Megan And MJC

My Dearest Moo Moo Cow,

• Megan Media Holdings Berhad ("MMHB or "the Company") wishes to announce that its subsidiaries, Memory Tech Sdn Bhd ("MTSB") and MJC (Singapore) Pte Ltd ("MJC"), have defaulted on maturing trade facilities amounting to RM47,362,332.46.

Since it involved MJC, let's go back in time and determine if that purchase of MJC made sense or not?

To answer that let's look at its 2003 quarterly earnings b4 the purchase of MJC.

Quarterly rpt on consolidated results for the financial period ended 31/1/2003

It had total loans of 95.647 million and its cash balances stood at 5.005 million!

The company's financial status is already poor. Yes?

So in March 2003 it reported its acquisition of MJC, a Singapore company which belongs to its big bossie, a Singaporean also, Yeo Wee Siong.

PROPOSED ACQUISITION BY MEGAN OF 32,875,000 ORDINARY SHARES OF SINGAPORE DOLLAR ("SGD") 1.00 EACH REPRESENTING THE ENTIRE EQUITY INTEREST IN MJC (SINGAPORE) PTE LTD

• For the financial year ended December 31 2002, MJCS recorded a turnover of S$112.9 million (S$1 = RM2.17) and an after-tax profit of S$6.7 million.Compare fy 2002 figures. Megan had a net profit margin of 17.03%. MJC had a net profit margin of only 5.9%!

So if one thinks about it, the Yeos, were asking Megan Media to buy their own company, MJC, whose profit margins were worse than Megan Media!

Some comments from Surf 88.

• Following the recent Memorandum of Understanding, Megan Media (Megan) (RM1.97, stock code 7101) has entered into a conditional sale and purchase agreement to buy 100% of MJC (Singapore) Pte Ltd (MJCS) for US$25.6M cash, or approximately RM97M. As highlighted previously, this is a related-party transaction given that Yeo Wee Siong (Executive Director and substantial shareholder of Megan) and Yeo Wee Koon (substantial shareholder of Megan) jointly control MJCS.
  
• Post acquisition, Megan would have to take on RM97M in purchase funding, as well as another RM135M borrowings currently under MJCS. On a pro-forma basis, group net debt would be raised to about 1.9x shareholders’ funds, after incorporating MJCS’ proposed sale of Megan shares.

So to think of it..

Megan is paying 25.6 million USD or 97.2 million ringgit to buy MJC. But in return what does Megan inherit? The 63 million SGD in debts or 135 million ringgit in debts and not forgetting, Megan needed to finance 97.2 million to buy MJC!

Or would it be wrong to say that Megan bought a company belonging to their big bossie company, which included some 135 million in debts in their books and Megan needed to finance some 97.2 million to conclude this purchase, which ulimately meant that Megan had increased its loans to a whopping 330 mil.

And of course one would have asked if such a business made any sense at all. This was because the business had already shown strains of difficulties! Megan business had already showed a clear continous drop in its net profit margins since 2001. And there were no signs of improvement.

How?

Megan, a company which was ALREADY in a poor financial health, inccured more debts to buy a company BELONGING to its boss. And to make the matter business, Megan own's business was already showing declining profitability, bought a company in the same business industry and worse still, the company's profitability was even worse than Megan. And to make it worse, consider the financial health of Megan back then. It had total loans of 95.647 million and its cash balances stood at 5.005 million!

Honestly, don't you think this deal was rather poor and it simply made no business sense for Megan to do so?

Some argued that perhaps not all corporate debts are bad.

Yes, not all corporate debts are bad. However, sometimes one needs to consider the business involved. In Megan's case, was it wise to for Megan to take such high debts considering the fact that they are in a tech business? A simple production line were said to cost some 20 million. Could these CDr's and DVDrs last that long? What if there is a new format? Would Megan survive a drastic change? And worse still, some 230 million of debts was incurred to purchase MJC!

How?

Well, they might survive but they might not, but for us, the investor, was it worth a bet?

And how about a much simpler question? Why insist on Megan?

Our market has so many listed companies and there are quite a few companies who were showing great improvement in their earnings back in 2003. And they did not have such a debt issue and neither did they have such a funky corporate issue.

Meaning an investor could have easily chosen another stock investment, one without this debt issue.

And do remember, investment itself is one big risk. Markets could crash, financial crisis could happen beyond our control. So for me, when I invest, I would try to limit my risk. The less questionable issues a stock has, the less potential risks I take. Yes, why take unnecessary risks? Why attempt to be a hero in a hard place?

And what did they say about debts? Debts are never good. Debts are cost to a business. The higher debts, the higher costs. And also look at most failed businesses. What's the one common factor? High debts! Debts kills - sooner or later.

By the way, Investing in poor quality stocks is best described by Warren Buffett as cigar butt investing.

• http://www.frips.com/cst.htm
  
  To quote Robert Benchley, "Having a dog teaches a boy fidelity, perseverance, and to turn around three times before lying down." Such are the shortcomings of experience. Nevertheless, it is a good idea to review past mistakes before committing new ones. So let's take a quick look at the past. My first mistake was in buying control of Berkshire. Though I knew its business – textile manufacturing - to be unpromising, I was enticed to buy because the price looked cheap. Stock purchases of that kind had proved reasonably rewarding in my early years, though by the time Berkshire came along in 1965 I was becoming aware that the strategy was not ideal. If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit. Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original "bargain" price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. The investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost.

Sometimes too much emphasis is based on which share would move up and by how much.

And when this happens one tends to take risks on riskier investments and hope that their share appreciates quickly in the near term.

And the result? Well, sometimes it could prove very rewarding but sometimes it could turn into a disaster.

Yes, the common adage is No Risk, No Gain.

But risking our money just to gain more? That does not sound like an investment for me.

It sounds more like a gamble.

I would rather go for those Gain Only or as they say go for the sure winners only.

Like Warren Buffett once said, "I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out."

I believe that would be a good definition of a sure win. :)

Anyway back to Megan...

However, one thing I am very sure from the very start is that I would not had put any money into this stock. There is just no investment value at all in this stock!

Now today, 2007, MJC is involved in a loan default worth some 47 million.

How?

At this moment of time, if one has this stock, one just have to realize that they had made a poor stock selection. Wise up, acknowledge the mistake made and move along.

It would be insane to attemp to stay invested in such a company?

Yes, there is a possibility that Megan one day could rise again. But is this a wise bet at all?

There is this saying, in the share market, you just do not have to win your money back they way you have lost it.