Friday, June 17, 2011

Featured Post: The Muhibbah Fiasco : How Lousy Disclosure Cost Shareholders Monies

Here's an extremely good reply to the posting: And Muhibbah Comes Crashing Down.

Friday, June 17, 2011

The Muhibbah Fiasco : How Lousy Disclosure Cost Shareholders Monies
This is an extension of the discussion I have in Moolah blog post : And Muhibbah Comes Crashing Down. Since it is too long of a reply and it has attachment and stuff, I have to do it here. Do give his blog post a read.

First and foremost, this whole thing is preventable if one take a good look at the annual report. But, poor disclosure standard in Bursa as well as what I think is some non-compliance of Bursa Listing Rule by Muhibbah reduces the chance of shareholders of discovering the receivables issue. But, it is alright, I have my own fair share of stupid preventable mistakes. Early last year, I made an investment into Choada Modern Agriculture (0682:HK) despite my brain tell me to do otherwise as there are a tad bit too many aggressive accounting practices and some dubious management actions. However, the numbers like PE and ROAs and stuff looked a bit too good and I just drank a dose of Jim Rogers that I rationalize everything that is wrong with the company. By the middle of last year, I am starting to get a bit too uncomfortable and think the whole thing is a fraud as they have been avoiding to answer or deflecting some of the questions that I asked. So, I sell and took a 20+% loss. On hindsight, I have some really good luck as this whole Chaoda thing is being discovered a fraud by HK Next magazine this year and I would have lost my pants if I had not sold it at a loss. With the Chaoda experience, you would have think that this idiot will learn some lessons. But, this idiot again make an ill-thought out blog post stating that I may go long on China MediaExpress without actually looking much into the company and try to rationalize too much. China MediaExpress turn out to be another fraud. I am again lucky that some kind soul actually talk me out of going long after reading my post. The key lesson learnt is to always read the footnotes, bring your brain with you when analysing companies and do not rationalize too much.

Lousy Financial Reporting Standard
That aside, back to Muhibbah. If one actually take the opportunity to read their disclosure in their annual report, one would not have face this problem. In their FY 2009 audited account, Muhibbah actually discloses this:
A trade debt of RM337.0 million (including retention sum of RM22.5 million) and an amount due from contract customer of RM28.3 million in relation to a project undertaken by the Company for the engineering, construction, installation, commissioning and completion of a bunkering facility has been outstanding for more than a year.
The project has temporarily ceased during the financial year ended 31 December 2009 due to financing difficulties encountered by the project owner. The last progress payment received by the Company was in February 2009. The project owner has continued to approve the progress billings submitted by the Company and had acknowledged its obligations under the contract signed with the Company. The project owner has informed the Company that it is in the process of arranging an alternative source of financing and expects the arrangement to be completed by mid 2010.
The Directors have evaluated the situation and other evidence available, including the assessment of the status of the project owner’s refinancing arrangements, and are of the view that no allowance for doubtful debts or a write down in the amount due from contract customer is required at this moment.
The account is audited by KPMG and is issued at 30/4/2010. KPMG, short of qualifying the account (for those of non-accounting background: Unqualified means good, qualified means bad), actually emphasize the issue in their audit opinion in addition to the disclosure in the notes. The audit opinion, meanwhile, is something that most investors do not read although most bad stuff that the auditor do not agree with the management normally end up there. Take note that by the time this audited account is being issued to shareholders, APH (the trade debtors) has not paid Muhibbah for more than a year. Plus, by the time the audited annual account is issued, it has reached mid 2010, the time frame that the whole financing thing supposed to be done. The fact that the opinion of the auditor remains the same means that the financing is not being completed yet. In addition, pay attention to the management reason for not providing for any doubtful debts : APH acknowledge the obligation under contract signed by the company. It is just an acknowledgement. A normal thing. It did not elevate Muhibbah position in the debtors packing list or provide them with any security. Just because APH acknowledge the debts, Muhibbah decide to not write down even a single cent of the thing. If say, the RM300mil debt is by different parties rather than one party, one may presumably would have write down the debt.

It is still okay if you hold on to the company at that point of time, as it is the first time the disclosure actually appeared. But, I would not be comfortable to invest at that point and if I invest, I would be constantly bugging their IR for progress. To be fair to our super star Bursa's finest analyst at CIMB, they do touch on the issue in their 19-page initiating coverage of Muhibbah with one paragraph out of that 19 pages of crap and do not discuss the serious damage done to their equity in the event of a default but rather put a positive spin on the whole thing. They maintain that the issue will be resolved within 1-2 months. Note, by the time that the initiating coverage is being produced, it is already in mid-November, well beyond the timeline stipulated in the audited account. Our Bursa finest continued to report that the issue will be resolved within 1-2 months for one or two more reports until he conveniently forgotten about the issue in the subsequent buy call that he issued thereafter. Perhaps, it is 1-2 months too long.

