Wednesday, June 30, 2010

Green Packet Boss Keeps Saying EBITDA Positive... But...

I always like to gauge a CEO or MD by what they say in the press.

For example, let's take the case of Green Packet.

On today's Edge Financial Daily:
Green Packet’s target to be Ebitda positive may be delayed

  • Green Packet Bhd’s target to turn earnings before interest, tax, depreciation and amortisation (Ebitda) positive by year-end may be delayed to next year following South Korea’s SK Telecom buying a 25.8% stake in its subsidiary and WiMAX arm, Packet One Networks (Malaysia) Sdn Bhd (P1), for US$100 million (RM325 million).

    We were targeting for Ebitda to break even and turn positive by end of 2010, but after discussions with our new partner (SK Telecom), we are going to be more aggressive this year in expanding our network, advertising and gaining subscriber base,” said Green Packet group managing director C C Puan after the signing ceremony to seal the alliance between P1 and SK Telecom here yesterday.P1 CEO Michael Lai said the new target was also dependent on the subscribers gained and the average revenue per user (ARPU) by next year.

Firstly, it's strange to see current day MD and CEO talks about EBITDA.

Comeon... what's good is the earnings before interest, tax, depreciation and amortisation (Ebitda) to the minority shareholder?

Common sense question? What about tax? Tax no need to pay? Depreciation and amortisation is not required?

Comeon.. no need twist and turn and no need to insult the minority shareholder's intelligence. Just tell us the net earnings. Yeah, where is ze moola? Just show us the moola!!!

That's all the minority shareholders is interested in.

And EBITDA positive. So that's their plan.

Anyway... let's indulge with this six letter word and let's put away ze brains for a moment and pretend and yeah, let's imagine that EBITDA is the holy grail and it is so, so so important. Ok?

Anyway what do we have? Iin today's news article, Green Packet says their plans to be EBITDA positive has to be postpone to next year.

Let's travel back to time. Hehe.. back to the past. :P

Feb 2008. Green Packet aims to regain sales momentum after weaker year

  • Managing director Puan Chan Cheong said that in terms of profitability, the company's solution business ought to contribute "good double-digit" net profit growth this year, while its WiMAX business will still be in "investment mode".

    "Nevertheless, we expect the WiMAX business to be ebitda (earnings before interest, taxes, depreciation and amortisation ) break-even this year," he told the media in Kuala Lumpur yesterday.

That was the promise made in Feb 2008. Star Business carried an even more bolder version: Green Packet sees 100% growth in revenue this year

  • KUALA LUMPUR: Green Packet Bhd, which reported 24% higher revenue of RM122.84mil for the year ended Dec 31 (FY07), expects a 100% growth in revenue this year as its diversification plans start to bear fruit. Group managing director and chief executive officer Puan Chan Cheong was confident of the “achievable” target, as the company had diversified its markets to cushion the impact of a slowdown in any one region.

ps: He was talking about REVENUE growth and not earnings growth.. :P

May 2008: WiMAX major earner for Green Packet

  • “For all three phases, we will require funding of about RM700mil. Once the network is commercialised, we are targeting to reach EBITDA positive by the end of next year,'' said Puan.

May 2008: EBITDA positive by end of next year.

7 Feb 2009: Green Packet set for a comeback

  • Despite the heavy capital expenditure required for the rollout of WiMAX, Puan expects earnings before interest, tax, depreciation and amortisation (EBITDA) of Green Packet’s service pillar to turn positive by year-end.

Feb 2009: EBITDA positive by year end.

May 2009, Green Packer losses increased by SEVEN FOLDS!

On Business Times. Green Packet Q1 loss widens on broadband rollout cost

  • GREEN Packet Bhd, a company that develops telecommunication solutions and offers wireless broadband services, said its first- quarter net loss widened more than sevenfold despite higher revenue, due to the cost of rolling out its wireless broadband services.

Yeah.. see how pointless it is to talk about REVENUE growth! What's good is it to have higher revenue growth when the losses widens more?

  • "By the end of this year, P1 would be Ebitda (earnings before interest, tax, depreciation and amortisation) break-even and will be cashflow positive from next year," said Puan

Aha... May 2009, boss said EBITDA will break-even from next year.

Ahem.. EBITDA will break even from next year.

12 Feb 2010: GPacket Q4 loss up on higher cost

  • Puan concurred that the group could return to positive EBITDA in the second half of this year.This would be achieved through additional customers for its international devices as well as connection management solutions business, besides more than doubling its WiMAX current network infrastructure and subsciber base this year.Green Packet expects to spend RM250mil to double network sites from 650 currently.Its subscriber base is also expected to more than double by the year-end from 140,000 as at the fourth quarter of last year.

12 Feb 2010, EBITDA positive in the second half of this year.

And recently, May 14th. Green Packet believes worst is behind it

  • Although the firm's first quarter net loss expanded to RM44 million, from RM22 million in the same period last year, the company remained optimistic that it will be able to achieve an Ebitda (earnings before interest, tax, depreciation and ammortisation) break even by the end of this year.For the first quarter ended March 31 this year, it posted a narrower Ebitda loss of RM29.8 million, an improvement from a loss of RM56.2 million in the fourth quarter of last year."These are planned losses, as we need to invest heavily to roll out our broadband coverage. In the second quarter of 2010, we expect (Ebitda) losses to be narrower, and by the end of this year, we will break even," said group chief executive officer Puan Chan Cheong after its media briefing in Petaling Jaya yesterday.Puan attributed the improvements in remaining quarters to its growing broadband subscriber base, as well as expansion in coverage.

May 2010, still say EBITDA positive by end of the year.

Now 30 June 2010. The EBITDA plan is delayed to next year!


And in the meantime, since not EBITDA positive, the losses keeps coming for Green Packet!

So how exactly would you gauge the boss?

And do you want to hear him utter this six letter word... E-B-I-T-D-A again????

Seriously, don't you think it's much better that the company just deliver the result than to make such statements to the investing public?


Who Has Lost Their Marbles? US Fed Tells Public To Ignore Bloggers Without Econ PHD!

On the Uk Telegraph, Ambrose Evans-Pritchard lashes out against Kartik Athreya who had condemned economic bloggers as chronically stupid and a threat to public order!

Time to shut down the US Federal Reserve?

  • Like a mad aunt, the Fed is slowly losing its marbles.

    Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order.

    Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences).

    Adam Smith didn't have an economics PhD

    “Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.”

    Don’t you just love that throw-away line “decent”? Dr Athreya hails from the University of Iowa.

    “The response of the untrained to the crisis has been startling. The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading.”

    You couldn’t make it up, could you?

    “Economics is hard. Really hard. You just won’t believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.”

    I hold my hand up Dr Athreya and plead guilty. I am grateful to Bruce Krasting’s blog for bringing this stinging rebuke to my attention.

    However, Dr Athreya’s assertions cannot be allowed to pass. The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did.

    Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.

    They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of “inflation targeting”. Have they all forgotten Keynes’s cautionary words on the “tyranny of the general price level” in the early 1930s? Yes they have.

    They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher’s “Debt Deflation causes of Great Depressions”? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.

    The Fed has since made a hash of quantitative easing, largely due to Bernanke’s ideological infatuation with “creditism”. QE has been large enough to horrify everybody (especially the Chinese) by its sheer size – lifting the balance sheet to $2.4 trillion – but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect.

    The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don’t we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell.

    And now the Fed tells us all to shut up. Fie to you sir.

    The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin.

    The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science and answers to Newtonian laws.

    In any case, Newton was wrong. He neglected the fourth dimension of time, as Einstein called it, and that is exactly what the new classical school of economics has done by failing to take into account the intertemporal effects of debt – now 360pc of GDP across the OECD bloc, if properly counted.

    There has been a cosy self-delusion that rising debt is largely benign because it is merely money that society owes to itself. This is a bad error of judgement, one that the intuitive man in the street can see through immediately.

