Monday 30 November 2015

Maxwells Mysterious Marketing

Maxwell International announced their quarterly results, they were simply horrible, a loss of RM 46 Million.

In the notes we can find the following:

When a company increases its advertisement spending by such a large margin, we expect positive results in sales.

But diving in the numbers, it appears that is not exactly what happened:

The company increased its marketing spending by a factor 39 (!) compared to the preceding year, but revenue was down 38%, while gross margin went from 24% to a pathetic 6%.

It all doesn't make any sense whatsoever.

I wrote before about Maxwell, about its puzzling transaction in which it bought a company which it gave back to the original owners two years later for free.

The share price:

Sunday 29 November 2015

Poor earnings growth for Bursa listed companies

My interest was sparked by an (highly readable, if I may add) article "Bits & Pieces - What if?" (February 2015) from CLSA in which it was reported that listed Malaysian companies had performed rather poorly over the last three years, which was expected to continue in 2015:

                       2012    2013    2014    2015
Sales Growth           6.5%   -0.1%   -3.7%   -6.4%
EBITDA Growth          2.7%   -4.7%   -3.6%   -3.9%
Core Earnings Growth   2.6%   -5.5%  -11.0%   -7.8%

I was rather surprised by this, I knew that numbers were not impressive lately, but this bad?

With some helpful advice and suggestions from others I have tried to reconstruct some of the numbers and update them up to this moment.

The data below comes from the 30 heavyweight stocks from the FBMKLCI 30, representing around 62% of the total Malaysian market capitalisation. The yearly number is the net profit in Millions RM. For companies that have their year end in December I made a rough estimate (in red colour) based on their first nine months of results (good enough for all practical purposes).

If we add the numbers up we find the year-on-year growth:

We notice a rather high growth in 2012, partially explained by the disappointing earnings number of Tenaga in 2011. If that had been (say) three Billion RM higher, then the growth in 2012 would be roughly 6%, which sounds more reasonable.

However, what is striking is the poor results in 2013 and 2014 (about equal to the inflation number, in other words: corrected for inflation zero growth) and negative growth in 2015 (caused primarily by CIMB, IOI and Sime Darby).

These thirty companies are the heavyweight blue chips listed on Bursa Malaysia, one would have expected a much better performance.

Unfortunately things get even worse when we translate the numbers to USD. This is the 5-year graph of the Ringgit versus the US Dollar:

I have added the estimated average rate of the Ringgit in each year and recalculated the net profit in USD and the growth:

The numbers have clearly worsened, growth for 2013 and 2014 is even below inflation, while 2015 has fallen steeply off a cliff.

Is it relevant to calculate the earnings of Malaysian companies in US Dollars?

Yes it is, at least for international fund managers, their fund performance is calculated in US Dollars, and assuming that share prices are in the long run based on fundamentals (one important factor is earnings), those fundamentals should also be calculated in US Dollar.

But even for Malaysians the numbers in USD should carry some weight, many products are imported and priced in USD, to buy them one needs to have earnings in USD.

The above numbers do not look good, and are (partially) to blame for the poor performance of the Malaysian market.

Another issue is that the above numbers seem very much disconnected from the officially reported GDP numbers by the Department of Statistics Malaysia, which show around 5% yearly (real) growth for the years 2011 until 2015.

The correlation is definitely not very high between the two: the 30 companies do not cover all industries equally, the GDP is based on clearly more than corporate earnings or sales, etc.

But in each year the thirty companies earn more than RM 50 Billion net profit, a pretty decent result, which is surely significant for the Malaysian economy.

So one would have expected that if the economy is reported to nicely grow in real terms, that it would be translated in the numbers as reported by the heavyweight listed companies.

Saturday 28 November 2015

AirAsia's accounting issues (2)

I wrote before about this issue, more than four years ago:

"AirAsia had previously drawn criticism from many parties as to why it never equity accounted the losses suffered by its associates and there were calls for greater transparency over the financial numbers recorded by the associates. The airline subsequently explained that with AirAsia having written down to zero its investments for both TAA and IAA in AirAsia's balance sheet, it did not need to recognise any further losses made by TAA and IAA as it had no accounting obligation to make good on those losses."

 I find the AirAsia's accounting much too aggressive. Thai AirAsia and PT Indonesia AirAsia are two strategic investments in which AirAsia has a large share (almost 50%) and to which AirAsia is lending large amounts of money. Conservative accounting would really require these losses of RM 254 million to be accounted for.

 There are several possible outcomes, in each of it AirAsia has to take the loss:
  • Their Thai or Indonesian operation goes bankrupt, in this case AirAsia has to write off its loans
  • The equity of their Thai or Indonesia operation is replenished, AirAsia has to write of its losses
  • The Thai or Indonesian operation turns highly profitable, again AirAsia has to write of its previous losses against these profits

Finally, four years later, AirAsia had to recognize its previous losses in its Indonesian subsidiary when it announced its results:

From the options I gave above, it turned out to be the second option, AirAsia was forced by the Indonesian authorities to replenish the shareholders funds in its Indonesian subsidiary.

This one-off event dragged down the quarterly results substantially, the PBT was a loss of RM 462 Million, almost exactly the prior year absorbed losses.

I concluded my previous posting by:

There is still the other accounting issue, AirAsia has booked as "profits" RM 659 million deferred tax assets. This is tax it does not need to pay in the future if it makes profit. Again, a very aggressive way of accounting.

