Megan Part III

Tc wrote the following reply to blog entry: Megan Part II

OK, back to discussion.

1. About "Hope", tcbull's [dun mind that I shorten ur name a little ;)] comment is from people who hold Techncal Analysis as the back bone for decision making. But for Fundamentalist investors, it is "Hope" to the company/product future growth potential that have them investing and keeping the stocks. OK, so now you know I'm subscribed to Fundamental analysis :)Also, I'm not exposed to the idea of technical analysis. I'll keep learning more in this area. Got to find more books from popular or mph

2. About the drop of earning from Q4'05 to Q1'06 FY, I think this largely was due to higher oil price. I beg to differ it was due to decline in DVD demand (see point#4). As you know oil are among the main raw material (polymer) to manufacture DVD/CDs. As moola pointed out, this is a bit alarming.

3. I was mentioning megan has about 40cents earning per piece. Take FY2003 example, annual net earning after tax is RM28.7mil, with average 6.3mil pieces produced per mth. You can calculate that translate into ~38cents net earn per piece. FY2005 net earning RM69mil, with 15mil pieces per mth, this also translate into ~38cents net earn per piece. So for FY2006 with predicted 19mil pieces produced per mth, assuming 38cents net earn per pcs, annual net earning shud be ~ RM85mil. It can be said that DVD business net earning is maintaining ~ 38cents through out the yr. The only way to increase earning is to expend your production capacity. This is why I think Megan have to expense production line fast to tap for DVD growth.

4. Talking about DVD growth, it was forcasted world demand is 5.5 billion pieces for yr 2006. A growth of 40% from yr 2005http://www.dvd-recordable.org/Article2338.phtmlDVD with 4.7GB capacity is about RM2 nowadays, Thumb drive has no match in price wise. 256MB thumb drive cost ~ RM80. You need 18pcs of this thumb drive (over RM1k?) to match a RM2 piece of DVD capacity. What will a user choose? That is for sure users will choose DVD for storage. thumb drive meant for small size storage, carrying 18pcs thumbdrive is too troublesome vs 1 DVD. DVD meant for world wide DVD holywood movies distribution, DVD-A audio and personal reliable storage. You also just can't imagine how many house hold DVD players there are world wide nowadays. It was just like 10yrs ago VCD (CD) is so popular in household.I believe DVD is here to stay for years, before replacing by next gen of DVD (blu ray, HD DVD), which are developed and back by major firms in the world (sony, philips, samsung, mitshubisi, pioneer, panasonic, toshiba ...etc)

5. I think investors are concerned over the large borrowing, and this causing the down trend?? 2 sifu please shed some lights... The borrowings (RM600 mil) is mostly recoverable in 5yrs time or more. While, if you are fundamental type investor, and have the patience to wait like Warren Buffet ("Hope"?!), perhaps Megan is your gem :p Again, I thank moola and tcbull for being critical. At least I'm not lonely anymore in finding friends/mentor to chat and learn about stocks.

rgds,tc

Hi Tc,

Regarding hope. I am sorry but i too do not believe in investing in a business based on hope.

Either the business is good or the business is shaky.

Since you have vested interest in this stock, it is paramount to your own financial health to determine this issue.

Buying in hope that the business that a struggling business will be good again in the future is rather risky.

Yes?

Oh, yes it makes good sense to understand why the business is struggling and in Megan's case the drastic concern over its huge slump in its recent q-q earnings. Now if the company has a strong durable product to sell or the company is fundamentally sound then perhaps one has the rights not to be overly concern over such issue.

But.... does Megan has a strong product? Just how strong is it? Just how durable is it?

Again it's up to your own responsibility to determine and evaluate this issue.

Now assuming u are right.. then u shudn't be wrorried, yes?

But if it is proven otherwise... ?

The issue of Megan's debt.

or rm634 million to be precise.

Do you think this debt can be recovered in 5 years time?

If you own the stock, have you considered your position?

Have you considered the risk if it does not?

Consider the following issues...

take the June 2004 quarterly earnings report and compare it to present day...

Quarterly rpt on consolidated results for the financial period ended 30/4/2004 (link for that june report)

1. Total loans then was some rm389 million.
2. Total trade receivables was some rm190 million. (the previous year was rm57 mil)
3. Piggy bank cash then was rm34.845 million.

Compare it versus their last reported earnings in Sept 2005.

Quarterly rpt on consolidated results for the financial period ended 31/7/2005

1. Total loans is now some rm634 million.
2. Trade receivable is now some rm270 million.
3. Piggy bank cash is now only rm11.797 million.

So how?

in slightly more than a year... the total loans went from rm389 to rm634 million. Were the loans justifiable?

Look at the piggy bank cash. If business were good ... why did the piggy bank cash deplete so much? Why the negative cash flow if business were bang bang sound so geng?

Is the borrowings even justifiable?

Does the borrowings made business sense?

Then consider the trade receivables issue. The drastic increase is truly alarming cause it suggests that Megan is having trouble collecting its sales.

Again, does it make business sense to borrow so much money in an industry when one cannot collect back what it sells?

Is it strange that the trade receivables can increase from 57 million (2 years ago) to a whopping rm270 million cuurently?

Isn't it strange?

Wouldn't you be worried about the competency if the management?

Can you even trust the management?

What if a portion of these debt turn bad?

Now consider this issue. Megan said it made rm12.969 million for the first quarter of its current fiscal year. Yet its piggy bank shrank by some rm 5.4 million.

Where did the Moola go? So how do u possibility see the loan issue be solved in say 5 years time when the piggy bank cash keeps depleting and the loans keep increasing?

Also, as a technology based product, can DVD last more than 5 years?

What if they invent something new?

A new disc version that needs new plant and machinery. Then what? Megan spend more capex again? Borrow more again?

Sooooo TC, how do u rate ur chances of buying and hoping in such a company?


-----------
here is an interesting discussion on the new Ipod Nano : The Better to See You With - The New iPod Hands On