    Debt draws forward prosperity, which leads to powerful overhang effects that are not properly incorporated into Fed models. That is the key reason why Ben Bernanke’s Fed was caught flat-footed when the crisis hit, and kept misjudging it until the events started to spin out of control.

    Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a rarer spectacle in science, where disputes are usually resolved one way or another by hard data.

    It is a branch of anthropology and psychology, a moral discipline if you like. Anybody who loses sight of this is a public nuisance, starting with Dr Athreya.

    As for the Fed, I venture to say that a common jury of 12 American men and women placed on the Federal Open Market Committee would have done a better job of setting monetary policy over the last 20 years than Doctors Bernanke and Greenspan.

    Actually, Greenspan never got a Phd. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind.

Now who is this Kartik Athreya?

Well Tyler has featured an article on him and Kartik's article in full can be read in his article, The Fed Has Lost It; Publishes Essay Bashing Bloggers, Tells General Public To Broadly Ignore Those Without An Econ PhD

  • Some Fed economist (with a hard-earned Ph.D mind you) named Kartik Athreya (who lasted at Citigroup as an associate Vice President for a whopping 7 months before getting sacked in 1998 only to find solace for his expiring unemployment benefits in the public sector) has written the most idiotic "research" piece to come out of the Federal Reserve since 1913, and the Fed has written a lot of idiotic research since then - after all you don't destroy 98% of the dollar's purchasing power in 97 years with non-idiotic research. But this just takes the cake. In "Economics is Hard. Don’t Let Bloggers Tell You Otherwise" Kartik says: "I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public." Alas, all Kartik achieves is to convince the general public that feeding Fed "economists" alcohol after midnight and letting them directly upload their resultant gibberish to the Fed's broad RSS feed the second they think they have a coherent thought , is generally a disastrous idea. In his piece, which has no other intention than to discredit and outright malign bloggers such as Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich, Athreya says: "In what follows I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy. This sounds mean-spirited, but it’s not meant to be, and I’ll explain why." Instead in what follows, the Fed presents 4 pages of thoughts so meandering, that the author's blood alcohol level must have certainly been well above the legal norm for the duration of the writing of this ad hominem pamphlet.

  • Before I continue, here’s who I am: The relevant fact is that I work as a rank-and-file PhD economist operating within a central banking system. I have contributed no earth-shaking ideas to Economics and work fundamentally as a worker bee chipping away with known tools at portions of larger problems.
  • Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to? To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too. People as varied as Matt Ridley and William Greider make book-length statements about economics. I’ve never done that, and this is my job. This is, to say the very least, bizarre.
  • So far, I’ve claimed something a bit obnoxious-sounding: that writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.
    You might say, “you’re telling us to leave everything to the experts, so why should I believe you are adequately policed?” This is a fair question, but as someone who has worked for a decade to publish in leading academic journals (with some, but hardly overwhelming, success), I now have the referee reports to prove that I live in a world where people are not falling over themselves to believe my assertions. The reports are often scathing, but usually very insightful, and have over the years pointed out all manner of incoherence in my work. The leading journals have rejection rates in the neighborhood of 80%, and I’ve had my share of them.
  • How can this be changed? A precondition for the market delivering this is a recognition by the general public that they are simply being had by the bulk of the economic blogging crowd. I hope to have alerted you to the giant disconnect that exists between the nuanced discussion that occurs between research economists and the noise (some of it from economists!) that one sees in the web or the op-ed pages of even the very best newspapers of the US. As a result, my hope is that the broader public will ask for a slightly higher bar when it comes to economics, rather than self-selecting into blogs that merely confirm half-baked views that might have been acquired from elsewhere.

And this punchline:

  • For my part, seventeen years after my first PhD coursework, I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect.


Yeah babe. I wonder who has their marbles!

Oh... here is the link to Kartik's paper: Economics is Hard

Have You Taken A Look At MEMS lately?

It was October 2009 that I last wrote on Mems: MEMS Told To Correct Its Financial Statements!

Key issue pointed by the news article was the following..

  • In a statement issued yesterday, the SC said it viewed MEMS' non-compliance with the FRS118 "Revenue" "very seriously".

    On August 4 this year, the SC directed MEMS to rectify and reissue its accounts for the financial years ended 2007 and 2008. MEMS was also to rectify and announce to Bursa Malaysia its unaudited condensed consolidated income statements for the six months ended January 31 2009.

    MEMS was to rectify the financial statements by excluding RM49.183 million from its revenue for all the three financial statements.

    The basis of the SC's directive was that the amount was derived from transactions that never took place in the respective financial years and period.

    Investigations by the SC revealed that the group's revenue of RM53.699 million reported in the 2007 financial statement contained bogus sales of RM13.007 million,
    while the revenue of RM71.994 million reported in 2008 contained RM24.161 million sales which did not take place.

    For the six months ended January 31 2009, MEMS reported revenue of RM37.366 million, of which RM12.015 million sales had not been transacted.
Transactions that NEVER took place according to SC!!

Yeah. That bad.

Last night Mems reported its quarterly earnings. Its review of performance was interesting for me.

  • For the quarter under review, the Group generated revenue of RM0.29 million, representing a decrease of 98.50% from the revenue of RM19.27 million recorded in the corresponding period of the previous year. The Group posted a loss before tax (“LBT”) of RM3.17 million for the quarter ending 30 April 2010 representing a decline of 489.68% against a profit before tax (“PBT”) of RM0.81 million for the corresponding period of the previous year.

    The Company provided full impairment of assets in its Penang plant as the management do not intend to resume operations after its cessation in September 2009. The Group has resumed operations of its Johor and Singapore plants albeit at a substantially reduced scale pending the restructuring of the Group.

The full impairment of assets issue was rather interesting.

You see, many investors like to find 'value'. Yeah, everything has some sort of value. Good or bad, there's some sort of value. As long as one buy cheap enough, one can make.

Well, I don't totally disagree. Take a broken laptop. As badly broken itself, if you can find someone offering some money for it. Not a lot but some, maybe 10 or 20 bucks! (I am not too sure ok, so don't take that statement as the holy grail because conditions do vary!)

So for stocks, good or bad, there is some sort of value in the stock. Heck, some even dare say that the listing status could be sold if the company is lucky and manage to find a kind buyer.

So some people invest in stocks using yardsticks like NTA or RNAV.

Now back to Mems. Mems is now saying it has provided full impairment of assets for its Penang plant.

Now if one look at Mems most recent 5 quarterly announcements, one would find a very interesting read. (10 Q3 earnings was reported last night)

Here are my comments on the numbers

1. Sales. Company's most recent quarterly sales is now only 29 thousand!!!!! Holy cow!!!

And this is a listed entity? A stock? And yeah.. during its peak, Mems had a traded market value of over 530 million! I wonder how much did the 'transactions that NEVER took place' helped the stock to trade so highly!

2. Earnings. 4 quarters of losses. Even without the write down, sales is only 29 thousand. How much profit can Mems make in the future with such sales revenue?

3. Cash. 288 thousand????

4. Debtors or Trade receivables. 09 Q4 and 10 Q1 saw the company write off the bulk of their high trade receivables. Again point to note that when trade receivables soars too high, sooner rather than later, it will be written off as bad debts. And the company will suffer losses! And the losses could be really huge if the debts to be written off is huge!

4. Plants.

Yes... that's the most glaring thing now.. the assets!

Look at the last column, Plants or plant and machinery stated in Mems 09 Q3 earnings was worth 90.265 million. Now since the company said it did not intend to resume operations since its cessation in Sep 2009, by logical reasoning, the plants and machinery is certainly worthless! Which means, the company has to write off the plants and machinery! Yup impairment of assets.