In other words, AirAsia is not accounting for losses that have occurred in its strategic investments, but it is accounting for possible future profits.

This does not seem right to me.

It still does not seem right to me, although I am not an accountant.

AirAsia did not incur those losses the last quarter, what they did was invest more money in their subsidiary.

By not recognizing the losses they have (in my opinion) artificially boosted their earnings over those years, but now they finally had to account for it (at least for their Indonesian subsidiary).
AirAsia X has booked RM 470 Million in "profits" due to deferred tax assets while it has not booked a single year of "normalized earnings" (corrected for one-off items) in its existence.
AirAsia and AirAsia X might have convinced their auditor who signed the accounts over those years, but they haven't convinced me. Surely this can not be the correct way to do things.

Thursday 26 November 2015

AirAsia X: is the rights issue enough? (4)

I wrote before about the upcoming rights issue of AirAsia X and asked the question if the money (RM 395 Million) is enough:

"The company has been bleeding lots of money (if one takes out one-off items and does not take deferred taxation into account, then AirAsia X lost money in every single year of its existence). Also, the company has large capital commitments."

AirAsia X announced its third quarterly results, and the loss for the year increased further to RM 562 Million, much larger than the recently completed rights issue.

On one side a large part of the losses (RM 357 Million) is due to foreign exchange losses, due to the weak Ringgit.

On the other hand, the company spend RM 371 Million less on fuel, due to the softening of the oil price.

Its shareholder equity is RM 503 Million, about equal to its deferred tax assets (RM 470 Million), which should (in my opinion) not be counted as an asset. In other words, without the deferred tax assets the shareholder equity would be very close to zero.

It looks like the company needs a huge injection of fresh capital, but another rights issue, so soon after its previous one, might be hard to digest for the minority shareholders.

Monday 23 November 2015

Proven Oil Asia in trouble? (2)

Five days after my last posting the MAS (Monetary Authority of Singapore) put the Capital Asia Group on their "Investor Alert List":

The company still advertises the Proven Oil Asia scheme on their website, mentioning "high returns from secure investments", "proven track record / non speculative", "proven strength of Conserve Oil Group Inc.":

Thursday 12 November 2015

Proven Oil Asia in trouble?

I have written several times about Proven Oil Asia.

The reason I wrote about this investment scheme was that a very similar one (Proven Oil Canada) in Germany seemed to have run in problems. Many of the names connected to the two schemes were the same. At the very least I had expected the authorities to have a close look at the scheme.

Both the Securities Commission and Bank Negara in Malaysia did indeed take action, Focus Malaysia and Kinibiz have written articles about the scheme.

In Singapore however I have not noticed any action whatsoever from the authorities, the media have also not given it any attention.

That might have been a mistake.

From recent information it looks like not only Proven Oil Canada but also Proven Oil Asia has run in some serious troubles.

MNP Ltd. ("one of Canada’s leading firms in Corporate Recovery & Restructuring") has a webpage devoted to Conserve Oil Group Inc., COGI Limited Partnership and Canadian Oil & Gas International. On October 26, 2015, MNP Ltd. was appointed as Receiver and Manager of these three companies.

Of interest are several of the articles listed on the webpage, for instance this one, some excerpts:

Another article with some excerpts:



The difficult structure of companies:

The convoluted structure might be a headache to unravel for investors in the schemes, but a field day for the lawyers involved.

In Germany a group has been formed by investors in the Proven Oil Canada scheme, the website is mostly in German, but Google Translate might help.

Tuesday 10 November 2015

When will Hibiscus bloom? (3)

From the previous posting about this subject:

".... the Company believes that there may be some shareholders who have been subject to margin calls on shares that have been collateralised and are being asked to regularise their margin positions."

It looks like at least one party has been revealed who was selling in the market due to margin calls, according to this announcement:


No of securities disposed 45,923,900

Circumstances by reason of which Securities Holder has interest Disposal on open market due to margin call forced selling

Hibiscus' shares were suspended yesterday, for the fifth time this year:

3D Oil (Hibiscus invested in the company and partially funds the exploration of the Sea Lion project) had a rather bad announcement today:

Its share price plunged 33% today:

Wednesday 4 November 2015

Scan: sloppy announcement

I wrote before about Scan Associates' rather "frivolous" legal action against Bursa Malaysia.

The company made the following announcement:

Four times the term "Material Litigation".

But, as detailed in an announcement the following day, it actually concerns a "Letter of Demand".

A case of rather sloppy reporting.

Of a much more serious nature was the announcement last week"

"The directors wish to announce that the auditors were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the Company’s and Group’s financial statements for the period ended 30 June 2015."

Next to that, there are the very serious allegations against the ex-CEO and ex-CFO.

The company is losing money badly, and has a negative net asset value. A miracle is needed, soon.

Tuesday 3 November 2015

When will Hibiscus bloom? (2)

I wrote before about this subject, and in general about Hibiscus in a rather sceptical way.

I don't know if Hibiscus will ever bloom again, and if so when, but definitely not today.

Hibiscus' share price dropped steeply, way below its IPO price:

In an answer to an "UMA" (Unusual Market Activity) query by Bursa, the company replied:

".... the Company believes that there may be some shareholders who have been subject to margin calls on shares that have been collateralised and are being asked to regularise their margin positions."

Added to that, the short term outlook for Oil & Gas does not look good, the RM has depreciated against the USD and the company has never made an operational profit in its existence.