Friday, 28 August 2015

AirAsia X: when it rains, it pours

AirAsia X has been in the limelight recently due to its poor results.

The company announced today another negative surprise:


The Board of Directors (“the Board”) of AirAsia X Berhad (“the Company”) wishes to disclose that its internal and external auditors have recently discovered that certain payments have been made to a service provider between the period of 2010 to 2014 for services which are now established to be fictitious.

Following the discovery of the irregularities, the Board has on the recommendation of the Audit Committee appointed PwCCS to carry out a forensics audit and instructed the Management to ensure the availability of all relevant documents and/or key personnel for PwCCS review and interview, where applicable.

In the course of the forensics audit, PwCCS discovered 24 payments have been made to a service provider amounting to RM7.01 million for fictitious services. The payments were authorised by a person in a management position within the Company.


This fraud came at a very unfortunate moment for the company, in the first half of this year the company lost a whopping RM 259 Million. The fraud will further lead to less confidence, and will draw away much needed focus from the management team.

The share is trading at RM 0.16, below its recent rights issue, and very much below its IPO price.

Tuesday, 25 August 2015

Silverlake Axis down 24%, suspended, after damning report (2)

Silverlake Axis announced yesterday is quarterly earnings, like nothing has happened. Some more information can be found in this article in the Straits Times.

A bit unreal, since the company has not replied to the very serious allegations by "razor99". But may be the results were ready and planned, and it was considered to release the results anyhow, even though the anonymous report was not even mentioned once in the results.

In the Value Investors Club there is a member named "razor99" who has written a report before about possible fraud at Longtop Financial, allegations that proved to be right. In the introduction of the report on Silverlake Axis there is a reference made to this report. If this is indeed the same writer, then that would add to the credibility of the current report.

For those that have not found the time to read the whole report (it is rather heavy on accounting), a shorter version can be found here.

I have read the report several times, and have not been able to find errors in it. I have to admit, that I am not an expert on Silverlake Axis, I only started to follow the company more closely over the last few months after a tip of a friendly party.

Given that, some comments by me:
  • The corporate structure is indeed horrific, and unexplainable so. Why does the group need so many subsidiaries, audited by so many different auditors, and even some in (notoriously non-transparent) BVI?
  • The amount of RPTs (both revenue transactions and acquisitions) is very high (although recently less so).
  • Transparency (in relation to the above) does seem to be a problem.

This is also determined by the Governance and Transparency Index of the NUS Business School, which put Silverlake Axis on the 507th place out of 639:




Why does a multi-billion company with a credible board of independent directors have such poor corporate governance standards, why did the board not insist on improvements? This is indeed a puzzle.

Another question is: why did SGX allow such a company to be listed in the first place? The company should have been forced to restructure pre-IPO, bringing under one umbrella all companies in the group with high RPTs.

On the other hand, the above considerations are red flags, but not really beyond the law.

In Section 5 undisclosed off-balance sheet debt is mentioned, with appendices 12-14 as proof. This allegation looks serious (at least to me), the company definitely needs to come with a good, concrete explanation here.

The report further suggests that because of this there might be more hidden loans. Silverlake Axis might want to give full transparency (beyond what is required) to show this is not the case, even in BVI registered related parties.

Section 6 gives an overview of the chairman cashing out (more than RM 1 Billion), and the minorities coughing up money (RM 555 Million). In itself there is nothing illegal about this.

This is however a very refreshing way to look at things, I hope analysts will follow this example, I suspect there are many other companies where the same has happened in the past. I hope to have time in the future to give some Bursa listed examples.

Section 7 gives a peer analysis. This is indeed quite disturbing for me, if the peers (as selected by Razor99) are typically for the industry, then this section does need some serious discussion by the company. The average salary for an employee is RM 111K, while the revenue per employee is RM 625K. With most revenue coming from project work and maintenance, these numbers do seem puzzling. A lot of the technology of Silverlake Axis even appears to be acquired, while spending little on R&D, not what one would expect from a top-notch technology company.

Section 8 about possible bribery is very disturbing, especially in the Malaysian context. But no conclusive evidence is given (which would anyhow have been impossible to do), although rumours have been going around for some time (I am aware of some of them, something I hardly ever hear).