The bottom line? The assets of its plant and machinery stated in its 09 Q3 earnings was 90.265 million. Today, Mems plant and machinery is only worth 28.925 million!

The chunk of impairment made on its assets was rather drastic, yes?

And this is where the potential risk/danger in investing based solely on NTA. Yes, on one hand, to know the company has tons of assets is certainly a plus. However, sometimes, in rotten cases (remember Megan? loans taken to buy non existent factories and plants?), the assets can be written down big time!

Update On Analabs Earnings

Analabs reported its earnings. It made a net profit of 3.640 million for the quarter, giving it a total earnings of 15.389 million for its fiscal year 2010.

Which is very impressive when one starts comparing it versus what it had achieved the previous year.

But then... on a q-q basis, the earnings was terrible.

Ah yes, yet another interesting issue. Should one look at a y-y comparison or should one look at the q-q comparisons?

On a y-y comparison, its 3.640/15.389 million earnings was very impressive. Last year, Q4, it made only 1.376 million and had a total earnings of 9.373 million for the fiscal year. Bravo.

On a q-q comparison, last quarter, it made 5.639 million. So the 3.640 million is rather a shocker yes? Why such a big decline?

Balance sheet comparisons.

1. Cash. This quarter 9.949 million. Last quarter 11.848 million. Last year 32.272 million.
2. Receivables. This quarter 26.924 million. Last quarter 25.275 million. Last year 7.812 million.
3. Investments in quoted securities. This quarter 14.544 million. Last quarter 14.863 million.

As mentioned before, the huge shrinkage in cash was because it bought a stake in its subsidiary for 32 million! Yeah... subsidiary.


From the company's earnings notes:

  • For the quarter under review, the Group recorded a revenue of RM36.7 million, which is an increase of 173% compared to the revenue of the corresponding quarter of the preceding year. This increase was contributed by the newly acquired business of manufacturing and sale of resin impregnated papers by RM25.2 million but was set-off by the lower contribution from the other business segments due to the weak prevailing operating environment vis-à-vis the corresponding quarter of the preceding year.

    As a result of the positive and substantial contribution in turnover mainly from the business of manufacturing and sale of resin impregnated papers and relatively lower raw material prices, profit before tax for the current quarter recorded an increase of 154% as compared to the corresponding quarter of the preceding year

This was the previous posting on Analabs: A Look At Analabs Earnings

Tuesday, June 29, 2010

Should I Be Optimistic On Kencna?

Kencana reported its earnings last night. The numbers were impressive (by itself - hehe.. meaning to say let's discount the local market expectations/comments on it).

Here is a simple compiled table on how Kencana has fared since listing.

ttm = trailing twelve months earnings.

Now using the ttm earnings as a simple gauge, it's most likely that Kencana would register another good profitable year for its current fiscal 2010. That's how I would ass-u-me. ( And for numbers/math fans, that should be about an annual compounded growth rate of 21.48% since fy 2007!)

Now stocks don't get rated by the market based on current numbers. They are always rated based on FUTURE expected numbers. Yeah, in simple terms, expected or estimated earnings. That's what I have been told. Hope I am not wrong.

So what's the current market expectations on Kencana?

Take OSK.

Now as I can see OSK's fy 2010 estimates is about 129 million, which is pretty close to what Kencana is doing now. However, Kencana is rated based on the FY11 estimate numbers.

OSK estimates Kencana fy11 profits to be at 191.8 million and uses a PE multiple of 16x for its fair value recommendation. This gives it a BUY target of 2.06!

CIMB numbers are actually higher than OSK! (LOL!)

CIMB estimates Kencana fy11 profits to be at 213.2 million and uses a PE multiple of 15x for its fair value recommendation. This gives a buy target of 2.15.

LOL! Yeah, OSK numbers are not the highest.

Now on the other side, RHB gave it an underperform rating with a price only 1.27!

RHB estimates Kencana fy11 profits to be at 160.9 million and uses a PE multiple of 13x for its fair value recommendation. This gives a buy target of 1.27.


Obviously, the key or the bone of contention is the fy11 numbers. OSK gave it 191.8 million, CIMB gave it 213.2 million and RHB only gave it a 160.9 million.

So who should I believe in?

Do I believe that cows can fly? :P

Would a look at Kencana's recent quarterly earnings help. How about we compile Kencana's most recent 8 quarterly earnings numbers to help us gauge if the fy11 numbers are achievable or not.

Anyway, here's the compiled table...

Now would I NOT say that judging by Kencana's most recent or latest 4 quarterly earnings, Kencana is averaging around 30-31 million only.

Now if I take CIMB's estimates of around 213.2 million. Divided by 4, CIMB is telling me that Kencana should be averaging net earnings of around 53 million, per quarter. Based on its ttm numbers, Kencana is averaging only around 31 million! So for Kencana to jump from 31 million to around 53 million, that's a jump or growth of 22 mil ( 53 - 31 = 22 mil) per quarter.

And let's see... this is about 70% increase, yes?

I hope my cow-cool-lator is not as faulty as my brains. :P

70% growth woh.

Hmmm.... so would I be wrong to say that perhaps CIMB is overly optimistic?

Ok.. the least optimistic is RHB and RHB's estimate is around 160.9 million. Divided by 4, that should work out to an average estimate of 40 million per quarter. Again, based on its ttm numbers, Kencana is only averaging about 31 million per quarter. So based on an estimate of 40 million per quarter, this still works out to an increase of around 29%.

Yes, despite being most under optimistic, RHB still expects Kencana's earning to grow around 29%!

Hmmm..... Ken ah?

Zelan And Its IJM Stake

Posted end of last month: Zelan Hit By Massive Losses

Yesterday afternoon, the Edge Financial came out with the following article:
Zelan’s 8.64% stake in IJM Corp worth more than own market cap

Huhuhu!!! Wakaka... it's time for......!

Honestly.. that was my initial reaction before reading what the article was suggesting.

I mean such articles are so, so, so sexy. It's like telling the whole Malaysia market that Zelan shares are currently traded for nothing.


Hey, I am not insinuating anything. So do not ass-u-me and make an ass out of u and me. :P

  • Written by Tony C H Goh
    Monday, 28 June 2010 15:52

    KUALA LUMPUR: Former high flyer Zelan Bhd, whose fortunes had plunged due to its overseas misadventures especially in the Middle East, is in an awkward position now as its 8.64% stake in IJM Corp Bhd is larger than its market capitalisation.

    The IJM stake, comprising 115.268 million shares, is worth RM565.96 million based on last Friday’s closing price of RM4.91. It is 89.5% higher than Zelan’s market capitalisation of RM298.53 million,
    based on its paid-up of 563.26 million shares and the closing price of 53 sen.

    Zelan has been battered following its project cost overruns and boardroom changes which saw the company sinking further into the red.

    For the financial year ended March 31, 2010, Zelan’s net loss widened to RM254.26 million or 45.15 sen per share, compared with the loss of RM137.22 million a year earlier.

    The company was badly hit by cost overruns for its projects in the Middle East, while lower contribution from its engineering and construction business saw revenue plunge 90% to RM51.82 million from RM517.7 million previously.

    During the period, Zelan suffered contract losses amounting to RM199.4 million, including RM93.4 million in Saudi Arabia, RM12.2 million in the United Arab Emirates and RM93.8 million in Indonesia. It also had an impairment loss of RM44.4 million from goodwill for the engineering and construction division.

    The boardroom changes also had the negative impact. It was in 2007 that saw the entry of tycoon Tan Sri Syed Mokhtar Al-Bukhary into the company.

    MMC Corp Bhd subsidiary, Tronoh Mines Malaysia Bhd, bought a 100% stake in the then privately held Zelan (M) Sdn Bhd for RM140 million from Noble Gem Sdn Bhd, Eminent Gateway Sdn Bhd and Navazi Sdn Bhd.