Then, on 29/4/2011, Muhibbah issued another audited accounts, this time for FY 2010. The same crap again is being said..blah blah blah...acknowledge its obligation..blah blah blah, but this time, one sentence is being altered:
The project owner is confident that alternative arrangement can be completed in 2011, as negotiations with interested party have reached an advanced stage.
Last time, they says that it is mid-2010, now they says is in 2011. No early, mid or late, just 2011. Take note also that all this while, it is the project owner says, not Muhibbah says. Muhibbah is a good lender. I do hope that they have a loan sharking division, if I ever end up borrowing money from loan shark, I will borrow from them. If I delay payment for two year plus, I think any loan shark would probably chop my hand off or something. But, this Muhibbah is apparently fine with more than two years of delay in payment. No provision, not even a single cents is being provide against this possible default. If you are a shareholder, if you saw this together with the sudden disappearance of reassuring words from our Bursa finest analyst on the issue, you should just sell. If you didn't, that is really padan muka.

The reason that shareholders may not have paid much attention to the issue may be due to something that I just found out today about our financial reporting. Apparently, in the audited accounts released by Malaysian listed company, there is no need for companies to report their account receivable ageing analysis. Initially, I thought it was Muhibbah that purposely do not disclose only to found out that other listed companies in Malaysia do not disclose their accounts receivable ageing. No wonder there are so many receivables-related blow up in Malaysia. Listed companies in SGX, HKEX ,even Indonesia and I believe the Philippines have to disclose their receivables ageing like this picture:

This sort of easy to read disclosure would certainly make shareholders pay attention to the RM337 million that pop up at the past due for more than 2 years column. Apparently, in Malaysia, we do not need to produce such disclosure. If the situation is very serious like Muhibbah case, we are flooded with a long chunk of text that regular, non-accounting background investor, may be too intimidated to even read it. If situation is serious, but not that serious, we may not even have a disclosure. You would have thought that, with so many receivables-related blow up in our country, those overpaid and useless buggers at our accounting standard board would adopt the best practices of their regional neighbours like Indonesia, but, instead, they are busy convincing the press that they should not be blame for any sort of fraud. Rather, the management should be blame, they say. It is like Polis Raja Di Malaysia attributing their inability to catch any thief by blaming the thief for stealing. It is the thief's job to steal, it is also the job of some questionable management to steal from shareholders. Sometimes, it makes you wonder why we need this sort of useless auditors.

The Change in Auditor

Another interesting point is that, Muhibbah actually change their auditors. They downgrade from a big 4 auditor- KPMG to a tier-two auditing firm Crowe Horwath. If a company upgrade their auditors, from a tier-two firm to a big 4, it is usually fine. But, if they downgrade, you need to pay attention. It could be that KPMG is too afraid to sign the accounts because the receivables size is too bloody big, so, they drop Muhibbah as a client. Sometimes, companies will give you crappy explanation like the big 4 is overcharging them, so, they drop them to save shareholder money. Most of the time, this is not the case. If Big 4 do not like the risk of auditing your accounts, they will purposely inflate the auditing cost to a price that you could not afford, a decent way for the Big 4 to tell you that, "we do not want to audit your company, it is too risky". As there are 4 big 4 auditors out there, it is impossible for them to raise the prices too high as there is always competition. When high prices is being used as a reason for switching auditors, you should be careful.

That is the case if a company provide any explanation for changing auditors. In Muhibbah case, they did not even tell you that they change their auditors! This lack of disclosure by Muhibbah, I believed, have contravene our Bursa Listing Rule Chapter 12 Rule 1201.1(3) :
Each Participating Organisation shall notify the Exchange, in writing, of any change to -
(a) the date of its financial year end; and
(b) the name of the statutory auditor who will furnish the Annual Report
Since the wording is "name of auditor", rather than "auditor", I am not sure whether any rules is broken. But, if there is no rules being broken, then, our Bursa Listing Rule have another grey areas that need to be plugged. Most, if not all, regional exchanges discloses their change of auditors.

Muhibbah also changes their company secretary, someone who should be responsible for all this disclosure stuff. Did Muhibbah purposely replaces an experience company secretary to a not-so-experience one? Lol, I don't know.

The Non-Disclosure and Management Selling Stocks Like Nothing Have Happened

Another point that troubled me is that, according to the CIMB report, the receiver on APH is being appointed in May. So, it is already one month. You would think that, when a customer enter into receivership, it is almost close to bankruptcy. Since Muhibbah have so much uncollected receivables from APH, it is their duty to disclose this. But, they seems to think that it is business as usual, nothing have really happened. It took a report from Business Times Singapore to brought our attention to that matter. Till now, still no news from Muhibbah.

It is really nothing have happened? Well, at least something is happening. As highlighted by Moolah, the management is selling off their stock more frequently within this month than any other month in the year. Here's the snapshot from Bursa website:

Don't you think the timing is a bit suspicious? In a more litigious society like the US, these buggers may get sued from the shareholders. But, in Malaysia, shareholders law suit are way too costly to bring these buggers to court. Even if these buggers are brought to court, you may not know whether the judicial system is clean enough to give a fair hearing.

