How does one value a company one cannot trust?

Here's ze trick question that I asked the other day again...

How does one value a company one cannot trust?

Remember this past blog posting on MTD Capital's flip-flopping of its business?

• ACPI to buy MTD Capital's construction arm for over RM80m
  
  What a shocker!
  
  What we have here is MTD Capital, a construction company, selling out its construction business to ACPI, a subsidiary company of MTD Capital for 80 million. And MTD Capital will then become a holding company!
  
  What the...!!!!!
  
  From an investor point of view, isn't MTD Capital simply moving away the 'cheese' from its minority investors???
  
  Isn't there a lack of respect from MTD Capital towards their minority shareholders?
  
  Put it this way.. if one had invested in MTD Capital because one believed in the potential of its construction business, this sale of the construction business has effectively taken out the very justification why one should have invested in the stock. How on earth is this possible? How can they allow such flip-flopping of business between subsidies?

I just realised that there is more!

Yup... more!

Malaysia's Metacorp Acquires 40 PCT Stake in Modal Ehsan

Two things strikes me from that news clip..

1. Metacorp Berhad (KLSE:8389) has agreed to acquire a 40 per cent stake in property developer Modal Ehsan Sdn Bhd for RM10.4 million (US$2.8 million
2. Modal Ehsan is a 60 per cent subsidiary of ACP Industries Berhad (ACPI) (KLSE:5924) which in turn is an associate company of Metacorp.

Ahem... when will all these ever end? Left hand selling to the right hand, right hand selling to the back hand, back hand selling to the under hand!!!

And to add extra icing to ze cake... there is this other news thingy: Malaysia's MTD Grants Granion Option to Buy MTD Infra Shares

Ahem!!!

Goodness me... what great corporate governance from this group!

So... how does one value a company one cannot trust?

When there is no corporare governance, how can the investing public expects to be given a fair chance to be adequetly compensated for taking all the risks in investing in their company?

How?

Remember the old adage...

Fool me once, shame on you.
Fool me twice, shame on me!!

to be continued... :p

Flip-Flopping of businesses!

ACPI to buy MTD Capital's construction arm for over RM80m

What a shocker!

What we have here is MTD Capital, a construction company, selling out its construction business to ACPI, a subsidiary company of MTD Capital for 80 million. And MTD Capital will then become a holding company!

What the...!!!!!

From an investor point of view, isn't MTD Capital simply moving away the 'cheese' from its minority investors???

Isn't there a lack of respect from MTD Capital towards their minority shareholders?

Put it this way.. if one had invested in MTD Capital because one believed in the potential of its construction business, this sale of the construction business has effectively taken out the very justification why one should have invested in the stock. How on earth is this possible? How can they allow such flip-flopping of business between subsidies.

Consider this. Say one still believes in this group of company and decides to chase after its construction business and invest in ACPi. Now my very cynical question is what's there to stop MTD Capital from privatising ACPi in the future (hence, taking the cheese away again!)? Not possible?

Here is a snippet from RHB commentary on this issue. (they are ceasing coverage on MTD Capital!)

X Reverse takeover of ACP Industries (ACPI) by injecting into it its construction division. MTD Capital (MTD) has proposed to inject its 100%-owned construction division valued at RM88m into ACPI, in exchange for 88m new ACPI shares that translate into a 39.7% direct stake in ACPI based on ACPI’s post exercise enlarged share capital. MTD, via 75%-owned Metacorp, currently already indirectly owns 38.7m shares in ACPI. In other words, the exercise will increase MTD’s effective stake in ACPI to a controlling 52.8%.

X Selling the construction division to ACPI cheap. We believe the price tag of RM88m for MTD’s construction division is on the low side. We arrive at an NPV of RM129m by discounting potential profits from the division’s RM1.8bn outstanding orderbook (including RM700m worth of job from the East Coast Expressway Phase 2) by 10%, assuming an average pretax margin of 12%, effective tax rate of 28%, and that profits will be recognised equally over the next three years (see Table 2). In fact, the transaction also comes with a profit guarantee of an average net profit of RM11m per annum from MTD’s costruction division over the next three years. The saving grace may be at RM88m, MTD’s construction division is valued at 2.8x its NTA as at 31 December 2005.

X New ACPI shares issued at a steep premium to market. Ceteris paribus, MTD will also be taking an immediate hit on the market value of its new 39.7% stake in ACPI as the new shares are issued at RM1 par, at a steep 37% premium to ACPI’s last traded price of 73sen. The saving grace may come from a potential re-rating of ACPI. For 1HFY03/06, ACPI reported a net profit of RM6.3m. Assuming this performance is sustainable in FY03/07, coupled with RM15.5m net profit contribution (based on our forecast) from the newly acquired MTD’s construction division, ACPI’s FY03/07 total net profit could come up to be RM28.1m (RM6.3m x 2 + RM15.5m), translating into about 13sen/share based on an enlarged share capital of 221.5m. Applying our 1-year forward target PER of 8x for construction stocks with a small capitalisation, ACPI’s post exercise indicative fair value could work out to be RM1.04.

X MTD diminishes into a mere holding company. We believe the biggest drawback of the exercise is that it diminishes MTD into a mere holding company.

