Megan: Part XIX

Dedicated to Wonder:

For quick reference, past postings..

• Megan
  Megan: Part II
  Megan: Part III
  Megan: Part IV
  Megan: Part V
  Megan: Part VI
  Megan: Part VII
  Megan: Part VIII
  Megan: Part IX
  Megan: Part X
  Megan: Part XI
  Megan: Part XII
  Megan: Part XIII
  Megan: Part XIV

Here' an update of my opinion on Megan recent quarterly earnings. If not for your request, I would not have made this posting. If I had made a posting, I would have been surely accused for being overly biased against this stock, no?

Before I start, here's a very important question that you should really, really ask yourself, why are you so interested in Megan?

Well, I would assume that there's only one answer.

Which is based on its current earnings per share versus the current traded price, the stock appears to be so cheap.

Right?

So you have one good point.

But in the business world, earnings could always be easily manufactured.

Always.

Some do it via acquisitions. Some do it via insane engineering of their business via enormous capital expenditure via bank financing. And worse of all, commonsense would tells us that such engineering is clearly not sustainable and sooner rather later, there is a real possibility that the business could tumble like a stack of cards once there is a slightest disruption to their business economics.

This was what I have been highlighting all this while for Megan.

I have made reviews after reviews after reviews of the extreme fundamental weakness in Megan.

And the most worrying issue is that the fundamental weakness has never improved each quarter but instead it declined even more drastically each quarter.

So let's take a look at what I posted in Megan: Part X

And let's just review those past reviews. New comments will be in... err.. green font.

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ps: Megan's latest numbers and new comments will be in PURPLE font. I will using green today.

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Time to look at Megan Media Holdings again.. :D

Here's a good exercise. Remember all the concerns I mumbled about? Since Megan Media will be reporting their earnings this month, let's list all of them concerns again so that when Megan Media reports its earnings, we can see clearly if Megan's situation improved or not...

1. Declining Net Profits.

Here is the most recent 7 quarterly earnings. Read from left to right with the last being the latest. The worry was the clear decline in earnings.

• 12.7 mil, 14.3 mil, 15.1 mil, 15.64 mil, 21.1 mil, 12.9 mil, 3.9 mil, 19.837 mil, 23.471 million

* ps... what's your expectations? :D

how? tremendous improvement wor... is this the turnaround one is waiting and HOPING for?

Wahh, second consecutive quarter of tremendous improvement. how? Is this the turnaround one is seeking for? Looks good the numbers BUT if one digs deeper, one would have realised that this is pure accounting profit.

What Megan did was they adjusted their depreciation rate from 20% to just 10%. So after spending hundreds and hundreds of millions, Megan dared to make such drastic changes in the rate of their depreciation. End result? Well, they have succeeded in making their numbers look good. But deep down, any accountant will know that this is pure nonsense considering the fact that Megan's business is so technology based, where changes are seen so constantly in its products. So is a depreciation of 10% just for the hundreds and hundreds of millions that they borrowed from the bank to purchase their latest machinery?

Oh.. if they had not used this accounting trick, their earnings for this fiscal year would probably fall as much as 58%!!!!!!

So does it matter that Megan reported a second consecutive quarter of tremendous quarterly earnings improvement?

2. Declining Net Profit Margins.

The last 4 quarters net profit margins.. and clearly the concern was the drastic slump in profit margins!

• 7%, 8%, 5%, 3%, 9% ... good improvement wor... so far so good!!!!!... hmmmm.....

for their quarterly earnings, Megan's net profit margin is 7.3% but their fiscal year net profit margin is a mere 5.8%! How?

3. In Part VIII , the balance sheet concern...

Inventories.............................................. 73,543 102.462 43.423
Trade receivables..................................... 333,357 326.950 319.001
Other receivables,deposits & prepayments......18,505 37.142 243.760
Fixed deposits with licensed banks............... 3,589 1.096 9.722
Cash and bank balances.............................. 93,998 53.274 49.829
Tax recoverable........................................ 410
Total...................................................... 523,402

The above was the snapshot of Megan's Current Assets in their last earnings report.

how???????? still good? Worse???

The concern was on ...

a) Trade receivables: 333.357 million. total now 326.950 million now 319.001
b)Inventories: 73.543 million. total now 102.462 million (drastic worry?) now 43.423

As mentioned and explained in that posting.. the trade receivables were soaring and so were the inventory levels.

Ah.. the structural weakness in Megan's balance sheet is extremely clear, isn't it?

Now, it would appear that Megan sorted out its inventory issue since inventory went DOWN from 102.462 million to just 43.423.

But.. consider this issue. Isn't it ironic that on a quarter to quarter analysis, sales went from 214.936 million to 322.671 million. Would I be wrong to say that there is a possibility that Megan embarked on some serious sales campaign to get rid of its excess inventory?

Now normally this would be deemed as an extremely good practice. Getting rid of excess inventory.

But.. take a look at the table of Megan's current asset again. See the entry named Other receivables,deposits & prepayments. My, oh my see how this entry balloned to an incredible 243.760 million? Last quarter it was just 37.142 million.

So would you want to even speculate what Megan did here?

Would we see any improvement? And how much improvement do we want to see? Do we see any improvement?

And last but not least the debts issue.

Total borrowings for Megan now stands at 725.151 million. Would we see some decline in Megan's borrowings or would we see Megan borrowings increase yet again? emm... debts now is 750.191 million!!! Fiyoh!!! debts still INCREASING!!! Megan total borrowings now stands at 838.669 million!!!!!!!!

How?

If there is no drastic improvement or if all these concerns still continue to worsen... what's the most commonsense thing to do?

But then... again... commonsense would have told one to sell this stock years ago!

how?

So Megan said it made 62 million for it's currrent fiscal year. And it boasted loudly that it's now a billion dollar sales company.

Fantastic.

But do you see any creation of wealth?

How much of this 62 million in net profit is being reflected in its piggy bank?

So does it matter that based on its current earnings per share versus the current traded price, the stock appears to be so cheap?