So how? Shareholders just lost 20% in a day and those folks at CIMB still call it a buy even though, if there is a real default, as they are unsecured creditors, they may take a huge hit in their equity. BTW, the CIMB analyst, I think he should learn some accounting, I think he mixed up asset and liability. He said that this whole crap will not affect his valuation because it had been provided it in the liabilities. I think he did not understand what is asset and liability. When people owe you something, it is a liability according to this analyst. By the same reasoning, Greece would be the richest country in the world. I look at his valuation, he did not provide for impairment either in his valuation, it makes you wonder where he come up with that crap.

When I was younger, some old man tells me that SC and Bursa have very stringent ruling. But, as time goes on, I could not help but feel that our regulation is actually much shitter than those of Indonesia and the Philippines. Come to think of it, that old man is a MLM fella, he may try to convince me that Bursa has stringent ruling and that his company is listed means his MLM company is good. It is probably the reverse case, Bursa sucks and his company sucks too. Just another day in the very uneven playing field called Bursa Malaysia....haiz..

P.S.: I just realised that the CIMB analyst that I always make fun of in this blog is the same not all their analysts are funny like that guy. Shareholders of Muhibbah, if you have not sold your shares, meanwhile, should pray for another government bailout of APH.

Many thanks for the posting. As mentioned to Mun Wai , my last look at Muhibbah was back in 2009.

Muhibbah had been a nice stock for me back in 2006 to 2007. Made some. :)

But back in 2009, things changed and my perception of the stock turned negative. The first warning came back in Feb 2009: Quarterly rpt on consolidated results for the financial period ended 31/12/2008.

It made some huge loss which was rather unexpected and Muhibbah said the following in its earnings notes.
  • The Group achieved a consolidated revenue of RM804.0 million for the quarter under review as compared toRM488.8 million consolidated revenue in the last quarter, representing a 64% increase.
    The consolidated loss before tax for the Group is RM26.4 million for the current quarter under review. The loss is mainly due to the revision made for revenue and estimated costs on prudence basis for the construction division in view of the challenging economy condition resulted from high oil price, escalated construction material cost and volatility in foreign exchange rates during the period.
I wasn't impressed at all.

Sales increased substantially. A 64% increase was too damn impressive. However, how and why they posted loss was a big no-no for me.

And it was the year 2009.

And the biggest warning came from its receivables. ( Yeah, the good old receivables indicator)

Receivables stated at the end of the quarter showed 738.662 million. The previous quarter ( Quarterly rpt on consolidated results for the financial period ended 30/9/2008 ) , the receivables was only some 546.775 million. Ok, it was not a 100% get out warning but it was rather dodgy for me.

The following quarter, in May, Muhibbah reverted back to profits - it earned some 14 million, however, I was not convinced and in Nov 2009, Muhibbah reported losses again. Quarterly rpt on consolidated results for the financial period ended 30/9/2009. Receivables had now soared to some 841 million.

On Feb 2010, Muhibbah continued to post losses. Quarterly rpt on consolidated results for the financial period ended 31/12/2009. Receivables now stood at 941 million.


That was more than being dodgy. It's rather scary. Just way too scary for me. And that was the last I watched Muhibbah.

Now remember, my first warning came in Feb 2009.

Look at the following Muhibbah chart from Jan 2009 to Feb 2010.

See the incredible run from March 2009? Muhibbah had a low of 0.645 sen then. That run peaked around 1.66+.


The company's fundamentals worsen but the stock soared as if it was on a misson to the moon.


Cows don't jump over the moon, do they?

That was what I thought and yes, I have not seen Muhibbah books since Feb 2010.

ps: Here's the nice big chart of Muhibbah - note the price is already adjusted for its split cum bonus issue back in 2007.


snowball said...

Hi Moolah,

Thanks for highlighting :-)

Moolah said...

snowball: No.. thank you. :)

Anyway, I have edited and add in some comments below your posting.

The Contrarian said...

well said, where are consistency in standards of reporting i question!! anyways if aged debtors analysis is compulsory you'll probably not invest in MANY Gov linked Entities :X how to raise capital like that !!

The Contrarian said...

MALAYSIA boleh Muhibbah Selalu

limko said...

I have been lucky with Muhibbah, lousy share notwithstanding. Made a total of four rounds, latest being today making some pocket money from contra on yesterday's big fall.

Sorry for bragging, hard to resist after reading Moo's article on Muhibbah.

Moolah said...

Aiseh.. taikor limko ... dun be so liddat mah.

So sorry.. me did not mean to brag... just trying to explain why I have not bothered to look into Muhibbah books. :P

solomon said...

APH is not a new issue one should be worried, neither changes in shareholding.

I think if the business is profitable then the cash-flow should rise. Yes indeed the case for it's latest quarter by naked eye. In fact, I see not and express some concern if not for the cash-flow from financing of RM80mil.

Loan for short and long term stand at Rm400 mil for last Q and this Q, but the finance cost 4x higher this quarter. This might reaffirm some depleting sign of financial which need to be revisit and monitor for next 2Q.

ronnie said...

Warren Buffett states that we should invest in companies in which the management is honest. This is the most important requirement. It matters not that management is super smart or highly competent or the business grossly undervalued.

When management lacks integrity, the Oracle of Omaha avoids the company. This is the first acid test. Would we marry spouses we do not trust? Do we invest in shares of companies where the directors cannot be trusted?