Should One Bet On Muhibbah Now?

So what do we have? Posted on Thursday: And Muhibbah Comes Crashing Down and posted on Friday:
Featured Post: The Muhibbah Fiasco : How Lousy Disclosure Cost Shareholders Monies.

And remarked in the comments of the posting And Muhibbah Comes Crashing Down, Muhibbah made the following statement on Bursa Malaysia.

• The Company is one of the contractors in respect of the Project known as Procurement, Construction and Commissioning of a Petroleum Hub and Bunkering Facility at the Reclaimed Island Off Tanjung Bin, Johor (APH Project). The receivables for certified work done and related costs amount to RM 370.8 million as at 31 Dec 2010.
  
  With reference to the articles in the Singapore Business Times on 15 June 2011 regarding the appointment by CIMB (the financier of APH project) of receivers and managers for APH, the Company wishes to inform that according to APH, they have identified an investor, and are in negotiations with the investor to fully finance the completion of the APH Project, including making due payments to contractors.
  
  As this is a oil and gas project with a secured business and the said investor due to finalise its financing transaction with APH, there are reasonable grounds to hold that the receivables are recoverable in due course.

So that's Muhibbah's reasoning. They are saying that APH is in talks with a potential investor and the talks includes making payment to long overdued contract work done by its contractors. So Muhibbah is saying it's hopeful and it believes that's these receivables could be collected.

On Star Biz today: Muhibbah recovers after explanation to Bursa on APH. ( Yeah the stock recovered but the article offers nothing much, does it?

On Business Times: Muhibbah shares rebound but investors wary

• ..... Analysts felt the rebound may most likely be a knee-jerk reaction, as the statement does not fully address investors' concern.
  "I don't think the announcement can fully address investors' concern. More information needs to be revealed," Jupiter Securities head of research Pong Teng Siew said when contacted.
  
  "This is one of the few things about construction companies that I am worried about. First, the capabilities of getting contracts. Then, when one gets the contract, it doesn't mean the job can be completed. Even if the job is completed, it doesn't mean money can be collected," he added.
  
  Analysts added that even if a new investor comes into the picture, Muhibbah may take a hit on its bottomline due to the provisions, as the new investor may take time to settle the due payments.
  Muhibbah was awarded a RM820 million contract to undertake marine piling and jetty works for APH. However, rising cost due to APH funding issues led to the stalling of payments due to Muhibbah.

I like the comment about constrution companies!

• "This is one of the few things about construction companies that I am worried about. First, the capabilities of getting contracts. Then, when one gets the contract, it doesn't mean the job can be completed. Even if the job is completed, it doesn't mean money can be collected,"

Yes, I strongly agree that the announcement does not fully address the investors concern on Muhibbah.

Now on the posting Featured Post: The Muhibbah Fiasco : How Lousy Disclosure Cost Shareholders Monies, blogger snowball made the following comments:

• Lousy Financial Reporting Standard
  That aside, back to Muhibbah. If one actually take the opportunity to read their disclosure in their annual report, one would not have face this problem. In their FY 2009 audited account, Muhibbah actually discloses this:
  
  

  A trade debt of RM337.0 million (including retention sum of RM22.5 million) and an amount due from contract customer of RM28.3 million in relation to a project undertaken by the Company for the engineering, construction, installation, commissioning and completion of a bunkering facility has been outstanding for more than a year.

  The project has temporarily ceased during the financial year ended 31 December 2009 due to financing difficulties encountered by the project owner. The last progress payment received by the Company was in February 2009. The project owner has continued to approve the progress billings submitted by the Company and had acknowledged its obligations under the contract signed with the Company. The project owner has informed the Company that it is in the process of arranging an alternative source of financing and expects the arrangement to be completed by mid 2010.

  The Directors have evaluated the situation and other evidence available, including the assessment of the status of the project owner’s refinancing arrangements, and are of the view that no allowance for doubtful debts or a write down in the amount due from contract customer is required at this moment.