    Noble Gem, Eminent Gateway and Navazi were controlled by Chang Si Fock @ Chang See Fock, Tan Cheng Huat and Lam Kar Keong respectively.

    Tronoh paid RM10 million cash and issue 65 million new shares at RM2 apiece for Zelan. Tronoh subsequently changed its name to Zelan, with MMC currently holding 39.25% in the company.

    The downward spiral of Zelan began after a boardroom tussle saw its chief executive officer Chang disposing most of his shareholdings in the company which was held through his private vehicle, Noble Gem, in 2008.

    Chang left the company in January 2009 when his contract expired and Raja Azmi Raja Nazuddin was appointed the new managing director in June 2009.

    Zelan has a unique value proposition as a specialist design and build power plant contractor. It has always haboured the ambition to be a regional independent power plant player, and have aggressively venture into the Middle East, Indonesia and India for construction and power related projects.

    Its projects in the Middle East include the Shuaibah III and Shuqaiq II independent water desalination and power plants in Saudi Arabia, Sidar Tower in Dubai, Meena Tower and Al-Reem Island in Abu Dhabi, the UAE.

    Zelan also has a joint venture with PT Primanaya Djan International to build a US$560 million (RM1.82 billion) 2 x 315 megawatt coal-fired power plant in Rembang, central Java in Indonesia for PT Perusahaan Listrik Negara. Zelan holds a 70% stake in the venture and PT Primanaya the balance 30%.

    Upcoming power projects in Malaysia, however, could see the revival of fortune in the company. MMC, Zelan’s largest shareholder, has stated its intention to expand the company’s coal powered independent power plant in Tanjung Bin, Johor.

    While no firm decision has been made on the proposal to expand Tanjung Bin plant, Zelan probably would have a role to play in the multi-billion ringgit project that may give rise to opportunity for Zelan to turn around its losses, analysts said.

    Zelan shares closed at 53 sen last Friday with 1.0 million shares traded. It has fallen 20% so far this year, while net asset per share stood at 83 sen as at March 31, 2010.

    This article appeared in The Edge Financial Daily, June 28, 2010.

Yeah... right on... value play!

Anyway.. the article and its contents came and went. I just did not bother much about it.

Then this morning... on Business Times... I saw the following small clip..

  • Zelan sells 0.7pc stake in IJM

    Published: 2010/06/29

    ZELAN Bhd has sold 9.4 million shares or 0.7 per cent of IJM Corp Bhd, a property and construction group, for RM45.5 million.

    It told Bursa Malaysia yesterday that the money will be used to reduce borrowings and fund working capital. (Oh.. the sale would create some 'profit' for Zelan. :P )


Seriously... I laughed out so loud!

The timing of both articles is so incredible.

Err.... good or whaaaaaaaaaaaat?


Our Exports To China Surging?

On today's Business Times:

  • Malaysia's exports to China surge to US$19.1b

    Published: 2010/06/29

    MALAYSIA'S exports to China in the first five months of this year rose by 82.2 per cent to US$19.1 billion (RM61.69 billion) compared with the same period last year.

    Malaysia External Trade Development Corp's Sabah director Syed Zahirulldin Syed Ali said with the implementation of the Association of South-East Asian Nations (Asean)-China Free Trade Area (ACFTA), where tariffs of over 90 per cent of the products were cut to zero, Malaysia's trade with China was expected to continue to grow.

    "Malaysia's economic relations with China have shown remarkable growth in trade and investment over the past 10 years, and we hope this trend will continue for mutual benefits," he said at the 7th China-Asean Expo (CAEXPO) promotional conference in Kota Kinabalu yesterday.

    Also present was CAEXPO secretariat vice director-general Gong Qijun.

    The CAEXPO will be held from October 20-24 in Nanning, China.

    Syed Zahirulldin said China was Malaysia's largest trading partner last year with total trade amounting to US$36.3 billion (RM117.24 billion).

    He said the CAEXPO has positioned itself as the symbol of cooperation between Asean and China not only in trade and investment but also in tourism.

    Syed Zahirulldin said last year, 100 Malaysian firms participated in the expo under five industry clusters - food, beverages, general products by small- and medium-sized industries, Malaysia brands and government agencies.

    He said last year, Malaysian exhibitors secured deals worth RM204.5 million. - Bernama

Now I had always reminded myself of this posting: Do Not Be Fooled By Headline Numbers

As stated in the posting, Pankaj Kumar reminded the following..

  • Moving towards the current economic indicators, it is also interesting to note how one economic figure can be misconstrued as good by some and bad by others when in reality it may well be saying something else.

    The issue here is that as most fund managers are busy keeping track of economic data out of the US, Europe and Asia practically on a daily basis
    , are we seeing the trees from the forest or mainly just looking at headline numbers?

    Most economic data are measured either on a month-on-month or year-on-year basis. There are two ways to measure the data points; either by absolute difference (for example consumer confidence data), which to me is more reflective of the real situation, or by percentage change, which can sometimes be misconstrued by investors...

Misconstrued by investors.

For example, yes comparison to last year numbers, this year numbers simply looked great. But what about last year numbers itself?

The first five months of last year... what period did it represent? What did the first five months of last year represent? Wasn't that almost the peak of the crisis, where almost everything in the world, declined? And if so, won't the comparison by misconstrued?

And also, earlier this month, I posted Malaysia's Exports To China Shows Big Decline

  • Exports to the PRC increased by 28.0% from April 2009 to RM6.53 billion. This was mainly contributed by higher exports of E&E products, palm oil, chemicals and chemical products, rubber products and LNG. Compared with March 2010, exports to the PRC contracted by 18.1%.

Yes, y-y comparison, April 2010 export numbers of rm 6.53 billion showed an increase of 28%.

However on a m-m comparison, our exports to China in March 2010 was RM7.98 billion. April numbers fell 18.1% to 6.53 billion.


Declining exports or surging exports?

Me? I can't wait to see our May export numbers.

Should I Invest In iCapital's Global Funds?

I got a request to comment on iCapital's 'international' fund performance fee and I was asked if the fee was justifiable and if the fund was worth investing.

In regarding to fund performance fee. Much had been written about it by blogger AhYap in his posting
Tan Teng Boo Responds to iCapital International Value Fund and Global Fund Performance Fee Issue! But Still Not Addressing The Real Problem. I would suggest one to give this posting a good read (no point in me repeating what's being said and more so, I have nothing to add. :D ) because I do find that the points raised are very much a concern for the prospective investor and that these concerns needs to be addressed before the investor makes an investment into the fund.


Reasoning is so simple and logical. It's not wise that an investor invests in a fund where the fund structure is so biased or stacked against the investor. The odds are against the investor. In layman's term: Hard to make money! The fund manger would most likely make money than you (in regardless of the fund performance!) Now this does not sound like a smart investment, does it?

Anyway what about the funds itself?

The funds was launched almost a year ago. From their website:
The i Capital International Value Fund Launch

  • Stock markets are currently at their lows. It is an excellent time for investors to tap into this exciting opportunity, not only recoup their losses, also to enjoy exciting, long term capital appreciation. Action has to be taken urgently as the global markets are already starting a new bull run.

I like to make one comment. Yes, last year indeed would be a great time since the stock markets then was indeed at their lows. Yes, let me give credit to iCapital for that. ( See I do give credit) but then and now, is a world of difference. Since iCapital likes to compare their fund nav with MSCI World and MSCI All Country Index, perhaps a simple view of the charts is appropriate for one to gauge how low are the stocks currently compared to last year when these two funds were launched. ( Valid question to address? )

How? How would you interpret these two charts of MSCI World and MSCI All Country? Let's NOT predict where the charts are heading but look at where these index are at currently. They are not at their highs, and neither there are at the lows. But gauging at where it is, would you define it as 'lows'? ( And of course, one could expand the question by addressing the current financial and economic woes globally. Would this be a great time to be investing? Yeah, of course the global markets could go higher, no doubt but then who's to say we won't visit the lows again? How? You have to address this, not me. :D )

Now the greatest asset of any fund is the fund manager itself.

