My Dearest Newbie,
You wrote the following.
- I am a newbie investor, just wonder to ask few questions regarding Megan.
1st, everyone knows that Megan is having financial difficulties right now, but one thing to say is that Megan still remained profitable in the past 4 years even though they have incurred lots financial expenses. As they disclosed, the difficulties arised because of big bulk of receivables, is this really an issue? If it is not collectible, why the auditor nor the finance department did not write off the debts? Does it mean it is still collectible? If yes, although the current ratio is not healthy but it's still acceptable.
Moola: Receivables were just part of the problem. If company cannot collect then the earnings aren't exactly earnings, are they? The other was the debt issue.
The receivables rose substantially after MJC purchase. And the receivables kept rising after the purchase. What's happening here? And at the same time, the company took on more loans.
Which brings us to your question, "If it is not collectible, why the auditor nor the finance department did not write off the debts?" Yes, why didn't Megan's financial department not acknowledge this issue? We were talking about a receivables compounding at the rate of more than 66.4% per annum since 2003!!!!!
Receivables are money if they can be collected to the company. So instead of dealing with this issue, the company decided to keep on borrowing more and more money.
Why?
I don't have the answers but it was SO CLEAR that either the management is totally incompetent or they simply do not care!
Either way, does it seem sensible to be an investor of such a business?
2nd, The long term debt is really incredible but even so, long term debt can be recovered by years earning isn't it?(Provided cash inflow from debtors)
Moola: At the end of the day, a debt is a debt is a debt. And all debts will have to be REPAID! And Megan's total debts total some 880 million!
3rd, 211mil of deposit is paid for future expansion, for purchasing land and plant(Extracted from 06 report),I don't understand why the management decide to do this when they know they will be having financial difficulties, one explanation is that they should be able to service the loan to overcome today's problem. Please be reminded that they still having a capital commitment of over 10mil.
Moola: At this moment of time and I do not have the exact info to make any rational comment on this issue.
4th, The industry is estimated to be going downside, but as i know, none of the product can replace or substitute DVD-R, at least for now.
Moola: Bottom-line is the economics of the business industry looks bleak.
5th, This is not a good investment simply because of the capital structure? Or because of the future prospects? Capital structure looks unhealthy because of huge long term debts, but lenders are not stupid, i believe lenders will assess the credit rating before they lend the money to Megan, so, should we believe it's credit although current issue is exposing?
Moola: It been defined that "superior businesses possess certain common characteristics, including robust profit margins, strong earnings and revenue growth, a clean balance sheet, and competent management."
Would you agree with such an assessment?
Back in Jan 2006, I tried to use this concept of buying a quality business on Megan. I found no positive at all. See http://whereiszemoola.blogspot.com/2006/01/buying-quality-businesses-megan-part.html
How?
There was simply ZERO JUSTIFCATIONS to buy Megan back then.
In fact it was a HUGE SELL for Megan back then!
Lenders are in the business of lending. Some loans are being treated as part of one's job. Some earn performance pay paid on loans achieved. Their focus is always on issuing the loan. Collection of the loan is not part of their job. So would I judge Megan on its ability that it managed to obtain such huge loans? Would you?
Or do you think it's wise to judge Megan's business based on its own merits?
And in that posting mentioned, did Megan have any investing merit(s)?
6th, Although there are excessive selling of shares from their directors but i actually found that a person called BRAHMAL A/L VASUDEVAN acquired more than 10mil of share in March 06'. I can't get any explanation of this, can Moola help me?
Moola: People buy shares for all kind of reasons. There is no way we can justify each buying or selling of shares. Some might even have some hidden agenda behind a purchase.
Most important, in my opinion, it's impossible to justify each buying and selling of shares by individuals. Hence, i would not delve too much on this issue.
Regarding the selling of shares. The timing of the sales is so questionable! Perhaps I was being too generous with my comments. Have a look at this blog posting by Sal, http://malaysiafinance.blogspot.com/2007/05/insider-selling-101-sc-and-bursa-must.html , and do read some of the comments posted!
These are the questions i really wonder to know about. Thanks Moola.
Moola: No problem at all!
Dear Moola,
ReplyDeleteThanks for your help in analysing Megan, but unfortunately, i got into it when the price is 50cents, what is your suggestion for me now?
By the way, i analyse a stock by
1stly, look at it whether it's profit making company.
2nd, financial statement, is there any unusual things? Because i understand financial statement actually tell us some stories.
3rd, CASH FLOW statement.
How do i determine it's underprice or overprice? Well, i am not expert in this part, that why i only pick those stocks with low P/E, usually it's less than 8x.
As such, Poh Kong is one of my pick, i believe in it's industry, it's healthy financial position (except for excessive stocks held, but the stock is GOLD!). Do you have any suggestion?
And may i ask how do you pick the stock? Of course it's for long term perspective.. Have you found any great invest opportunities? I have read through the review on ORNASTEEL and can't deny that it's a good investment opportunities which is a growing business with a low P/E.
Thanks again for helping Moola.
Hi Moola,
ReplyDeleteThis is a great blog. I hope you won't mind if I chip in to give my 2 sen worth to newbie.
Hi newbie,
I'm sorry to hear that you've bought into Megan at 50 sen. I can understand it's not a nice position to be in.
My advice is to first consider its "liquidation valuation" price as a base line. There is still a chance that MEGAN might not go into bankruptcy, but it's the base line for further consideration.
To me, the liquidation valuation is an approximate valuation, assuming that certain assets are "more real" than others. E.g. cash can normally be taken at 100% of its face value. However, in the event of liquidation, it is unlikely that things like PPE (Plant Property Equipment), Inventory and maybe even Receivables will fetch 100% of the values states in the Balance Sheet. On the other hand, All Liabilities are likely to be real.
For Megan, I would personally consider using 100%, 80%, 50%, 50% of Cash, Receivables, Inventory, and PPE. You can validly use different values.
If you use those %, then, the liquidation price for Megan, based on its latest Q3/07 earnings report is minus 31 sen.
In other words, chances are if Megan goes to liquidation, shareholders get nothing. Creditors might not even be repaid in full.
The way I would interpret that result is that basically, you now have a very limited time to dispose your holdings. As time passes, the odds would seem worse to me. Unfortunately, I can't tell you exactly when, and at what price to dispose of your holdings. I simply don't know, and I'm sure that it is always possible that the price could temporarily spike up above my own figures due to speculative activities. However, the longer you hold MEGAN, I suspect the odds will be worse.
Anyway, this is just my own personal opinion. Consider this a 3rd opinion to Moola's quality 2nd opinion. Personally, I find the liquidation price useful in deciding whether to invest in a stock or not, since I normally like to see an increase in the liquidation price over time.
Perhaps, when I have the time, I will consider doing a short posting on liquidation valuation in my blog (Fusion Investor).
I hope you are successful in minimizing your losses. My advice is sometimes, one needs to bite the bullet, to avoid further bleeding, especially when the odds are not good.
Take care,
Seng.