  The account is audited by KPMG and is issued at 30/4/2010. KPMG, short of qualifying the account  (for those of non-accounting background: Unqualified means good, qualified means bad), actually emphasize the issue in their audit opinion in addition to the disclosure in the notes. The audit opinion, meanwhile, is something that most investors do not read although most bad stuff that the auditor do not agree with the management normally end up there. Take note that by the time this audited account is being issued to shareholders, APH (the trade debtors) has not paid Muhibbah for more than a year. Plus, by the time the audited annual account is issued, it has reached mid 2010, the time frame that the whole financing thing supposed to be done. The fact that the opinion of the auditor remains the same means that the financing is not being completed yet. In addition, pay attention to the management reason for not providing for any doubtful debts : APH acknowledge the obligation under contract signed by the company. It is just an acknowledgement. A normal thing. It did not elevate Muhibbah position in the debtors packing list or provide them with any security. Just because APH acknowledge the debts, Muhibbah decide to not write down even a single cent of the thing. If say, the RM300mil debt is by different parties rather than one party, one may presumably would have write down the debt.

And I had commented the following:


But back in 2009, things changed and my perception of the stock turned negative. The first warning came back in Feb 2009: Quarterly rpt on consolidated results for the financial period ended 31/12/2008.

It made some huge loss which was rather unexpected and Muhibbah said the following in its earnings notes.

• The Group achieved a consolidated revenue of RM804.0 million for the quarter under review as compared toRM488.8 million consolidated revenue in the last quarter, representing a 64% increase.
  The consolidated loss before tax for the Group is RM26.4 million for the current quarter under review. The loss is mainly due to the revision made for revenue and estimated costs on prudence basis for the construction division in view of the challenging economy condition resulted from high oil price, escalated construction material cost and volatility in foreign exchange rates during the period.

I wasn't impressed at all.

Sales increased substantially. A 64% increase was too damn impressive. However, how and why they posted loss was a big no-no for me.

And it was the year 2009.

And the biggest warning came from its receivables. ( Yeah, the good old receivables indicator)

Receivables stated at the end of the quarter showed 738.662 million. The previous quarter ( Quarterly rpt on consolidated results for the financial period ended 30/9/2008 ) , the receivables was only some 546.775 million. Ok, it was not a 100% get out warning but it was rather dodgy for me.

The following quarter, in May, Muhibbah reverted back to profits - it earned some 14 million, however, I was not convinced and in Nov 2009, Muhibbah reported losses again. Quarterly rpt on consolidated results for the financial period ended 30/9/2009. Receivables had now soared to some 841 million.

On Feb 2010, Muhibbah continued to post losses. Quarterly rpt on consolidated results for the financial period ended 31/12/2009. Receivables now stood at 941 million.

How?

That was more than being dodgy. It's rather scary. Just way too scary for me. And that was the last I watched Muhibbah

This morning, I decided to search some old news on Muhibbah and AHP.

Back on 14 Sep 2009, there as this article on the Edge:

• Muhibbah cut to sell
  Written by Financial Daily
  Monday, 14 September 2009 10:48
  
  ECM Libra Investment Research has downgraded MUHIBBAH ENGINEERING (M) BHD [] to a sell at RM1.33 with a target price of RM1.11, due to company-specific issues — cost overrun, project implementation hiccups and potential funding issue due to its high leverage.
  
  The research house said Muhibbah’s second-quarter (2QFY09) CONSTRUCTION [] margin contracted to 1.7% due to further cost overrun from the Yemen LNG jetty project.
  
  “Asia Petroleum Hub (APH) and South Klang Valley Expressway (SKVE) are another two projects with implementation hiccups. Work progress of APH has slowed down significantly following the pullout by the financier of the project owner, which resulted in uncollected receivable in excess of RM200 million,” it said.
  
  ECM Libra said that removing these projects would see Muhibbah’s current order book of RM3.8 billion being slashed by 30%.
  
  The research house also said the company’s high gearing has been a concern, especially when its profit margin has been thin.
  