SIAS announced a press release regarding the matter. It made a stunning comment:

"It is unfortunate that such an anonymous report can have an impact on the stock as it lacks credibility".

I honestly have no idea how anyone can be so sure. Also, why did the author make such a comment without going in any detail whatsoever?

"If the person or persons responsible for the report are found to be mischievous then the company must take prompt legal action and, if the facts indeed are found to be mischievous and misleading, SIAS calls also on the authorities to take police action."

Not one word what action should be taken if it turns out that (some of) the allegations turn out to be true.

"It is the small investors who always suffer the consequences."

Sorry, that is simply playing the gallery.

But what if the allegations are (substantially true)? Would this anonymous report not limit the damage, prevent more money from minority investors to be poured into the company while preventing the chairman of cashing out more money, and enabling the authorities to take action?

Also, it does give the independent directors a chance to improve things on corporate governance issues. Something that anyhow seems to be overdue.

"SIAS calls on all listed companies to be as transparent as possible to their shareholders to prevent such attacks from members of the online community who indulge in such attacks for personal gain. Companies must be prompt in responding to such attacks to ally the fears on the part of the investors and consequently avoid losses."

Finally something I agree with. But given that the company has been the target before, and its long listing history, has Silverlake Axis really been "as transparent as possible"? I strongly doubt it and NUS Business School seems to agree with that, placing the company in the last quartile of its CG list.

How this episode will play out, of course I don't know. It is a very high profile case, with lots of vested interest. The company has been recommended by many astute investors and its numbers did indeed appear very good. Will it turn out that the numbers were simply too good to be true? Time will tell.

Sunday, 23 August 2015

Kian Joo: the deal is getting cheaper and cheaper ....

Kian Joo announced a good set of results for its second quarter:




Both revenue and profit are nicely up.

To recall, there is a RPT in which Kian Joo would sell all of its business to Aspire Insight (owned by the the former MD of Kian Joo and EPF), which translates to RM 3.30 per share.

That deal has taken quite some time due to legal reasons, but Bursa has allowed an extension until September 30, 2015.

However, in the mean time no dividend has been paid since 2013, which means that the net assets have grown nicely. The deal looked already cheaper, now even more so.

In the Malaysian context it is very hard to fight these kind of deals. But Datuk Anthony See has a decent stake of about 8.6%, he doesn't like the offer and may be is able to rally the minority shareholders to hold out for a better bid.

The next six weeks will be interesting, both for the minority investors in Kian Joo, and for shareholder activism in Malaysia in general.

Are monkeys suitable fund managers .......?

Research by London’s Cass Business School shows that randomly chosen portfolios — that might as well have been picked by monkeys — are overwhelmingly likely to beat market-cap-weighted indices. But most monkeys failed to match equal-weighted indices, or indices based on most sophisticated measures to limit risk.

So the hierarchy is that simple equal weighting indices beat monkeys, who beat value-weighted indices like the S&P, which beats the average active manager (who nonetheless complains that the S&P benchmark is unfair).

Yet our money is still mostly run by active managers, while none that I am aware of is run by monkeys. For these reasons, and many more, we need to know more about indices.


Interesting article in FT showing that monkeys might be suitable candidates (and probably cost efficient ones) to pick stocks.

I have posted about animals punching above their weight before.

The above article in FT is actually more regarding equally weighted indices:


S&P has long published an equal-weighted 500 index, in which each stock is 0.2 per cent of the index. This is probably a more valid benchmark than the S&P 500 itself — and as the chart shows, it is much harder to beat. The mere act of regular rebalancing needed to keep it equal-weighted means taking profits in gainers and buying stocks that have recently fallen — which is good. It also overweights smaller and cheaper stocks, which do well in the long run.


Wiki: The FTSE Bursa Malaysia KLCI, also known as the FBM KLCI, is a capitalisation-weighted stock market index, composed of the 30 largest companies on the Bursa Malaysia by market capitalisation that meet the eligibility requirements of the FTSE Bursa Malaysia Index Ground Rules.

The same applies to the EMAS index.