Yes, the performance of the fund most likely would not be replicated if the fund is managed by someone else, which is why it's so important, in my flawed opinion, to question the integrity of the fund manager.

Do you trust the fund manager completely? 100%? Sure?

So how do you trust a fund manager? Obviously, not everyone, will get to know him personally. So how else to gauge him? Well for me, I could be wrong but one way I would judge him is by his 'market actions', what he says and what he does in the market. And I would see if there is any conflict of interest behaviour. Are these logical questions to ask? Well if you insist on gauging him based on fund performance and totally discounting character of the fund manager, I guess the rest of this posting would be a waste of time. For me, fund performance or the ability as a fund manager is without a shadow of a doubt, a must but so is the issue of the fund manager. Trust of the fund manager is so, so very important.

April 2008, I wrote the following posting: What Do You Think of ICap's Recent Disposal Of Shares Held? . What happened was TTB was quoted in the press to be 'unabashedly bullish' in spite of the apparent market meltdown in US. ( Let me quote him again "“Firstly, the subprime problem remains just that – subprime. Secondly, while many large financial institutions have been badly hit, the central banks have successfully averted a credit or liquidity crunch scenario. Thirdly, the US economy is certainly slowing down but a recession is only a possibility, and not certain.” ). So if you hear this famed local value investor making speaches like this, won't you feel bullish too? Now get this... the problem with that bullish statementS (it wasn't just one statement, it was several!) made publicly, the following quarterly earnings report,, the local closed end fund, announced it had disposed securities worth 50.999 million!!

How? Publicly he said 'unabashedly bullish' but at the very same period, his fund dumped securities worth 50.999 million like plague! ( see this posting More Rumblings On Tan Teng Boo's ICapital's Disposal Of Shares also)

Why tell everyone you are bullish when you are actually disposing a lot of shares?

And since iCapital has an independent investment advisory business, they are issues to address yes?

Personally, I find no reason why the need of the investment advisory business. Surely if iCapital fund managing business is good, why bother with investment advisory? Can make money meh? And because it owns fund managing business and investment advisory business, the integrity questions will never end!

Yes, for example, does the fund buy stocks they are recommending? Obviously, they would. Simple reasoning. If the stock is no good, the investment advisory won't recommend it and neither the fund will buy it. But what if, things get skewed to the left? What if the advise is given because the fund holds the stock? What if the fund contradicts what the investment advice given? See how messy these questions are? And since so messy, why is iCapital still insisting on keeping that business?

For example: On August 2008: More on iCapital Transparent Issue. I compared iCapital's stock recommendation list as of July 2008 and I was amazed to read the stocks all carried HOLD or BUY ratings but when I compared to its 2008 annual report (click here: CAPITAL.BIZ BERHAD ) iCapital the fund said it had sold!

In the posting iCapital: How Independent Is The Advice When They Hold Vested Interests In The Same Shares They Are Advising On?, I compared the shares disposed, with assumption it had all been disposed during the period, 1st Dec 2007 to 29th Feb 2008, since according to its earnings notes, it had disposed some 50.999 million in that period.

The following was what I noted:

  • Take Boustead Holdings, it traded as high as 7.00+ during this period. It's now 4.74.
    Take Intergrax, it traded a as high as 1.40+ during this period. It's now 0.695.
    Take Lion Diversified, it traded as high as 2.00 during this period. It's now 1.03.
    Take Petronas Dagangan, it traded as high as 8.60+ during this period. It's now 7.00.
    Take Poh Kong, it traded as high as 0.70+ during this period. It's now 0.44.

    It would appear to me that iCapital fund management was spot on in disposing these shares during that 1st Dec to 29th Feb 2008, where it disposed some 50 million worth of shares. Yes the sum of disposals were as much as 50 million ringgit!

    Absolute brilliant for the fund!

    But what about their subscribers? (the stocks listed above all had either a buy or a hold recommendation as stated in the posting here )

Yes, the fund contradicted what its own investment advisory stock recommendation!

Now on the issue of the investment advisory recommending a stock in which the fund had vested interest. See iCapital And Swee Joo (long posting! :P) Companies fundamentals were questionable. So was its earnings but yet, iCapital gave it a buy rating when it had vested interest in the stock! (And what about the Mieco saga? )


And then there is Axiata! See iCapital Lost 14 Million In Axiata Without Explaining Why

Well, iCapital lost a lot money in Axiata. That wasn't so much the problem. The problem was, it chose NOT to disclose WHY it sold in its quarterly earnings notes. I thought iCapital should have shown the investing public more respect by disclosing the reasoning why. Yeah, iCapital finally did explain why but only in its agm. Was the action acceptable? I did not think so. To wait for the agm to get the explanation is not acceptable. The investing public had the right to know immediately since the size of the loss was staggering and more so since iCapital had preached investing terms like 'value investment' and 'buy for the longer term', why did iCapital dispose its holdings in Axiata? What happened to fund 'investment philosophy? This closed end fund was a traded entity. It's listed in the local stock exchange and as much as the stock could go up, it could also be sold down! To not disclose why was simply not acceptable. Not for me.

And yeah, some do not LIKE what I had pointed out in iCapital. See iCapital: As Long As There Is Result, You Should NOT Question. Their reasoning is "As an investor, what matters most to them is returns on investments.If TTB can outperform the market, who cares what mistakes he makes? Who cares whether he explains his decisions or not?"

Me? I repeat again.

But as long as iCapital.Biz is a public listed entity, I believe I have the right to POINT out all the mistakes he makes and as long as it is a public listed entity, it is ONLY correct that he address this issue by explaining to the shareholders and the investing public. By NOT doing so only reflects so poorly on the integrity of the fund and TTB himself.

And this is my flawed opinion and no matter how flawed it is, it's mine and it's my right of opinion.

Anyway, so how now?

Based on all these issues, what do you think of this fund manager?

Isn't the conflict of interest one glaring concern? And yeah, what about integrity?

For me, I believe all these questions needs to be addressed when one is thinking about investing in iCapital's global funds. And yes, read AhYap's blog on the issue of fund performance fee too! These are valid issues to address.

Anyway, please understand that these are my mere second opinions and I do hope that it helps and most importantly, end of the day, it's your money, not mine and if you think my posting is severely flawed, so be it.

I am just a nobody and I am not an advisor and neither am I a fund manager.


Sunday, June 27, 2010

Hai-O Warns Of Challenging Next Year

On Star Business: Hai-O records big drop in Q4 revenue

  • Saturday June 26, 2010

    Hai-O records big drop in Q4 revenue

    PETALING JAYA: Multi-level-marketing (MLM) company Hai-O Enterprises Bhd reported a sharp drop in revenue in its fourth quarter ended Apr 30 due to stricter rules on recruitment of new members, in line with more stringent requirements set by the authorities

    Net profit declined 10% to RM14.2mil versus RM15.8mil a year ago, while revenue tumbled 26% to RM98.8mil from RM132.9mil, the company told Bursa Malaysia yesterday.

    The group’s performance in the fourth quarter “was below internal target,’’ the company said. But strong growth in previous quaters boosted its full year net profit ended April 30, 2010 (FY10) to RM70.9mil from 52.3mil previously.

    The company declared a dividend per share of 14.5 sen in the last quarter, bringing its total payout to 28.5 sen per share.

    “The next financial year wll be another challenging year for the group in view of the slowing down in sales activities in the MLM division,’’ it said.

    To counter this, the group plans to launch new health supplements and increase the range of its skincare products, as well as organising more workshops for existing members.

    “The board of directors is of the opinion that the group would continue to be profitable in FY11,’’ it said.

Company itself said 'next financial year will be challenging because of the slowing down in sales activities in the MLM division'.