MTD no longer offered direct exposure to its highly profitable KL-Karak Expressway when the toll road was spinned off to a listed vehicle, namely, MTD Infra Perdana, a few years back. With now its only bread and butter, the construction division, being injected into another public listed company, i.e. ACPI, MTD will no longer be a direct construction play. We believe the exercise will severely erode MTD’s appeal as a "must-have" construction company in investors’ portfolios. Investors who like MTD’s construction projects could always invest direct in ACPI.

X Downgrade to Underperform from Market Perform, cease coverage. All in, we are negative on the latest corporate move by MTD. Indicative fair value is. reduced by 20% to RM1.52 (based on 8x FY03/07 EPS) from RM1.90 (based on 10x FY03/07 EPS) previously. The de-rating in PE multiple is to reflect MTD’s diminution into a mere "holding company of a public listed construction company", from a public listed construction company previously following the proposed corporate exercise.

~~~~~~~~~~~~~~~~~~~~~~~

Incredible, isn't it?

I wanna HOLD your hand..

Why does one wanna hold onto an investment?

Hmmm..... my answer? Simple. If the investment is still bearing fruits, surely it's a no-brainer to HOLD on to our investment. Tiok boh?

If your dah-ling continues to gives u ever-everlasting luv... surely u wanna hold onto all dat loving. Tiok boh?

Same with footsie... if a team continues winning... doesn't it makes sense NOT to bet AGAINST it? Tiok boh?

Same with stocks, isn't it? If and IF the company earnings remain as strong as ever dun u want to hold on to ur investment for as long as possible? I would. Wouldn't you?

Unless... of course the company has been losing money for a number of quarters and as them sifu say, their earnings outlook is rather cloudy or has low future earnings visibility. Or as me Ah Poh says the next meal dunno when and where it would come from. Eat rice or eat porridge olso dunno!

Sooooo for us, ze kuci-kuci-mai investor.... u think it's wise to HOLD and HOPE that the earnings will recover in the future?

Buy and hold long term?

Forever and ever?

What if the earnings take longer to recover?

Then how?

Will that stock's share price depreciate while one HOLD and HOPE?

Can we discount that share price depreciating from happening?

What if share drop teruk-teruk?

Where is the complaint department? Is there one?

Tiok boh?

Soooo... take ACPi

For Fy 2003 it made 23 million. For Fy 2004 it lost 26 million. Last fy 2005 it lost 33.8 million.

Soooo... back to the main issue.. if one bought ACPi based on fy 2003 earnings performance, why is one still HOLDING on to a stock has been losing money for its last two fiscal year?

Does it make sense?

Do we know precisely when it's earnings will turnaround?

Do you? I don't!

Take this write-up from Dynaquest (15th April 2005) ACPi was priced then at 0.96. Dynaquest gave it a HOLD recommendation.

With the negative factors outnumbering the positive for a long time, most of the institutional investors and retailers alike have made their exit. This largely explained the plunge in the share price from RM3.16 during the market rally in March 2004 to slightly below par in early 2005. As most of the weak holders would have disposed of their holdings, the downside risk at the current hammered down level is foreseen to be reasonably low. Nevertheless, a BUY call still does not appear timely until we see some lights in the construction industry. The investors are also now spoilt with plentiful of buying opportunities in other growing sectors of the economy. The still dark operating scenario, hence, remains a good excuse for potential investors to shy away and wait for more convincing leads. We would rank ACPI as a HOLD for the moment.

LOL!! "As most weaker share holders have disposed their earnings.."? I tell u what... those shareholders who sold once they realised that ACPi's earnings fundamentals were decaying, these were the smarter investors for ACPi share price dropped from rm3.16.

anyway.... have a look here at Dynaquest's write-up (31st May 2005) . ACPi price has now dropped to rm 0.79 from rm 0.96. See how it wasn't that wise to hold on to a stock which is losing money?

ACPi last traded today at rm 0.655.

See how buy and hold doesn't work?

We cannot simply hold onto to a rotten investment and hope it recover, can we?

Dun we want to hold on to only to 'winning' investments?

Btw.. ACPi recorded a small turnaround in it's earnings (a profit of 4 million) for its last reporting quarter. How? Is this the turnaround?

Anywayyyyyyyy... S&P initiates covereage on ACPi with a HOLD

interesting comments:

"Our main concern, however, is that the domestic outlook for demand for ACP's products remains lackluster, given indications of continued austerity in infrastructure spending, coupled with the potential for softening building construction,"

"Valuing ACP is challenging, given the low visibility for future projects, "

Another HOLD?

Anywayyyyy.... what still baffles me.... those so-called-investors.... why are they still HOLDING on to this stock?

Isn't it simply way past its sell date?

Way back then there was some justifications to invest in this stock based on fy 2002 or fy 2003 earnings. However, all bets were off once this share started losing money. There was simply no earnings visibility. And if one had sold the stock then, one might have had managed to sold the stock when it was trading around rm3.16.

To HOLD and wait for the earnings to recover.... just loook at the end result. ACPi is now trading at rm 0.655.

When will its earnings recover? And it simply amazes me that annother HOLD recommendation has been recommended given the fact the analyst itself concurred that ACPi has a low earnings visibility.

Now if ACPi earnings does recover... holding on might have some justifications.... but.... if the earnings take a much longer time to recover... what if ACPi continues to lose money for this fiscal year... what would happen to ACPi's stock price? Won't it get hammered? Why take such risk? And worse still, what's the reward for holding on?

See why HOLDING might not be a wise suggestion?

What say you?