Mieco

Does a tumbling share represent an investment opportunity?

Take an investment grade share. The share price tumbles. Does this equate to an investment opportunity? Without a shadow of doubt that whenever a share displays some weakness in their fundamentals, which in returns causes its share price to fall, it does provides the investor with an opportunity... but in the case of investment, this (opportunity) should be examined in great detail because this investment is only deemed valid provided if the weakness or subdued financial performance is only a temporary situation. Well, if the subdued performance should drag on or continue for a longer time, this would then render the stock unattractive as the temporary weakness had caused a serious deterioration in the company’s fundamentals.

As Ah Poh says, what used to be good might not be good in the future. And if it ain’t good, it just ain't good.

Tiok boh?

In short, whenever we see a weakness in a stock's financial performance (which leads to lower price) sometimes this could be an opportunity to invest in PROVIDED if the weak financial performance is only temporary.

Determining and evaluating the weakness in the financial performance is utmost important, else our investment result will kena hantem kaw-kaw by our eagerness, our greed or perhaps our foolishness in trying to search for moola making opportunities in the share market.

Err… making moola out of nothing at all?

Issit really all that simple in the share market?

Let’s take an example: Mieco Chipboard.

Yes, Mieco used to be an investment grade stock. It was a stock which had a very impressive balance sheet, net cash and no debts (at it’s peak it had a net cash of 180+ million and no debts) and it had a pretty decent net profit margins.

See Mieco

The first chart of Mieco showed the 3 year chart of Mieco. It used to trade around the low 1.00 region. As the market rose during 2000 to 2004, Mieco’s investors were rewarded handsomely with the stock peaking around the 3.00 mark.

So when the stock start declining in 2004 from it’s peak, was this an opportunity to invest in this stock or was it simply a death trap?

A detailed study of the company’s quarterly earnings is a must. Have a look here for Mieco’s quarterly earnings table. ( Click here )

See the coloured boxes. Those are my warning flags in me opinion. see ( here for some comments )

Anywayyy… let’s consider the following chain of events.

As noted, the first sign of weakness in the company’s earnings happened when Mieco announced its 03 q4 earnings on 24th May 2005. Price of Mieco then was 2.89. It was trading around an earnings multiple of 19x based on trailing earnings.

There was a huge increase in the company’s borrowings. Now this one is debatable cause Mieco’s borrowings was incurred because it wanted to built a brand new factory. Capex was estimated at around 300 million.

And the next flag was raised in Mieco’s 04 q1 earnings announced on 20th Aug 2004. There was a drastic drop in Mieco’s net profit margins. A company which was consistently performing with net profit margins around 17-18% dropped to 12%. And the company is now in a net debt position. Mieco was trading around 2.40.

Sooooo….at this moment of time…..was Mieco an opportunity? Or wassit simply a death trap?

The pros were suggesting that Mieco has great future ahead. With the new factory, Mieco’s future earnings will be boosted. So with the share price dropping from around 3.00… surely now around 2.40… this would be a grand opportunity to invest in Mieco, tiok boh?

The cons? New factory is costing a bomb. Now coupled with declining margins, isn’t it too early to jump in? Shouldn’t one be more prudent and wait and see if the declining profit margin is only a temporary thingy? And shouldn’t one wait till one get confirmation when the factory will be completed and when the production will start? Cause if the declining earnings continues, some could view as a serious problem since Mieco has now a huge burden with its huge capex plan. Tiok boh?

What if I wait another 3 months for its next earnings report?

And in the next quarter, 04 q2, Mieco’s net profit margins has now slumped to just 10%. Total cash is now at 84.3 million with net loans at 149.6 million. For comparison sake, take 03 q2, just a year ago, Mieco used to have zero loans and a net cash of 182 million.

How?

Mieco despite the warning flags raised last traded at 2.70 on 26th Nov 2004. Isn’t this the time to kiss and say goodbye to this stock?

Or should one invest in it based on the fact that everything should turnout ok once Mieco’s new plant is completed and operational?

Ahh… but when?

Take a look at the next for quarters earnings. Things never did improve. The waiting for the new factory is still but a wait.

In the meantime, Mieco’s earnings has slumped to a mere 120k for it’s last reported earnings (in the peak, Mieco earned around 8-9 million per quarter). Total loans now stood at 225 million versus cash of 22.3 million. From being a share with a net cash of 182 million, Mieco is now a share with a net debt of over 203 million.

Ahem… what a turnaround.

Is this the same Mieco? Issit?

Remember what Ah Poh said about what used to be good might not be good in the future?

Back in perhaps 2001, an investor investing in Mieco was investing in a company with decent earnings growth. A company which had a solid balance sheet.

Now? An investor investor in Mieco is investing in a company with has some serious balance sheet issue and the investor is HOPING that its earnings will turnaround.

What a huge difference! No?

And even if Mieco’s earnings does turnaround… isn't there a possibility that whatever earning derived from its new plant might be used to pay for its debts? And if so, what’s left then for the investor?

How?

Mieco last traded at 1.37. Its warrants closed at 0.50.

Still think that now is an opportunity to invest in the stock?

How about avoiding?

How about selling?

Yes, again… there is no doubt that when Mieco’s new factory is fully operational, there is a huge possibility that Mieco’s earnings will turnaround.

But the biggest issue is: WHEN!

When?

Bila?

Consider this.. if Mieco’s new plant needs another 6 months or so to start producing (if only hor.. me have no idea when its factory is ready) and in the meantime Mieco’s quarterly earnings continues to decay...just imagine what would happen to Mieco’s share price? Isn’t there not a possibility that the share price might continue to drop some more if and if Mieco’s earnings does not improve?

Isn’t it more prudent to avoid the share until we have better earning visibility?

Why be a hero in a hard place?

Why take such unwarranted risk in the stock market?

Do we want to end up as a zero? A zoro? Or a Soh-loh?

Think about it dude… :D