How Now For LCL?

Yeah, LCL used to be a darling stock. The stock gave many an investor a very rewarding investment if they had invested in the stock in 2005-2006. By 2007, they would have been in dreamland.

Hence, now the stock had plummeted to such low levels, naturally its understandable that there would be interest.

It's natural.

For no stocks go down forever and neither does it go up forever.

Hence, some are pondering if the sell down is perhaps overdone, which means this could be a heavenly opportunity.

Let's explore via these comments from the posting LCL Stock Gets Hit On Payment Default!

• solomon said...
  It teaches us the importance of biz concentration risk and country risk.
  
  However, I see values in the company with its good track records. Only timing and people fails her.
  
  The major shareholder could almost double its stake now with his previous stake paring. If the company can reschedule some of the loans, I think it can overcome the bad times.

Interesting comments.

Let me skip the first line for a moment and let me share my opinion on the second line. '.. the company with its good track records'.

Yes from fy 2005 to fy 2007, LCL showed a rather impressive growth, where its net earnings went from 8 million to 12 million to 21 million. ( I guess this is the good track record you are referring to and needless to say, the market was also extremely impressed with what they saw - despite some clear flaws in its financial fundamentally..)

It's impressive no doubt but..... let's look at one report back in 2007, in which K&N Kenanga initiated coverage on the stock. I do have a copy of that report. Here's a snip of the report.

First, the price of LCL back then on 11 June 2007. Notice the incredibly high price target from K&N. (IINM LCL had a one for 2 bonus issue in 2007)

Secondly, natually is Dubai. The small arrow.

• ....Their impressive capex has no doubt enabled them to secure large contracts where most of its competitors outsource their fabrication work. Its current orderbook is RM437m with 83% in Dubai.

Current order book worth rm437 million, with 83% in Dubai. And the title of the report, was 'Malaysia Middle East Success Story'. (come back to the 2007 order book 0f 437 million in a moment)

Would it not be correct to say that the success where LCL built its solid track record (some also argue that this track record is not solid enough because it's only 3 short years!) was from Dubai itself?

Now Dubai have come crashing down.

Would this not put a huge question mark over its good track record?

Thirdly, the receivables issue. (See this was an existing problem back in 2007!)

• Large trade receivables but good quality clients. Given the nature of the work process where a certain quantity is shipped together upon completion of fabrication in the factory, the amount of receivables is high. In addition, Kerzner International and Emaar Properties have payment period of 4 to 8 months upon presentation of bills. The 75% of the value of the shipment of fabricated IFO materials is billed upon delivery on site and the remaining 25% is billed when it has been installed. Payment default by clients is expected to be low.

I am sure that many can see instantly the questionable issues with the analysis made.

Kerzner International and Emaar Properties have payment period of 4 to 8 months!

Many would wonder if this is such a healthy business practice at all. How could a payment period of 4 to 8 months be considered as good quality clients???

And the last statement, 'payment default by clients is expected to be low'........ oops!

Lastly, a quick remark on how K&N valued the stock.

• Initiating with BUY and target price of RM7.48 using 8x PER on FY08 EPS of 93.5 sen.....

Here is fy 2006 Q4 earnings reported on Feb 2007. Quarterly rpt on consolidated results for the financial period ended 31/12/2006. LCL made 12.9 million for the year or an eps of around 32 sen.

Here is fy 2007 Q1 earnings reported on May 2007. Quarterly rpt on consolidated results for the financial period ended 31/3/2007. LCL made only 4.1 million or some 10 sen eps.

In June 2007, K&N values the stock based on the next year, fy 2008 earnings. It expects LCL to make some 38 million or a massive eps of 93.5 sen!!! Optimistic forecast?

Some sure say yes! And to give such an optimistic report given the fact the stock HAD already flown sky high (see small chart on K&N report) would be questionable, yes? (This is probably why we keep hearing that one generally would be better off if one avoids all these bullish reports)

And now we come back to the first issue. "It teaches us the importance of biz concentration risk and country risk."

Yes, business concentration risk and country risk should always be considered if one is an investor.

A business with a large single customer always carry a larger risk.

In an older posting, Understanding My Investment Risks, I wrote the following:

• For example, take the stock VADS. It was a stock market winner but I chose to ignore it because I simply could not comprehend the risk involved in investing in the stock. VADS is a stock in which its majority shareholder is also the main and only customer for the business. Such a model simply did not make sense to me. Hence, from an investing perspective, I had chosen to give it a pass.

