent times, margins have fallen below 3%!

Now with such razor thin margins, do consider how MaeMode is doing its business again, where billing is only made after the job is completed.

And then consider the issue of payment default.

Based on such razor thin margins, could MaeMode afford even one default in payment?

And from an investing perspective, ie if MaeMode was not a listed company, do you think it is logical to be a business partner of such a business?

My answer? You should know, is a no.

Of course, I could be wrong and that MaeMode could grow into one profitable company, yeah I understand the simple thing such as wind of fortunes could turn favourable for MaeMode but based on such numbers, based on such track record, I rather be flawed because I miss this opportunity.

Errr... missing out is never a crime for me, hor. Losing money based on a bad set of reasoning is.

Ah... this missing out issue, is rather misunderstood by many.

Many thinks that one is a loser if one misses out.

But is this really the case?

Take a simple comparison. Take a real casino. As you know, every day, got many losers in a casino but there are also many winners each day. Some big ones. Every know and then, one would see someone winning big, sometimes making a million in the slot machines. It happens pretty often, yes?

Now, if you are a casino gambler but have a history of no luck in the slot machines, what do you want to do when you see someone striking rich in the machines? Do you want to follow, just because you do not want to be considered a loser because you missed out? Yeah, so do you want to put in a couple of thousand in the slot machines each day, hoping you would also be the next million dollar winner in the machines?

Ah... sometimes... lady luck do smile at us and we could be the next winner.

But then .... there's a great chance we are not so lucky.

And this is very much the same with stocks. Sometimes, we see people punting and making so-called blind money from the machine. But if punting is not something we are good at, should we follow? Expanding it further, this is very much the same with stock pickings. For sure, if we buy stocks that 'have not' move in a very bullish market, of course, there is a chance the stock will move. But then, I am sure, many could easily point out too that in a very bullish market, there exist stocks that could even plummet into the abyss!

Ah.. I am not implying anything, ie I am not saying MaeMode is a 110% candidate to plummet. All I am saying is I rather miss whatever opportunity this company has got to offer based on its track records.

  • That is, Maemode have to borrow its working capital via bank borrowing first, which in accounting, its consider its receivable, which then justify its growing receivables in par with growing borrowing in its balance sheet every time there is new project secure. In short, Maemode business model is unlike conventional, its need to borrowing money as working capital which in turn account these working capital as receivable, then once the project in completed, billing will be make and set off most of the receivables and the balance is its net profit. It is indeed difficult to analyze its balance sheet correctly, as there is keep project coming in which in turn causing its unlikely to pare down its receivable per project

Hmmm..... so what you are saying is 'Maemode business model is unlike conventional, its need to borrowing money as working capital which in turn account these working capital as receivable, then once the project in completed, billing will be make and set off most of the receivables and the balance is its net profit'

Err.... again... assuming and accepting your points.... errr.... my simple question is.... how long can MaeMode keep using such business model?

Can it forever borrow money as working capital?

Look at the rate its borrowings has increased over the years. In 2002, it owed its bankers some 75 million. And despite the capital raising effort in 2005 and 2008 (MaeMode raised 31.7 million in rights issue in 2005 and 13.245 million in 2008 private placement). MaeMode's borrowings as per its latest earnings report is at an incredible 328.176 million. Now aren't those figures astounding and crazy? It is for me.

And you said 'set off most of the receivables and the balance is its net profit'.

Now if that's the case, why isn't there any sign of receivables shrinking?

In 2002, MaeMode's receivables was 56.894 million. Today receivables stands at an incredible 353.212 million.

Err... is there any sign of collection? Why is the receivables ballooning each single year?

Ok, let's not go so far back to 2002. Let's use 2007 instead.

In 2007, MaeMode had 191 million in borrowings and receivables were 243.109.
Today, MaeMode has 328.176 million in borrowings and receivables are at 353.212 million.

Which means MaeMode's borrowings increased by 137.18 million and receivables increased by 110.1 million.

