Megan: Part IV

One of the basic ideas in investing is to take advantage of the market fluctuations when it causes depressed stock prices. With the depressed stock prices, we, the investors are represented with opportunities to invest in stocks that are selling at a much discounted prices. Take advantage of the depressed share prices. That's our advantage.

Now obviously if we simply invest in any stock or any business simply based on the fact that the price is cheap compared with what it used to be, all our advantage is then neutralised if the stock or business does not have a solid underlying foundation. Tiok boh?

Think of this famous mumbling from Warren Buffett.

I guess I had too much inclination originally to buy mediocare, or worse than mediocare, businesses at a very cheap price. That works OK, in the sense that you never lose money; but you never end up with a great business that way either. So that emphasis has shifted over the years. We don't want to buy the worst furniture store in town at the cheapest price; we want to buy the best one at a fair prcie.

See how important is it to determine the QUALITY of the business and not base the decision to invest in the stock based soley on the price factor?

Paying a cheap price is always good but the object or the little thingy that we buy or the business we buy must also be good, else it defeats the whole purpose, right?

Else what we buy could simply end up cheaper in value!

I remember me Ah Poh teaching me...

A cheap item low in quality will always remain low in value!

Same in business... an average business bought at a cheap price will most likely to remain an average business over time. And if that is the case, would this represent the best investment for our hard earned moola? Where's our advantage then?

This is what i have been thinking on why the attraction lingers on for Megan.

For i can clearly see this so-called "opportunity" from the chart as provided by Chargingbull in his blog.

Megan's share price has dropped sooooooooooo much mah....

If it falls so much from the previous highs of around 2.30+... surely the price now around 0.955 must be ok mah. No meh?

And then... and then... Megan make big money what. No meh? Last year it made rm66 million wor. Earnings per share more than 32 sen. Low PE what?

Ahhh..... tiok... tiok... very tiok. All these facts is but correct....

but...but.... butttt...

why is Megan's debts such a big issue and why is Megan's earnings and share price ignored by the market?

Is the market wrong or should we adopt a contrarian approach against the market?

Firstly, let it be stated that long ago... in 2001 and 2002... Megan was a pretty decent company. A company with growth and operating with a decent net profit margins around 18%-19%.

But as you and i know, growth can be engineered or as they say artifically created via acquisitions which are funded via insane borrowings.

For some company do borrow tons of money to buy other business and some even goes to the extreme of buying related businesses to generate the profit growth for the company. And as everyone knows such engineering and buying of profits generally makes poor business sense especially when the amount borrowed by the company does not create any value or any real wealth or value for the company. Worse still, we know very well that sooner or later, these borrowings needs to be repaid back to the bankers.

So what is the best way to define value or wealth? How about the piggy bank Moola?

Show Me the Moola mah.......

Agree onot? Tiok boh?

let's go thru the most recent 6 quarterly earnings once more.... let's do some clicking and compiling of some actutal data from the Bursa website. (pls do verify my data hor..i could make some typo mistakes)

Quarterly rpt on consolidated results for the financial period ended 30/4/2004

1. Sales 220.050 million.
2. Net profit 12.790 million. (5.8% net profit margin)
3. Total loans then was some rm389 million.
4. Total trade receivables was some rm190 million. (the previous year was rm57 mil)
5. Piggy bank cash then was rm37.218 million.

Quarterly rpt on consolidated results for the financial period ended 31/7/2004

1. Sales 203.708 million.
2. Net profit 14.305 million. (7 % net profit margin)
3. Total loans then was some rm457.224 million. (increased by 68.224 million)
4. Total trade receivables was some rm213.501 million. (increased by rm23.501 mil)
5. Piggy bank cash then was rm14.914 million.

Quarterly rpt on consolidated results for the financial period ended 31/10/2004

1. Sales 221.397 million.
2. Net profit 15.113 million. (6.8 % net profit margin)
3. Total loans then was some rm482.297 million. (increased by 25.073 million)
4. Total trade receivables was some rm231.821 million. (increased by rm18.320 mil)
5. Piggy bank cash then was rm35.253 million.

Quarterly rpt on consolidated results for the financial period ended 31/1/2005

1. Sales 211.989 million.
2. Net profit 15.642 million. (7.3 % net profit margin)
3. Total loans then was some rm520.608 million. (increased by 38.311 million)
4. Total trade receivables was some rm198.438 million. (improvement wor!!)
5. Piggy bank cash then was rm54.295 million.

Quarterly rpt on consolidated results for the financial period ended 30/4/2005

1. Sales 267.602 million.
2. Net profit 21.107 million. (7.8 % net profit margin)
3. Total loans then was some rm592.993 million. (increased by 72.385 million!!!!)
4. Total trade receivables was some rm252.957 million. (increased by rm54.519 mil)
5. Piggy bank cash then was rm35.467.

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

1. Sales 248.859 million.
2. Net profit 12.969 million. (5.2% net profit margin)
3. Total loans is now some rm634 million. (increased by 41.007 million!!!)
4. Trade receivable is now some rm270 million. (increased by 17.043 million)
5. Piggy bank cash is now only rm28.810 million.



Now here is an interesting way to interpret these results.

(remember i said Megan used to be a decent company? Last time it used to operate with net profit margins between 18-19% way back in 2001-2002. Now? 5% for the latest quarter? See how drastic the change in fortune for Megan?)

take from the very first link. ie from period ending 30/4/2004. If we tally some of the figures up, we will have the following.

1. Total sales: 1373.605 million.
2. Total net profit: 91.926 million.
3. Net borrowings increased from 389 million to rm 634 million. An increase of 245 million.
4. Trade receivables rose from 190 million to 270 million.
5. Piggy bank cash is now 28.810 million. (Piggy bank at start of the period was 37.218 million)

Soooo where is the wealth or value generated?

Where is the moola?

Mana tu moola pegi tok?

Show Me the Moola!!!

Does it make sense for a business to borrow some 245 million more moola to make a reported net profit of 91.926 million when all u have to show for is....

1. A depleted piggy bank. Piggy bank used to be 38.810 million. Now only have rm28.810 million!!
2. Trade receivables. Amount owed to Megan increased by some 80 million! (What is shocking is when we put into perspective, the total net profit earned by the company for this period is only 91 million. (80 million out of 91 million equates to a whopping 87%!!!))

Does such business make business sense?

Borrow so much moola to do business and all the company has to show for is more people owing them moola?
And the most malu thingy is the piggy bank gets depleted to do such business.

Now this is where the commonsense comes in for the investor or the folks seeking opportunity in a stock whose price has been depreciating for so long. (remember being contrary doesn't mean we have to be silly!)

Does such business makes sense?

Do you agree that it is illogical to see a company borrowing so much money and the end result is that the bulk of the profit generated made is in the form of 'trade receivables' or IOUs?

What if Megan's customers doesn't pay up for all these hutang? Then how?

What about Megan's own hutang to their bankers? U think Megan must pay or no need to pay? rm634 million wor!!!

Again... does it make business sense?

If no... does it matter how much Megan makes if all they make is in the form of 'trade receivables'?

And if so does it matter how much Megan's earnings per share is?

And if so does it matter how much Megan's share price is?

Does it matter if Megan trades around 95 sen? or 85 sen? or 75 sen? or 65 sen? or 55 sen?

* last edited 8.20 pm - 17th Dec 2005 *


^ ^ post is dedicated to anonymous ^ ^

I still do not understand why you say Megan's debt is bad.Care to explain? Thks!