Mieco: Part III

Let's look at an example based on the blog posting on Philip Fisher: Management Integrity.

Let's refresh what was said.

According to Fisher, "It is the nature of business that in even the best run companies unexpected difficulties, profit squeezes, and unfavorable shift in demand for their products will at times occur."

For example, a well-managed company under-taking a massive plant expansion might face unexpected delays, unexpected expenses or unbudgeted costs. And this delay totally messes up the management's profit forecasts or could it even put a huge damper on the group's profits.

And according to Fisher, "How a management reacts to such matters can be a valuable clue the investor."

Now in the plant expansion example, some management may 'calm up' their investors by not telling the investors what exactly is happening because the mangement does not want to create an impression that either things are out of control or they do not have a contingency plan to correct what is going wrong.

And according to Fisher, "The investor will do well to exclude from investment any company that withholds or tries to hide bad news."

Let's look at how true his statement that "The investor will do well to exclude from investment any company that witholds or tries to hide the bad news."

Let's use Mieco Chipboard as an example. (this is because I was just updating some of my old notes, I realised that Mieco fitted this example very well!)

Let's run thru briefly what happened again ( Click here for a compiled table ). Firstly, there was this new factory expansion. Exactly as what Fisher is talking. And this new factory is not delivering!

On 24th May 2005, Mieco reported its 05 Q1 earnings. One can see that Mieco's quarterly earnings dropped from 8.948 million a quarter ago to just 2.498 million.

So instead of explaining to the investors why the sudden huge drop in profits, there was this overly bullish statement made by Mieco on the 17th June 2005, stating that Mieco targets 500 million in revenue the next year. And Mieco was rightly querried by the SC on the 20th June.

Classic example of what Fisher was saying! Company did poorly. Instead of explaining to the investors what went wrong, the company continued to make optimistic statements in the press! Now big question, should the investor listen to Fisher's advice? Would the investor do well if he/she excludes themselves from such an investment?

On 29th Aug 2005, the company announced its 05 Q2 earnings. Net profits slumped to an alarming 120k for the quarter. Remember Mieco had underwent a huge capital expansion to finance the new plant. And the new plant is simply not delivering.

Did Mieco management come out and explain why their results were so extremely poor?

On Sept 13th 2005, RAM downgraded Mieco's RM175mil Al Murabahah commercial paper from stable to negative.

Mieco shares started to tumble badly in the market.

Now get this, on the 12th Oct 2005, the management had a write-up in the Edge weekly. The article carried the title 'Mieco's long-term prospects still bright'. According to the reporter, that was what the director said of the company prospect.

Dejavu!!

Company is not doing well BUT the management comes out and insist that the company prospect is still bright!

Guess what? On 22nd Nov 2005, Mieco announced that it lost 3.742 million for its 2005 Q3.

Present day, 21st Feb 2005, 4.30 pm, Mieco last traded at 1.00. Again the Fisher question is asked. Would the investor do well if he/she excludes themselves from such an investment?