  “We carried out an ROE DuPont analysis, which revealed that much of Muhibbah’s return on its equity, depend largely on the use of leverage vis-à-vis its peers. Muhibbah has the lowest net profit margin but the highest equity multiplier.
  
  “It also faces funding risk as it has relied heavily on short-term financing (86.8%) for its working capital as well as to finance its capex over the last few years.”
  
  ECM Libra cut its FY09 and FY10 earnings forecast for Muhibbah by 20.6% and 26.5% respectively, to mainly account for losses from the Yemen project and implementation hiccups from APH and SKVE.
  
  There was still further downside risk if APH’s debt turns bad as FY09 earnings per share (EPS) may fall by 194.6% into the red while net tangible asset (NTA) per share will fall by 30.1% to 86 sen.
  
  The research house said that while some may argue Muhibbah’s current undemanding price to earnings (P/E) of 7.7 times meant that all these negative factors have already been priced in, it begged to differ.
  
  “Due to its exceptionally high leverage, we prefer to compare Muhibbah’s valuation with its peers using EV/Ebitda. At 9.7 times based on FY10 earnings, it is more expensive than small-cap average of 5.3 times and just slightly below big-cap average of 11.1 times,” it said.
  
  Muhibbah closed at RM1.34 last Friday, up one sen.
  
  “Pegging a nine-times multiple based on our implied EV/Ebitda valuation for a comparable small-cap construction stock, we derive our revised target price of RM1.11 (previously RM1.77),” it said.
  
  Muhibbah closed at RM1.34 last Friday, up one sen.
  
  
  This article appeared in The Edge Financial Daily, September 14, 2009 

Now this article can also be viewed on ECM website: http://www.ecmlibra.com/investor/index.asp?mode=newsroom&year=2009&id=pr2009091400

It puts things into a new perspective, doesn't it?

Think about it.

APH is an old problem. Back on Sep 2009, ECM Libra Investment Research had already noted AHP financier pullout issue and its states this pullout resulted in uncollected receivable in excess of RM200 million.

Can you see what I am thinking already at this point?

Remember Muhibbah's own statement on Bursa website yesterday.

• The receivables for certified work done and related costs amount to RM 370.8 million as at 31 Dec 2010

What are these two statements saying to you?

Me?

I, seriously, do not know what on earth Muhibbah management is thinking in regards to APH!

APH back in 2009, already had this financier pullout issue. As stated by ECM Libra Investment Research, Muhibbah is having payment issue with its customer APH and the amount owed to Muhibbah back then was already in excess of 200 million. And back then, "“It (Muhibbah) also faces funding risk as it has relied heavily on short-term financing (86.8%)".

So what did this company do?

It just carried on and the amount owed by APH is now some 370.8 million!

OMG!!! ..... what was that hit the fan?

Totally unreal.

How would you rate such management?

How now brown cow?

Would you bet NOW that this APH debts can now be collected???

And while searching for Muhibbah's old news articles, I realised that CIMB Research only started covering Muhibbah back on 11 Nov 2010. Nice date 11/11/10. (ps: remember the size of report thingee? LOL! this report, which had colored photos included, has 19 pages. :P )

CIMB said:

•  Initiate with TRADING BUY. Our search for construction laggards throws up Muhibbah Engineering, a midsized contractor that has diversified into cranes, shipbuilding and airport/road maintenance concessions. In addition to riding on the improving outlook for project flows in both the local and overseas markets, Muhibbah may soon see a resolution to the payment issue for the Asia Petroleum Hub (APH) project, which has been a major drag on its share price. We begin coverage with a TRADING BUY call and target price of RM2.00, pegged to a 20% discount to its RNAV. In addition to the likely resolution of the APH project, the share price could be catalysed by (i) better-than-expected quarterly performances, (ii) more contract wins, and (iii) a recovery in investors’ sentiment on the stock as its foreign shareholding has plunged from 41% in 2007 to a low of 6% now.

Page 9 of the report:

Two things stood out.