Yeah, as a stock, VADS was a stock market winner. LOL! Seriously till this very day, I feel nothing for missing out. As an investor, I see no sense in investing in something which I did not understand.

Which exactly is the same for LCL.

For all its growth, its growth was based on a single country. Dubai, housing market was booming insanely, so was LCL. And needless to say, for LCL, it came with the risk of a single country with an existing issue of having a long payment period.

No doubt, the initial years were good. It gave LCL the early promise (the 'track' record') but it also saddled LCL with massive payment collection issue.

Would I say that 'Only timing and people fails her'?

In my flawed opinion, my answer is no.

The long payment period (4-8 months) was an existing issue and the fact that the bulk of LCL business came from Dubai. These were the two issues that the management knew from day one. And what about the Dubai itself. Surely, the management would have understand that nothing grows forever.

Back on Feb 2008, there was this interesting posting by Mish: Where is All The Oil Money Going?

The very first pix Dubai in 1990 (clickable link to the picture posted by Mish), the second showed Dubai in 2003. The subsequent pictures of Dubai from 2007 was simply astounding. Could Dubai actually support such an astounding growth as a city?

And LCL has gotten its hands smack right in the middle of it all.

Despite the payment issues, would it not be fair to say that it appeared that LCL adopted a no-risk-no-gain business policy?

Look at the end result today.

So did market timing and people fail her?

Me? I think, in my flawed opinion, the management should hold its hands up and admits that perhaps it should have done much better!

Lastly..

• The major shareholder could almost double its stake now with his previous stake paring. If the company can reschedule some of the loans, I think it can overcome the bad times.

What was his reasoning to dispose so much of his shareholdings in November 2009? Why? Now a month, later, in December, LCL has defaulted on RM72m loans. What if this was one of his reasoning that he disposed his shares? Given LCL balance sheet (as per LCL earnings notes in November (see posting Quick Look At LCL's Earnings)), LCL only had some 12.59 million in its piggy bank and with the known difficulties in collection of monies from Dubai, wasn't this one of the main reason he sold?

And if so, what's the implication to HIS minority shareholders?

Some probably invested in his company because of the faith in him. But doesn't it look as if he had abandoned ship?

Yeah, he could double his stake back NOW by buying back the shares.

But IF... I am a potential investor, do I like what had transpired? Would I have faith in him?

Ah, the rescheduling of the loans could be a breather for LCL but will the bankers do it?

As per CIMB report highlighted here, Affin Bank holds the huge of the loan, at some 69 million. Would Affin Bank show some good ole Christmas kindle spirits by allowing LCL to defer its loan repayments?

It's tough for me to answer this. I think Affin Bank has gotten its head wet in a rather difficult situation. These are the list of banks listed in CIMB report.

1. Affin Bank
2. Am Bank
3. Alliance Bank
4. Bank Islam Malaysia
5. Bank Muamalat Malaysia
6. CIMB Investment Bank
7. EXIM Bank
8. Kuwait Finance House (M)
9. Public Bank
10. Standard Chartered Bank (M)
11. Royal Bank of Scotland

(LOL! Did I read some articles claiming that our banks have no exposure to Dubai? Well, LCL has demonstrated that indirectly, many banks are exposed to Dubai!)

Now I do believe in miracles. I do, really. So I shall not be nasty and suggest that LCL has no chance at all. But assuming if LCL do get a lucky break from its bankers, where and when is LCL going to get money?

Look at the next snip from CIMB report. LCL has a massive 293 million loans maturing within the next 12 months! LCL has 12 months to pay back its bankers some 293 million. (CIMB do expects more default in payments!)

Where to get those money?

In the posting, More Comments On LCL, I highlighted LCL's receivables.

• Trade receivables - 221.436 million
  Amount due from customers for contract works - 154.107 million
  Amount due from related companies - 41.641 million

Amount due from related companies... 41.641 million???? Hmmm.... why so much? Since LCL in trouble, how come these related companies not paying back???

Receivables and amount due from customers equates to a massive 375.543 million.

Could LCL collect these money tp repay its bankers?

Sceptics answer most likely is that if LCL could have collected, they would not have defaulted that 72 million. The opportunist, would say, miracles do happen! (Give them a break, it's the holiday season!)

Oh.. some would also re-ask again, given all these that has happened, why did LCL Corp Bhd chief operating officer (COO) Michael Tan Jin Sun resign back in Oct 2009? Anything to do with all this mess? And why in November 2009, did the five non-executive directors resign? Four of these non-excutive directors resigned from the AUDIT committee. Anything smelly?

Now would you bet on it?

How?