Ok, as it is, on a y-y comparison, everything is still rosy as its earnings is 70.9 million. Last year it was 52.3 million.

However, since the company is warning of a challenging next year, perhaps its best for one to look at the sales/earnings numbers on a q-q basis.

Here is the most recent 4 quarters.


Is the slowdown apparent?

Saturday, June 26, 2010

Octagon Series: The Fall

Part IV of the Octagon Series:

It's now Jan 2007.

  • Thursday January 18, 2007

    Tyre recycling plant ready soon

    PETALING JAYA: Octagon Consolidated Bhd’s associate company Advanced Pyrotech Sdn Bhd (APT) expects revenue of about US$10mil from its soon-to-be operational RM110mil continuous process pyrolysis plant in Pulau Indah, Selangor in the year ending Dec 31, 2008.

    Octagon executive director Siti Fatimah Mohd Shariff said the revenue would be mainly from a seven-year contract it had secured from a South Korean company....
And how was the company doing? Earnings actually slumped. (Octagon reports its Q4 earnings in Dec, so fy 2006 earnings was announced on Dec 2006)

Now pretty at all, yes?

Earnings now is only 10.262 million and most importantly the company now only have 8.444 million cash and 2.339 in debts.

Recall the following statement..

  • So Octagon had a healthy business but it was flat. No more growth. Having a healthy cash pile was not enough. They want to diversify! This is the bottom line yes?
Management was not satisfied with its healthy but flat business. It went into search for growth!

April 2007.

  • 25-04-2007: Octagon eyes more special purpose coating biz
    By Surin Murugiah & Cheong Yuan

    Octagon Consolidated Bhd is stepping up efforts to further tap the special purpose coating business in the
    local aviation, marine, oil and gas, and infrastructure sectors.

    Its managing director and chief executive officer Mazlan Ali said on April 25 that Octagon would leverage on its extensive expertise in the consumer electronics coating business to diversify into these sectors and venture into the overseas market.....
Moving into oil and gas?

Oct 2007....

  • Octagon bags RM400m Colombo plant job
    By Zaidi Isham Ismail
    October 24 2007

    OCTAGON Consolidated Bhd, a maker of industrial paint,
    has bagged a RM400 million deal to build and operate a RM400 million renewable energy plant in Sri Lanka.

    Octagon managing director and chief executive officer Mazlan Ali said construction is due to start in June next year and will be fully completed by 2009.

    "Once running, the project is expected to impact Octagon's financial performance immediately generating returns to revenue and pre-tax profit in the current and next two financial years (ending October)," Mazlan told reporters in Kuala Lumpur yesterday... ( can see this also:
    Octagon wins RM400m contract in Colombo )
Bagged a 400 million deal to build and operate a renewable energy plant in Sri Lanka?

Come Dec 2007.

Ahem. Cash improved but if you look at the cash flow statement, the increase was from its bank borrowings which exploded to 40.1 million! Receivables exploded to 51.354 million.

Do you remember this statement on when to sell a stock?

  • A stock begins to show decaying fundamentals, such as lower profit margins or lower return on invested capital
Is this decaying fundamentals or is this not decaying fundamentals?

And the search for new business continued. So did the decline in Octagon's fundamentals.

Yessire me! The rest is history. Octagon announced its earnings last night. Here's the compiled table.

Cash is a mere 12.4 million. Debts totals 178.8 million now! Receivables is now 81.378 million!

Imagine when these debts are written off as bad debts! And if one is counting, this should be Octagon's sixth consecutive quarter of losses.

So why did all this happen?

All because the company was not satisfied with the healthy business which had no growth!
Would that be wrong to say?

And needless to say, the stock was an absolute disaster for those who insisted to buy and hold the stock! Octagon last traded at 16.5 sen!

So did buy and hold fail again? No. Absolutely not. The Buy strategy would have given the perspective investor a decent reason to invest in the stock in Sep 2003. However, the events after that and the fact the stock flew up, up and away soon after, the investor had ample time to quit the stock with a real handsome profit.

And the decline in the stock fundamentals did not just happen over night. There were so many justification for the investor to SELL!


  1. Octagon Series: The Rise
  2. Octagon Series: A New Octagon
  3. Octagon Series: Failed Plans And New Plans
  4. Octagon Series: The Fall

Octagon Series: Failed Plans And New Plans

Part III of the Octagon Series: .


  • Thursday February 3, 2005
    Octagon expands coating business

    OCTAGON Consolidated Bhd is expanding its coating business and further increasing its participation in the manufacturing and trading of customised industrial paints, inks and chemical products with acquisition and subscription of shares.

    The company, through wholly-owned subsidiary Profound Peak Sdn Bhd, proposed to acquire the entire interests in Premierpath Sdn Bhd for RM19mil.

    Another wholly-owned subsidiary, Octagon Industrial Coatings Technology Sdn Bhd, proposed to subscribe for 75,000 new shares or 30% of the enlarged issued and fully paid up capital of Advanced Coatings and Surface Technologies Sdn Bhd (ACST), for RM75,000.
    The acquisition and share subscription to be satisfied wholly in cash would be funded by internally generated funds and/or borrowings, Octagan said in a statement yesterday.

    It said that the proposals are also expected to enhance the group's future earnings and provide it with stable cashflow generating businesses.

    Premierpath and its subsidiary, Premierpath (KL) Sdn Bhd, are involved in the manufacturing and trading of paints, thinners and printing materials.

    It said that Premierpath reported audited consolidated net tangible assets of RM5.8mil and profit after tax of RM1.67mil for the year ended Dec 31, 2004.

    It said that the vendors of Premierpath, Yeap Hup Suan, Yeap Siew Kian, Yap Kim Wan @ Yap Mah and Low Kim Leng, had provided a profit guarantee for Premierpath for three financial years.

    Under the profit guarantee, Premierpath and its subsidiary are expected to record profit after tax of not less than RM2.67mil for the year ending Dec 31, 2005, RM3.2mil in 2006, and RM3.71mil in 2007.

    ACST, which is principally involved as a supplier, dealer and contractor for high performance coatings, has been successfully registered as an authorised dealer of paint and industrial chemicals to Petroliam Nasional Bhd (Petronas) and all its subsidiaries in the upstream sector and registered with the Finance Ministry as a supplier of, inter alia, paint and industrial chemicals.

    For the period ended June 30, 2004 it registered loss after tax of RM70,000 and a net tangible asset of RM30,000. – Bernama

19 Million for a company that just registered a loss after tax of rm70,000 and a nta of rm 30,000.


Oh why?

Hey I do love this song so much. :D (ps: Still want to HOLD this stock? Are you sure? )

On 19th Feb 2005, Octagon managment speaks to the Edge Weekly on their failed Indian project! Yes, they had decided NOT to proceed with their plans.

  • Corporate: India still in Octagon's sights
    By Lim Ai Leen

    Octagon Consolidated Bhd's plans of becoming an independent power producer in India have come to a halt. But the management is still keeping an eye open for other power opportunities there.

    In February 2004, the company announced that it was buying two power producers in India — Kasargod Power Corp Ltd (KPC) in Kerala and RVK Energy Private Ltd (RVK) in Andhra Pradesh — for RM50 million. Last month, it terminated the share sale agreements for both buys, citing the sellers' inability to meet conditions precedent to the agreements.

    Executive director Siti Fatimah Mohd Shariff explains that these conditions are commercial in nature and include uncollected claims made by the vendor to Kerala state, and the vendor's inability to get the gas company's approval for the assignment of the fuel supply agreement. She says: "We have extended the deadline twice. We have given them ample time to meet the conditions precedent. They have not met the conditions and we don't want to extend anymore."

