Strong Sell on Megan Media

My Dearest Moo Moo Cow,

Someone passed me this research report on Megan Media.

• Megan Media Holdings
  
  Recommendation: STRONG SELL
  
  MMHB MK Price: MYR0.455 12-Month Target Price: MYR0.26 Date: May 9, 2007
  
  Summary: The Megan Group was set up in 1994 as a provider of plastic injection service to the electronics and automotive industry. It later diversified into the media storage business and became the first licensed local CD-R/DVD-R manufacturer in Malaysia.
  
  Analyst: Robert Lin
  
  Recent Developments
  
  • On May 4, Megan announced that two of its 100%-owned subsidiaries defaulted on MYR47.3 mln trade facilities and indicated both companies would be unable to meet other repayments. This is due to an exceptional build-up of its trade debtors, according to the announcement. Megan will decide whether it will go into bankruptcy within three business days.
  
  • Based on the available information, we estimate that the group’s total exposure to its subsidiaries amounts to MYR465 mln, comprising a US$40 mln loan that was extended by the parent company to a subsidiary (source: FY06 annual report), and an issue of Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with guarantee from the parent company (source: FY06 annual report).
  
  Earnings Outlook
  
  • We have slashed our earnings forecasts for Megan. We now forecast Megan to record net losses of MYR101.9 mln (from net profit of MYR54.7 mln) and MYR6.1 mln (from net profit of MYR64.0 mln) in FY07 and FY08. Our revised forecasts are based on (i) the write-off of the US$40 mln loan extended by the parent company, and (ii) higher interest expenses.
  
  Recommendation & Investment Risks
  
  • We downgrade our recommendation on Megan to Strong Sell (from Hold) after cutting our 12-month target price to MYR0.26 (from MYR0.70), which is derived from ascribing 0.15x (from 0.25x) to our revised FY08 BVPS estimate.
  
  • We believe the group is technically insolvent, with total borrowings of MYR888 mln vs. total shareholders’ funds of MYR507 mln by end 3QFY07. Given the potential bankruptcy and related liabilities that may exceed our estimate, we believe there is significant downside for Megan.
  
  • We have picked a target P/B multiple of 0.15x, suggesting a 40% discount to the trough P/B of Taiwanese optical disc manufacturers.
  
  Nevertheless, we view this is a benchmark as opposed to a fair value for Megan, as the financial health of the group is highly uncertain.
  
  • Risks to our recommendation and target price include a higher-thanexpected proceeds from the disposal of the group’s assets. In addition, an extension of debt obligations and lower-than-expected interest rates proposed by lenders will enable Megan continue its operations without being liquidated.

How?

Do NOTE that the analyst has not touch the issue of receivables at all!

And if a chunk of that were to be classified as bad debts, the losses would simply be devastating!

A target of rm0.26? That is simply too generous!

Still want to sit on paper losses ( Good posting, my dearest Moo Moo Cow! )?

Still want to average down on? Isn't this like trying to average down on one's mistakes? Denying that one is wrong?