1. Another reason was the unpaid sum of c.RM300m from the RM817m Asia Petroleum Hub project in Tanjung Bin Johor due to an internal issue with the client’s bankers. The project was awarded in 2006 but saw cost overruns in 2008. In 2009, and at 40% of physical progress, the project’s bankers expressed concern over the need of additional funding. This resulted in the suspension of payments to Muhibbah from May 09.
2. Cash stood at RM266m at end-2Q10 while borrowings totalled RM338m. ( will come to point 2 later)

OMG! Payments to Muhibbah was suspended since May 2009!!!!!!!!!

OMG!

Think about it again. APH had suspended payment to Muhibbah since May 2009. ECM in Sep 2009 was talking about Muhibbah's uncollected money from APH to be about more than 200 million.

And as pointed out by snowball, Muhibbah states in its 2009 annual report that the amount owed was 337 million.

So how did the amount owed by APH grow to 370.8 million?

Yes, I am sure Malaysia Inquiry Mind would want to know how come? APH suspended payment to Muhibbah from May 2009. Why did Muhibbah allow more contract work done when payment to them is suspended? Why? Work for free? Why didn't Muhibbah issue a stop work order?

And the most AHEM factor of this report is on page 5.

Lookie...look at where the arrows are pointing!

Look who's the paymaster of APH?

*whistle*

How now brown cow?

And one comment posted last night:

• solomon said...
  
  APH is not a new issue one should be worried, neither changes in shareholding.
  
  I think if the business is profitable then the cash-flow should rise. Yes indeed the case for it's latest quarter by naked eye. In fact, I see not and express some concern if not for the cash-flow from financing of RM80mil.
  
  Loan for short and long term stand at Rm400 mil for last Q and this Q, but the finance cost 4x higher this quarter. This might reaffirm some depleting sign of financial which need to be revisit and monitor for next 2Q.

Ok let's refer back to CIMB report on Nov 2010. ( Lazy method. :P)

CIMB said:

• Cash stood at RM266m at end-2Q10 while borrowings totalled RM338m

Let's do a simple comparison with Muhibbah's most recent quarterly earnings report on May 2011. Quarterly rpt on consolidated results for the financial period ended 31/3/2011.

Remember, let's compare current cash, borrowings with what CIMB had noted in its Nov 2010 research report on Muhibbah.

And the borrowings.

How?

Did the cash/borrowings improved since Nov 2010? Or has it worsen a lot?

Has solomon made an excellent comment?

And then look at the receivables stated.



Receivables is now some 903.653 million!

Remember.

Back on Nov 2008: Quarterly rpt on consolidated results for the financial period ended 30/9/2008 - the receivables was only some 546.775 million.

Feb 2009: Quarterly rpt on consolidated results for the financial period ended 31/12/2008 - receivables soared to 738.662 million.

Receivables today is some 903.653 million!

Think about it.

Even if one minus out APH receivable issue of some 370.8 million, Muhibbah still have an incredible high receivable issue!

How?

Should one be weary?

Why is Muhibbah having so much problem with its receivables?

Considering the fact that management had to borrow more and more money, why can't the management realise and acknowledge the receivables IS THE ROOT of the problem?

Not too difficult to comprehend, yes? Collect these receivables money and you don't need to borrow from the bank!

How?

If you ask me, in my flawed opinion, Muhibbah's future lies on its ability to collect its debts. It cannot simply carry on like how it's run right now. Look at the case of APH. Payment was suspended. Yet the money owed increased! Why didn't Muhibbah do a stop work oder? Why carry on knowing very well that you might not be paid? And judging from Muhibbah's receivables, clearly APH is not the only problem. So how? What if these debts have to be reclassified as bad debts? And what again is the potential damage to Muhibbah if these debts is classified as losses? Remember as it is, total receivables is at a mindblowing 903 million!

And the APH issue. Could APH find that 'investor'? Would that investor be a kind soul and pay the outstanding amount owed to its contractors? Would there be a haircut on the amount owed?

How?

Would you want to bet on Muhibbah now?