    Chief executive officer Mazlan Ali adds that the deals also fell through because of changes to the tariff structure last April. He elaborates: "…after we signed our agreement, there were new charges — the transmission or wheeling charges went up from 8% to 28% per kilowatt hour… They also increased the cross-subsidy surcharge on transmission and distribution charges. And electricity duty went up from six paisa to 25 paisa per kWh," he says. Mazlan observes that the hike was due to the free electricity that needed to be given to farmers.

    These changes, says Mazlan, make the financials uncertain. KPC signed its power purchase agreement with the Kerala State Electricity Board in 1995, and has 13 years left on the contract. It continues to pay the 8% wheeling charges under the old tariff regime but it's not clear for how much longer. He says the general view among Indian power players is that the new 28% charge will wipe out the industry. "It doesn't make commercial sense. But to wait for them to come up with the new tariff is too long," he says.

    "If you reflect the new tariff order in the profit and loss, it becomes a negative… And with the conditions precedent not being met, it actually changes the risk profile of the business," Mazlan surmises.

    While Octagon's management stresses that this setback has no financial impact on the company, it does disappoint those who were looking for a bottom-line boost beginning this year. The deals came with net profit guarantees of RM11.53 million, RM11.79 million and RM10.19 million for the financial years ending March 31, 2005 to 2007, respectively.

    On average, Octagon's mainstay industrial paints and coatings business has been earning a healthy RM11.3 million a year in net profits over the last three years. But growth has been pretty flat, hence the diversification into power generation. Half of the company's RM40 million cash pile was supposed to be pumped into the Indian power project......

So Octagon had a healthy business but it was flat. No more growth. Having a healthy cash pile was not enough. They want to diversify! This is the bottom line yes?

Now India plan is halted. So they had earlier spend 19 million on a loss making coating business. And then on 9th April 2005, they announced their venture into tyre recycle plant!

  • Saturday April 9, 2005
    Octagon to invest RM100m in recycle plant

    OCTAGON Consolidated Bhd will construct a waste tyre pyrolysis plant, estimated to cost RM100mil, to recycle waste tyres into commercially marketable products.

    The plant is to be set up under Advance Pyrotech Sdn Bhd (AP), a joint venture between Octagon and K.K. Incinerator Engineering and Construction (M) Sdn Bhd (KKM).

    Managing director and chief executive officer Mazlan Ali said the plant, which could process 120 tonnes a day, was expected to be completed in the fourth quarter of 2006.

    The plant would be located either in Pahang or Selangor to facilitate tyre collection.

    It would recycle waste tyres into products such as high-quality carbon black, recover oil and steel wire chips by utilising South Korean pyrolysis technology, he told a press conference in Kuala Lumpur yesterday.

    The joint venture agreement (JVA) was signed on Thursday.

    “The JVA is a step in the right direction for Octagon, as it is synergistic with our renewable energy project in Malacca.

    “Both projects are environmentally-friendly solutions for today's waste management problems,” Mazlan said.

    Project director Jonathan Lee said the plant would help overcome the serious environmental issues posed by waste tyres in Malaysia.

    The illegal dumping of tyres could pose a variety of health risks, including become breeding ground for dengue-carrying mosquitoes, he said.

Come Dec 2005.

Numbers still look ok, except for the cash. And yes, trade receivables are increasing so ever higher.
(It is ok that the cash decreased because the company already said it made that 19m acquisition of Premierpath )



  1. Octagon Series: The Rise
  2. Octagon Series: A New Octagon
  3. Octagon Series: Failed Plans And New Plans
  4. Octagon Series: The Fall

Octagon Series: A New Octagon

Continued from Octagon Series: The Rise

On 24th Feb 2004. Octagon was suspended.

  • Octagon Consolidated Bhd (pre-susp RM5.95) - From inks and paints to power generation.2004-02-24
    From inks and paints to power generation. In line with Octagon's strategy to venture into power generation business, the company has signed three conditional share sale agreements on Saturday (21 Feb) to acquire two Indian power plants. The 2 plants are Kasargod Power Corp Ltd (KCPL) located in Mylatti Village, Kasargod district, and RVK Energy Pte Ltd (RVK) based in Krishna district, Andhra Pradesh state. KCPL began its commercial operation in May 2001 with a capacity of 21.178MW, fuelled by petroleum supplied by Bharat Petroleum Corp Ltd, a government-owned company. Meanwhile, RVK started in Jan 2000 as a merchant power producer (MPP) with a capacity of 19.17MW, powered by natural gas supplied by Andhra Fuels Ltd (source: Bernama). Prior to the new venture, Octagon was primarily involved in the production of customised industrial paints, inks and chemical products. Industrial paints make up 97% of sales. Products are sold under the "Durachem" brand name. The group has operations in Selangor, Penang, Johor and Indonesia. The stock has run up substantially for the past 12 months, with a 1-year return at 254%. Not rated (52w Hi-Low: RM6.00-RM1.72) (Moolah: yup, that was Octagon's unadjusted stock price then!)

And the next day, online investment portal, Surf88 wrote the following.


Octagon Consolidated (Octagon) (RM5.95, stock code 7109) has proposed to purchase two power generating companies in India, hence not only diversifying from its current core operations of industrial paints, but also geographically to India as well. The to-be-acquired companies are:

  • Kasargod Power Corp (KPC), the operator of a 21.2MW power plant, which is one of only two existing independent power producers (PPA) in the state of Kerala. KPC, which commenced operation in May 2001, is backed by a 15-year power-purchase agreement (PPA). Octagon has proposed to pay RM16.5M cash for KPC which posted RM1.7M-RM1.8M annual net profit in the Mar 2002 and Mar 2003 financial years;

    RVK Energy (RVK), the only merchant producer in the state of Andhra Pradesh which has been operating a 19.2MW plant since Jan 2000 under a 12-year arrangement. RVK is in the midst of negotiating a seven-year PPA with a cement plant which if successful, would take up 97% of its expected electricity output. Relatedly, there is an ongoing dispute as to whether RVK needs a transmission licence to sell electricity to end users. Octagon has proposed to pay RM33.5M cash for RVK which posted RM3.8M-RM4.8M annual net profit in the past three financial years up to Mar 2003.

Take note that the vendors have guaranteed cumulative net profit for KPC and RVK amounting to RM11.5M in the Mar 2005 financial year, RM11.8M in Mar 2006, and RM10.2M in Mar 2007 based on prevailing exchange rates. The proposed acquisitions are inter-conditional and subject to various approvals including from the Indian and Malaysian authorities as well as shareholders.

Separately, Octagon has also entered into a Joint Development Agreement with KSK Energy Ventures (KSK) to express its intention to invest in Indian power projects developed or to be developed by KSK upon mutually agreed terms. KSK is linked to several individual vendors of KPC and RVK.

Surf88: While the acquisition pricing for KPC and RVK seems cheap at less than 5x PER based on guaranteed profit, one should note the various dimension of risks which may come with a diversification outside core expertise and in another country, including forex, operational, regulatory etc. We also note the uncertainties at RVK vis-à-vis the need of a transmission licence and also that it does not have a firm PPA as yet. Further, the net profit guarantee seems high relative to actual net profit of RM5.5M in the Mar 2003 financial year.

In the Oct 2003 financial year, Octagon itself posted flattish EPS of 18.4 sen, giving the stock an expensive historical PER of more than 30x based on the pre-suspension share price. Although the proposed acquisition should enhance valuation from such levels (assuming all goes well), we also note that the share price has more than doubled in the past few months, having traded at no more than RM2 up to mid-2003. We would hence advise caution. Meanwhile, financing for the RM50M proposed purchase should not be a problem given net cash of RM37M at end-Oct 2003 and about RM14M proceeds from the pending private placement of 5M shares @ RM2.88 to two independent directors.


The rising share price mentioned in the posting The Rise Of Octagon Consolidated made the stock expensive. (Rather expensive if you ask me. :p ) and then you have this DOUBLE DIVERSIFICATION plus private placement to independent directors

Me? I don't like to see such share placements. Yeah, after the share placement, how could the 2 independent directors be independent?.