And during this period, how much did MaeMode actually make in terms of net profits?

In 2007 it made 16.218 million.
In 2008 it made 20.418 million.
In 2009 it made 11.793 million.
In 2010 it made 6.940 million.
2011 Q1 it made 0.852 million.

All in? The total earnings during this period is only 56.231 million only.

Compare again. During this period, MaeMode's borrowings increased by 137.18 million and receivables increased by 110.1 million.

All I can see is disconnect and I simply cannot comprehend such a business model.

Does MaeMode sounds like a logical sound business entity that I want to be a business partner in? My answer is a simple NO.

  • I'm on opinion that Maemode recent secure two new project LCCT and Indo coal plant will contribute significantly in its 2011 financial result. Expect its EPS to be above 10sen. Its upcoming warrant 1 for 3 also serve as sweeten if its share price ever back to before 2008, share price was above RM1.00

Sorry but sweetener?

The exercise is at 1.00 yes?

So how can this be sweet?

Before 2008, it's share was above 1.00.

Well.... the earnings since 2008....

  • In 2008 it made 20.418 million.
    In 2009 it made 11.793 million.
    In 2010 it made 6.940 million.
    2011 Q1 it made 0.852 million.

That's a rather a poor set of earnings, yes?

  • From my own investment point of view, Maemode should have limited downside risk, and the risk is further cushion from upcoming warrant 1 for 3, 2sen each for 10yr.

Oooh... limited downside risk?

That's 3 words I would never dare use in the stock market.

ps: Thanks for sharing your investment point of view and I am just merely sharing my investment point of view back with you... and needless to say... please just take my comments with a pinch of salt for I am always wrong in the stock market.

ps/ps: Regarding MaeMode's current debt of 328 milliom... is this not a worry when you put into consideration of MaeMode's current earnings?

ps/ps/ps: The receivables issue. What if a portion of it is considered bad? Not possible? Say 10% bad? That's more than 30 million to be written off. Would this not be a huge risk factor?


Kris said...

Maemode, can only bill payment upon task completion and absorb any incurred cost along the way..Seems an illogical business model.

I prefer the model the property developer has: Bill first then build later. The risk is at the property buyers.

That is why developers don't like the government's idea of BTS: Build Then SELL..Something like Maemode's current biz model.

Then again, i only understand property biz not Maemode's bizness like you Moola.:P

Anonymous said...

Hi kris

That is exact Maemode business model, pay whatever upfront cost to complete project via bank borrowing and later only can bill its customer. The risk are poor cash-flow, bear interest cost and risk of unable complete the project on schedule and of course delay in customer payment and all other collection risk.

Anonymous said...

Hi Moola

I really impress with all your analyze on Maemode and you have rightly point out its risk associated with ever increasing borrowing, receivable, downtrend on its earning, possibility to make huge provision on bad debt and written off it in balance sheet etc

But, what i'm concern is only short term on investing in Maemode to entitle its upcoming warrant(1-3month) and possible good set of result in its Q2, which in turn could resume its EPS back to above 10sen.

Based on its 54week range of share price 48-77sen, i'm quite confident that Maemode share price have limited further downside risk, which i'm already pointing out its 1 for 3 warrant will cushion its risk. Newly warrant with 2 sen each, exercise price at RM1 and is for 10yr, should have trade at premium 30-50% of its mother share.

Anonymous said...

If put all concern on Maemode issue related to receivable and borrowing aside fist. Back to short-term prospect on Maemode (1-3month): Among the plus factors are warrant 1 for 3 (warrant at 2sen, could potential trading above 20sen once is listing), cum dividend of 1 sen; potential higher EPS in Q2 and for FY 2011, EPS could recover >10sen based on 2 newly secure project. Maemode has historical trading median PE range from 6.5-9x

value investing in malaysia said...

hi moola,

whats ur take on mitrajaya?

just posted my writeup on this counter.