Did the chicken... ?

The manner in which Comsa Farms restated their earnings is really worth looking at.

LOL!!... We need to study how these buggers do it mah!

Quarterly rpt on consolidated results for the financial period ended 31/12/2005

The restated earnings caused Comsa to report a loss of over rm110 million!

Here is a snapshot of the major adjustments in Comsa balance sheet.



(Click on the picture for a bigger view..)

As you can see the biggest adjustment was made in...

1. Inventory.

The adjustment of 90.273 million was made! So from an inventory balance of 98.301 million, Comsa's adjusted balance became 8.028 million!

Holy chicken!!! That's simply mind-boggling!

2. Trade receivables.

Comsa initially reported a trade receivable balance of 70.185 million. This figure is adjusted to 100.799 million!!

And the following announcement was made by Comsa explaining the adjustment.

(i) The adjustments to the inventories and biological assets are due to the adoption of International Accounting Standards ("IAS") 41 on 1 April 2005 and the related accounting policies. For further details, please refer to Note (I) (a) of the Restated Financial Results;

(ii) The adjustments to the consolidated revenue and cost of sales are due to the overstatements of sales and purchases, which have not been substantiated with valid invoices and other supporting documents;

(iii) The adjustments to trade receivables are due to the provision for bad and doubtful debts and the overstatement of sales mentioned in item (ii) above, whilst adjustments to trade payables are due to the overstatement of purchases mentioned in item (ii) above; and

(iii) The adjustments to the Property, Plant & Equipment ("PPE") are necessary to reflect the fair value of PPE as at the Said Dates.

Waaa.... consolidated revenue and cost of sales are due to the overstatements of sales and purchases which have not been substantiated with valid invoices! Holy chicken!!!!!

And the end result of this overstatement of sales... (from Comsa notes) (ahem! from 60.9 mil to just 9.9 mil!)

• The Group's revenue for the current financial period ended 31 December 2005 decreased to RM9.9 million from RM60.9 million in the prior financial period ended 31 December 2004 while the loss before taxation was RM110.2 million from a profit before taxation of RM2.5 million in the previous corresponding quarter. The decline in revenue and the loss was mainly due to the over-statement of sales during the period, loss on disposal of wholesale, retail, breeder and broiler operations and the provisions for bad and doubtful debt as disclosed in Note 7 of this section.

Truly incredible!

Do you find the explaination made by Comsa to be sufficient?

So the areas to look out for.... overstating of sales, inventories and trade receivables. Overstating of sales is complex and not easy to spot but the tell-tale signs in inventories and trade receivables should never be ignored and discounted. Remember the issues of inventory and trade receivable build-up?

And those that had been following Comsa for a while, Comsa has turned into deadly value trap because at one time, it was argued that Comsa used to be trading at a low price earnings multiple and it had always traded well below its NTA. Investing lessons yet again?