Friday, February 17, 2006

EPIC, Trade Receivables and lack of transparency

Here is another example of 'trade receivables' issue.

Quarterly rpt on consolidated results for the financial period ended 31/12/2005

Eastern Pacific Industrial Corporation or better known as EPIC announced its earnings yesterday. See the link above. In which you can see that EPIC reported rather huge losses of 15.499 million out of a sales revenue of 21.672 million for its fiscal 2005 4th quarter.

According to EPIC, the losses were due to provision for doubtful debt and diminution of investment.

What is disturbing for me is that EPIC made no attempt to explain why and how this provision was made. This is a clear example of lack of transparency and the lack of respect towards its minority investors.

Now, luckily I had a copy of the RHB research on EPIC today, in which the analyst tried to explain where the provision came from. Makes me wonder... why the company can’t come out and set the record straight instead of folks like RHB trying to guess what happened! Make any sense? Look at the size of losses! A loss of 15.4999 million from a sales turnover of 21.672 million is relatively huge in size!

Here is what RHB ‘under-standing’ of what happened.

We believe EPIC made a provision relating to the failed C$10.5m investment in Canadian oil and gas company Aurado Energy Inc in February 2004. Although the London Court of International Arbitration ruled in EPIC’s favour in March 2005, we believe the company failed to recover the full amount estimated to be more than RM30m.

The "Trade and other receivables" item in the FY05 balance sheet has only dropped by RM18m which suggests that a portion of the investment remains on the books. Assuming the provision is RM18m, this would imply that operating profit for 4QFY05 was still below our expectations resulting in EPS (excluding the estimated provision) of 12.4 sen, or a 9% decline yoy.

For the record, currently EPIC’s trade receivables amounts some 46.9 million while last year, same period, the trade receivables was at some 29 million.

Hmm…. Yet another example of unknown risks involved when trade receivables increases drastically…