More on iCapital Buy Call On NasionCom

Received the following comments on the posting, A Look At iCapital's Buy Call on NasionCom!

• KC said...
  Don't be so naive to think that Icap will have 100% accurate in their analysis.
  
  Read it, do your analysis, form your own judgement. Act on your own risk!

Dearest KC ,

Let's not be so arrogant and yes, obviously, everyone do understands that one should also do our own analysis and use our own reasoning and not rely on companies like iCapital.

And I am not here to suggest that iCap needs to be 100% accurate in their analysis.

The posting was made because I was simply amazed and appalled by how our most reputated INDEPENDENT INVESTMENT Advisory company could have had come up with the conclusion.

Do read the next comment for random.

And random said...

• The issue is not whether investment advisors can get it 100% accurate..
  
  If you can get 6 out of 10 correct, you're already very very good
  
  The issue is whether or not they own up to it when they've made a mistake..
  
  Last I heard, there is such a thing as a SELL call..

Dear random,

A lot of folks like to rate investment advisors based on their accuracy, which is bench marked against the said stock movement.

I do have a differing opinion.

When one is focused on benchmark issues like accuracy and the performance of the said stock, then it renders the actual usefulness of the investment analysis/report. Focus is on performance, right? So what's the difference between a report/analysis with the basic stock tipster?

Is there any difference?

I see zero difference then because everyone is judged on how that stock performs, which ultimately renders the analysis/report useless.

And more so when one considers that in the market, sometimes some stocks go mysteriously higher after a report is published. Which makes one wonder if the analysis was really good or perhaps the dark force was simply stronger?

So what do I prefer?

I prefer to rate the analysis/report based on the reasoning why a certain call is made on the stock.

Yes, I do not want to see contradictory buy calls made despite the glaring issues within the stock.

In short, it's not about how the stock call or recommendation performs but how the call is made.

Let me show what I am mumbling about.

Let's look at NasionCom table again. I added a new row to indicate the ttm (trailing twelve months) or most recent 4 quarters earnings then.

1. Earnings was poor yes? Look at the trailing earnings. A net profit of 4.352 million from a sales revenue of 178.352 million, equated to a net profit margin of a mere 2.44%. What's the likely conclusion from these numbers? Wasn't NasionCom a company that had razor thin profit margins? And given the extremely poor earnings shown in NasionCom's fy 2005 Q3 and Q4, shouldn't this be a concern?

2. Cash. Cash as at 05 Q1 was 10.285 million. 4 quarters later cash was only 3.638 million. Isn't it correct to say the cash is depleting?

3. Loans had ballooned from 28.138 million to 64.356 million. Isn't that not a concern?

4. Receivables exploded from 48.445 million to 71.150 million. Isn't that not a concern?

How?

What does common sense suggest here?

Let's see, with a cash balance of only 3.6 million versus total loans of 64 million, surely the level of borrowings is a worry. And when one adds in the fact the company ONLY made a net profit of 1.7 million for the quarter, surely the level of loans is totally massive! And to makes it worse, receivables is at a whopping 71.150 million!!! Why did the receivables grow so much? Anything smelly?

Commonsense question again.. which sane company would want to do business where the amount that is owed to the company is more than their loans? Why can't the company collect these receivables? And if these receivables, these money are collectable, then the company won't even need the loans right? Doesn't it make sense?

So many clear issues within this stock and yet Icapital comes up with the following conclusion.

• iCapital finds NasionCom to be an interesting company, with one of the factors being the direction and strategy that the new managing director has planned for the group. However, what worries us is the level of borrowings currently carried by the group. As at 1Q06, the group has rm64 million worth of borrowings, rm3.6 million of cash, and incurred interest expenses of rm1.3 million (35% of operating profit). On balance, iCapital rates NasionCom as a Buy below rm0.15 for the medium-term.

How would you rate iCapital based on such reasoning??

They see high level of borrowings but yet they chose to discount it.

Why?

How could they come out with such a terribly poor recommendation?

And this is how I would rate iCapital.

ps: Look at NasionCom now. The company cannot even officially release their fy 06 earnings and the company is fighting hard to ward off delisting from Bursa Malaysia!