Seriously? Share went up so fast... what else do we want? Better to take profit, yes? From ink and paint to power plants woh! Power plants business so easy meh?

The company was featured prominently in the news.

On Star Business:

  • Thursday February 26, 2004
    India power ops boost for Octagon

    OCTAGON Consolidated Bhd expects its proposed acquisition of a mini-power generation operation in India to help double its net profits in 2005 from the RM11mil reported for the year ended Oct 2003, according to chief executive officer Mazlan Ali.

    “The forecast is based on a net profit guarantee of RM11.53mil by March 2005 from the vendors and developers of the power plants and at least RM10mil from Octagon’s coating division,” he told a press conference in Kuala Lumpur yesterday.

    He said Octagon was guaranteed net profits of RM11.8mil in 2006 and RM10mil in 2007.

    The industrial and specialised coatings manufacturer marked its entry into the new core business when it entered into purchase agreement to buy over RVK Energy Ptd Ltd and Kasargod Power Corp Ltd (KPCL) with several parties, including Caterpillar Power Ventures International Mauritius Ltd, K&S Consulting Group Private Ltd and Maruti Finance Pte Ltd, on Feb 21 for RM50mil.

    Mazlan said the acquisitions, subject to approvals from the local authorities, would be funded internally as well as by offshore financing.

    “We have some RM40mil in cash and there’s not much we need to borrow,” he said.

    Mazlan said the acquisition of RVK and KPCL would provide the Octagon group not only with a stable cashflow but also a stable base for its entry into India.

    With an installed capacity of 21.17MW, KPCL, one of two independent power producers in Kerala that have started commercial operations, has secured a 15-year power purchase agreement with the Kerala State Electricity Board.

    RVK's plant, which boasts 19.17MW and a 12-year wheeling agreement with Transmission Corp of Andhra Pradesh Ltd, has been operating for the past four years.

    Octagon had also signed a joint development agreement with KSK Energy Ventures Ltd in a tie-up aimed at looking into opportunities in future power generation ventures in India, Mazlan said.

    He said the potential for power generation in India was huge in view of the current undersupply of electricity in a country of 1 billion people which was experiencing strong economic growth.

    India’s current 108,000MW of installed capacity is expected to double in the next 10 years.

    The world’s fourth largest economy expects a 8% to 10% growth in gross domestic product in the next 10 years.

On 2nd March 2004, on the Edge Weekly:

  • Corporate: A careful diversification, says Octagon
    By Lim Ai Leen

    What is a producer of industrial paints doing with power plants? Enhancing shareholder value,
    says the management at Octagon Consolidated Bhd, dismissing any notions of synergy between the two businesses.

    Last Wednesday, the company announced that it was buying two power producers in India - Kasargod Power Corp Ltd (KPC) and RVK Energy Private Ltd (RVK) - for RM50 million.

    "We hope to increase profits. Octagon has zero gearing and RM40 million cash, which only contributes fixed deposit income to the group," explains Mazlan Ali, managing director and chief executive officer.

    The purchases, Mazlan adds, will not be at the expense of dividend payouts. "We've been paying dividends at about 12.5% a year. And we are looking at maintaining that policy this year," he stresses.

    Half the company's cash pile will go towards the purchase, while offshore financing will supply another RM20 million. Octagon will be retaining RM10 million of the purchase price as security against performance guarantees provided by the vendors. "Our gearing will be at about 0.8 times after we complete the purchase," says Mazlan.

    According to executive director Siti Fatimah Mohd Shariff, the search for an alternative business has been going on for the last three years. "
    We decided to go into power producing because of the stable earnings cash flow," she says.

    Another factor was the price. "Assets are more expensive in Malaysia. And those who have successful businesses in India are very quiet about it," she observes.
    Not surprisingly, there is some scepticism about this move despite it being described as a "careful diversification" by Octagon's management. Both Mazlan and Siti Fatimah shrug off concerns that they may not have the requisite know-how for the new business.

    "Power plants are quite easy. It's a question of generation, transmission and distribution. We will learn the ropes, culture and acclimatise to the government there. We don't need a big team, just experienced people. And we aim to be fully independent within three years," says Siti Fatimah.
    ( Moolah: Waaa.. power plants are quite easy!!! Really? )

    Both producers operate "mini-power plants", that is, plants that generate less than 40mw of electricity. They both also have power purchasing agreements (PPA) in place.
    KPC has been operating for 21/2 years, and has 13 years to go on its PPA with the Kerala State Electricity Board. RVK, on the other hand, is a merchant power producer which sells to power distributors. It has been running for four years, and has a 12-year wheeling agreement with the Transmission Corporation of Andhra Pradesh Ltd.
    As back-up, vendors Caterpillar Power Ventures International Mauritius Ltd and K&S Consulting Group Private Ltd will stay on as operations and maintenance contractors at the plants. Plus there are net profit guarantees to the tune of RM11.53 million, RM11.79 million and RM10.19 million for the financial years ending March 31, 2005 to 2007, respectively.

    Mazlan also believes that the future looks bright. He says: "India's power industry is generating 108,000mw currently. And demand is expected to grow by an additional 10,000mw each year on top of that."

    If all goes according to the guaranteed numbers, Octagon could see earnings for the group double. Power generation could emerge as the second core business of the group, contributing an equal share of the profits.

    "That is assuming that the first core business does not also grow," Siti Fatimah points out, referring to the industrial paints and inks, or coatings, business under the Durachem group of companies. These are mainly supplied to the consumer electronics industry. This business has earned Octagon an average net profit of RM10.9 million a year over the last three years. Muted growth in this sector, though, was one of the reasons for pursuing the power alternative.

    It also provided the impetus for expansion plans - to improve research and development capabilities and move the business towards higher-end, higher-margin specialised coatings. New and larger factories in Shah Alam, Johor, China and Indonesia should start showing results over this year and next.

    "Currently, we are producing 4.4 million litres of paint. After all this expansion, our capacity will stand at 7.4 million litres," says Mazlan. The management are hoping to see a 10% growth in profits over 2004 and 2005 from this.

    Looking further ahead, Octagon may not be stopping at just two power plants. It has also entered into a joint development agreement with KSK Energy Ventures Ltd to explore potential new projects in India. KSK operates the "Small is Beautiful" fund, which focuses on development projects that generate less than 100mw of power. It has five projects in the works currently.

    India may also provide other opportunities. "We are not discounting industrial coating in India… together with prospects in the renewable energy industry," says Siti Fatimah.

    Octagon still requires approvals from shareholders and the Securities Commission before it can go ahead. Siti Fatimah is confident that investors will back the proposal. "We have proved ourselves as far as Durachem is concerned. And we are the same bunch of people," she says.

    Investors are reacting positively already, judging from the stock market. Octagon's share price closed at its year-high of RM6.50 last Thursday. This was an increase of 9.2% from its close of RM5.95 on Feb 19, before the announcement was made.

(Sorry the above news links were all broken. Too long ago! :P )

Waaaa.... share price closed at year high of 6.50.

On an adjusted price basis, that was around 3.40. (So from 1.30ish to 3.40!!!)

So how?

Not a little incy wincy scared? Still don't want to take profit? The stock is now looking really pricey. Company taking on huge diversifications. And the management... err... how would you rate their explanation of their diversifications? Did you like how they addressed this issue in the media?

Seriously.. sometimes it is ok to take profit... it is not a sin! As long as one finds that there are justifiable reasoning to do so!

(To be continued...
this is part II of the Octagon Series.

Part I: Octagon Series: The Rise )


  1. Octagon Series: The Rise
  2. Octagon Series: A New Octagon
  3. Octagon Series: Failed Plans And New Plans
  4. Octagon Series: The Fall