Regarding Scan Associates!

The following article on Business Times caught my attention, SCAN Associates expects quick return to the black

• SCAN Associates Bhd, a security software provider expects to make a quick return to the black, as well as increase overseas contribution to group sales by as much as 10 per cent this year.
  
  Currently, some 30 per cent of SCAN's RM25.2 million revenue comes from abroad and the increase is due to expected sales from the Middle East.
  
  SCAN had sunk to the red last year due to bad debt provisions for a business deal in the Middle East, resulting in the group suffering a net loss of RM10.2 million, versus a net profit of RM10.6 million in the year before.
  
  Chief technical officer and technology director Datuk Dr Norbik Bashah Idris said SCAN hopes to move stronger in Middle East after forming a partnership with Al Fanar Group, which is among the top 100 companies in Saudi Arabia.
  
  "The Saudi market is not so much affected by the weak market situation happening in most countries today and the partnership helps to strengthen our presence there," he said in Kuala Lumpur yesterday.
  
  On the home front, SCAN has bid for some RM25 million worth of projects, but Norbik said the group will review the situation now that the government is cutting down on spending.

Quick return to the black? Eh? This stock was just listed not too long!

Scan was listed on Sept 2006. I know because I was amazed at how folks at RHB were willing to value Scan during its IPO based on a rather optimistic and very generous fy 2007 earnings projections. And due to these generous projections, this small software was granted an extremely rich market valuation of around 115 million soon after listing. The following passage was from RHB's IPO notes on Scan on Sept 2006.

• Valuations. We project FY12/06-07 net profits to grow at 3.4% and 26.4% respectively underpinned by: 1) Growing ICT security industry; 2) Business focus in high margin ICT security consulting and managed security services; 3) Strong presence in government projects; and 4) Revenue growth in the private sector. Indicative fair value is RM0.77 based on 9x FY07 EPS, in line with our target PERs for Heitech Padu and Mesiniaga but more than 50% below international peers such as Symantec.

For some reason I just could not understand why RHB made such an extremely high growth projections. ( see this forum posting http://sahamas.net/forum10/720.html )

And how ironic now! Scan NOT only did not deliver such a growth but instead it recorded a whopping loss of 10.4 million for its fy 2007!

So could one have seen this mess coming?

Yes, were there indications for the investor?

Did you now after listing on Sept 2006, it reported a loss on May 2007!

No joke!

The third quarterly earnings reported by Scan showed a loss! Quarterly rpt on consolidated results for the financial period ended 31/3/2007

And the receivables suck out like a sore thumb! Here is a quick snapshot of its balance sheet.

For a company with a current sales revenue of around 5.95 million, a trade receivables of around 23.209 million is highly suspect!

And the rest was history. Come fy 2007 Q4 earnings, Quarterly rpt on consolidated results for the financial period ended 31/12/2007 , the company said it was 'prudent' and decided to provide for a portion of these receivables!

• Being prudent, the Group provides allowance for doubtful debts amounted to rM9,945,420 and foreign exchange loss of RM1,644,064 during the year. As a result, the Group has recorded a loss of RM10,410,735. Without such provisions, the group is expected to make a profit of RM1,178,749.

And the following is Scan's last reported earnings, Quarterly rpt on consolidated results for the financial period ended 31/3/2008, on May 2008.

As it is, its trade receivables are still insanely high at 15.093 million when you consider the company's extremely smallish sales revenue of 3.9 million!

What if more 'prudent' provision is required?

Consider this, in the first year of listing (2 quarters), Scan said it earned some 10.7 million. How ironic, for the next fiscal year, Scan made provisions of doubtful debts close to 10 million!

Isn't this like wiping out all its earnings?

Let me show you another appalling issue.

Recently there was this article posted on the Daily Edge. 21-04-2008: SCAN sees growth prospects in Middle East

• 21-04-2008: SCAN sees growth prospects in Middle East
  by Lim Shie-Lynn
  
  KUALA LUMPUR: MESDAQ-listed SCAN Associates Bhd sees a growth opportunity in the Middle East for its security outsourcing services and managed security services (MSS), its chief executive officer Datuk Aminuddin Baki Esa said.
  
  Last year, it entered into a joint venture with Saudi-based AlFanar Co to enhance its footprint in the Middle East. The AlFanar group would hold a 51% stake, while SCAN would take up the remaining 49% in the JV.
  
  Aminuddin said the partnership was pending approval from the Saudi Arabian General Investment Authority. “We are anticipating to receive the approval this month and our target would be to set up the security operations centre (SOC) by June this year.”
  
  He said the SOC would provide IT security solutions to the Alfanar group and SCAN’s clients in Saudi Arabia. It would also carry out the set up of a data-centre network, application and testing support.
  
  SCAN would also be entering into a joint venture with a telecommunications company based in the Middle East, where the company’s outsourcing security services would be offered to small-medium industries via its telco partner, Aminuddin told The Edge recently.
  
  He declined to elaborate on details of the JV but said both companies would be signing a memorandum of understanding in May at the World Congress on Information and Technology in Kuala Lumpur.
  
  Aminuddin said the business nature in the Middle East provided a window of opportunity for SCAN as there was a tendency for the local manpower to focus mainly in strategic planning and policy development of a company.
  
  “They leave it to folks like us to develop and manage the IT security infrastructure. As such, we see a higher requirement for our services in the Middle East than in Malaysia,” said Aminuddin.
  
  Through its expansion into the Middle East, Aminuddin said its overseas contribution to revenue would increase to 60% from its current 30%.
  
  SCAN is also expanding its MSS services by developing a device management service, called the “NEXUS” initiative, with a Korean partner. The Nexus’ software development is expected to be completed by early next year.
  
  Aminuddin said NEXUS would provide clients with various operational options such as profiling, data warehousing, data filtering and analysing network surveillance data automatically to further strengthen SCAN’s existing MSS system.
  
  For the financial year ended Dec 31, 2007, SCAN posted a commendable growth in the MSS segment where revenue grew 18% to RM11.2 million from RM9.5 million in FY06. For 2008, the company is targeting a revenue growth of over 30% from RM11.2 million in 2007 with the NEXUS initiative.
  
  SCAN has also targeted to go for a global services benchmarking certification, “Global Services 100 Companies” next year that would enable SCAN to gain more exposure internationally, said Aminuddin.

The passage in red is so misleading.

Here is Scan's said quarterly earnings for the financial year ended Dec 31st 2007. Quarterly rpt on consolidated results for the financial period ended 31/12/2007

Could someone please tell me what the article is saying?

What revenue growth?

Why didn't the article state that Scan had recorded a whopping loss of 10.4 million?

Why?

Was there an intention to mislead?

Sigh!