Megan: Part XIV

Saw that Standard and Poors had a research note on Megan:. 3QFY06 results. Upgrade to Sell (from Strong Sell)

Upgrade to Sell from Strong Sell? LOL!! This I really do not understand.

So what's a difference between a Sell and a strong Sell?

Is it like Sell means that you should slowly sell the stock, while a strong Sell means you should Sell all asap? ;p

Anyway here is Standard and Poors definition:

• Sell: Total return is expected to underperform the total return of the KLCI or KL Emas Index respectively, over the coming 12 months and share price is not anticipated to show a gain.
  Strong Sell: Total return is expected to underperform the total return of the KLCI or KL Emas Index respectively, over the coming 12 months by a wide margin, with shares falling in price on an absolute basis.

Here is their reasoning on their recommendation.

• Recommendation & Investment Risks
  · We raise our recommendation to Sell from Strong Sell. In our opinion, the company remains challenged on multiple fronts: (i) relentless product pricing pressure, (ii0 rising borrowing costs and (iii) strengthening MYR vs. the US$. That said, we also believe that these negatives are, to a certain extent, reflected in the share price, which has declined by 38% in the past six months.
  · We have adjusted our FY06 and FY07 earnings forecasts upward by 63% and 116%, respectively to incorporate the change in depreciation policy. We have also cut our EBITDA forecasts for FY06 and FY07 by about 10% and 20%, respectively as we take on lower ASP assumptions, partially mitigated by lower polycarbonate prices.
  · In light of the accounting changes that have increased the reported earnings (but not affecting the fundamentals of the company), we switched our valuation methodology to one that is based on EBITDA instead of earnings. Our revised 12-month target price is MYR0.66 per share (vs. MYR0.70 previously), based on 2.5x EV/EBITDA (FY07 forecast) which we think is fair given the difficult operating outlook.
  · Risks to our recommendation and target price include a reversal in the trend of ASPs for DVD-Rs, faster than expected decline in prices of raw materials and an unexpected decline in interest rates.

here are some of my opinions...

• In our opinion, the company remains challenged on multiple fronts: (i) relentless product pricing pressure, (ii0 rising borrowing costs and (iii) strengthening MYR vs. the US$. That said, we also believe that these negatives are, to a certain extent, reflected in the share price, which has declined by 38% in the past six months.

ok... Standard and Poors reasoned that because of the relentless product pricing, rising borrowing costs and the strengthening of MYR vs the USD are the main issues that the company faces. And because of these issues, this had caused the sharp decline in share price of 38%. And because of this 'to a certain extent, reflected in the share price' a justifiable reason in itself?

Take the main concerns.. pricing pressure. It is still there. It has not improved. And with sales revenue being down, doesn't it mean the product is having problem selling?

Rising borrowing costs. Well it is still rising isn't it?

Now if both the main concerns got worse... was the justification to a sell from a strong sell justifiable?

Or should one take into consideration that the share price had already suffered a sharp decline? And because it already had suffered a sharp decline...it gives justification to their recommendation. Do you accept such thinking? Now what if these conditions really worsen? Not possible?

Anyway, from a business perspective... if the product is having difficulties selling and there is an issue with product pricing, doesn't this STRONGLY indicate that this product itself is in huge troubles?

And when one puts the increasing borrowings into perspective.. doesn't it not indicate that such a business requires constant, increasing borrowings to stay competitive in the game?

Doesn't it not indicate strongly that this is a rather rotten business to be in?

Think about it... in a business, when you increase the capex, surely you want to see an increase in your profitability. Right or not? Else it makes no sense in making those godzilla-sized capexs. Right? So what do we see in Megan? Huge capex and no results to show!

• We have also cut our EBITDA forecasts for FY06 and FY07 by about 10% and 20%, respectively as we take on lower ASP assumptions

See? They realise the ASP (average selling price) problems and are lowering their EBITDA forecasts!

• · In light of the accounting changes that have increased the reported earnings (but not affecting the fundamentals of the company), we switched our valuation methodology to one that is based on EBITDA instead of earnings

Ah... can you see what I see? Can you see that Standard and Poors are trying so desperately to be nice and generous in their write-up?

Look at what they are saying.

Despite the accounting changes, which increased the reported earnings (but not affecting fundamentals of the company)...

LOL!!!... aren't they implying that despite Megan FUDGING their reported earnings, there has been NO changes in the fundamentals of the company??

Yes mah.. as mentioned before, there was no creation in wealth at all and in fact the fundamentals actually worsen!

• We have adjusted our FY06 and FY07 earnings forecasts upward by 63% and 116%, respectively to incorporate the change in depreciation policy. We have also cut our EBITDA forecasts for FY06 the depreciation rate of its optical assets in its key Malaysian subsidiary has been halved to 10% (management believes that this would better reflect the useful life of the assets). This resulted in a sharp fall in depreciation charges to MYR18.1 mln in 3QFY06 vs. MYR42.9 mln in the preceding quarter.

ps... according to Standard and Poors, this change in accounting has resulted in depreciation charges to rm18.1 million in 3QFY06 vs rm42.9 million in the preceding quarter.

Ahem... a simple shift in accounting numbers have resulted a drastic swing of 24.8 million in 'reported earnings' for Megan.

LOL!!!.... Am I wrong to say 'a rm24.8 million profit' was made by a change in depreciation rate??

How?

ps...

these are all UNAUDITED earnings... I wonder... if and when these earnings are audited... will their auditors be so kind to allow such huge changes in depreciation rate?