Auditing Megan

My Dearest Moo Moo Cow,

I am taking the liberty of reviewing what you wrote previously on What about Megan? . This is because S&P has upgraded its recommendation to a HOLD from a SELL. Perhaps things are not as bad.

Could you be mistaken?

Were you overly biased, my dearest Moo Moo Cow?

Well I am not gonna audit completely what S&P said but I would just like to focus on the first point they said. This for me, it's most important part of the report because it is rather at it is.

• Megan’s 3QFY07 (Apr.) net profit of MYR10.6 mln vs. MYR19.8 mln a year ago was below our expectations, due to lower margins and higher finance costs. 9MFY07 net profit of MYR39.2 mln reached only 60% of our previous FY07 estimate. Megan did not declare any dividend in 3QFY07.

Let's see what the analyst from S&P is saying here.

Lower margins and higher financial cost.

This is a serious point in any other business, yes?

Take the issue of lower margins. Is this a new issue or is the problem getting worse and worse?

let me do an audit on its previous years net profit margins. Fy 2003 (13.2% margins), fy 2004 (8.7%), fy 2005 (7.2%) and fy 2006 (5.8%). Current fiscal year (3 quarters) margin is at 5.1%.

The net profit margin is getting worse and worse each year. This is a fact!

Financial cost. Back in fy 2003, Megan's financial cost was 7.003 million. (note: in fy 2002. it was only 4.076 million).

Currently? Megan's financial cost for this quarter alone is 16.724 million! And the financial cost for this fiscal-year-to-date 3 quarters is 44.952 million!!!! And at this rate, Megan's financial cost for this fiscal year would be a whopping 60 million,.

Goodness me, it looks like you are correct, my dearest Moo Moo Cow. This debt bubble built by Megan is simply insane.

Do you like figures and stats, my dearest Moo Moo Cow?

Do you realise that Megan's financial cost is compounding at an astonishing rate of 71% per annum for the last 4 years (since 2003)?!!!

That's simply insane.

No sane company runs a businsess in such a manner!

Now I want to check on your balance sheet concern. Let me do my own audit. I will first refer to Megan's fy 2003 Q4 balance sheet. ( refer this excel file: here )

I would want to look at the 2 issues; inventories and trade receivables, mentioned by you...

back in fy 2003 Q4. These were the 2 figures

Inventories.......................................................... 13.252
Trade receivables................................................ 56.939

And the below is figures is taken from it's latest quarterly earnings:

Inventories.......................................................... 125.090
Trade receivables................................................ 430.354

WOW!!!!!!!

My dearest moo moo cow, I do see your extreme concern! I cannot see how any sane business would conduct its business in such a haphazard manner.

Remember inventories could consist of raw materials but 125 million of raw material? Sorry that does not make any cow sense (sorry for the pun, my dearest!) ! And also inventories do consist of stocks on the shelves. Do not discount this issue. Common sense would ask the investor to reason out if the inventories consist of un-sold dead inventory. Yeah, dead stock. Isn't this where warehouse cheap sales come from? That's a possibility that no intelligent investor should discount.

Trade receivables. The simple question begs to be asked again. How could this figure balloon so high? Why isn't the company collecting these debts? Why? Remember the company's debt issue, which is at an insane 888.131 million.

Now if the business owes the bank a whopping 888 million, why doesn't the business attempt to collect this 430 million in trade receivables?? Why?

Is there a reason why it cannot do so?

And is there a reason why this figure is increasing at alarming rate? Do you know that the trade receivables compounded at an whopping 66.4% per annum since its fy 2003?

WOW!!

ps. here is S&P historical recommendation on Megan. And I do think that I would have sold it way back in 2003 and never look back on it. Yeah, megan is an extreme good example that one should not invest just based on the earnings reported. Look at the figures behind the earnings.

Date      Recommendation  Target Price
New       Hold            0.70
5-Jan-07  Sell            0.59
6-Oct-06  Sell            0.60
11-Aug-06 Hold            0.62
4-Jul-06  Sell            0.73
3-Apr-06  Sell            0.66
3-Jan-06  Strong Sell     0.70
30-Sep-05 Hold            1.20
16-Aug-05 Buy             1.34