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Author: RicheHo   |   Latest post: Sat, 18 Mar 2017, 09:29 PM

 

How to Spot Unfavourable Factors of a Company?

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I had been reading shares recommendation article from many bloggers. They taught us how to study, choose and value a company. I read many good companies’ researches from them. In fact, there are many good fundamental companies in Malaysia market. Somehow, I rarely read any articles pointing out a weakness of a not performing company or a profit making company with its price not moving up.

Today, I would like to share about how to point out a weakness of a company. I will use AYS Ventures Berhad (5021) as an example.

 

AYS’s business activities can be divided into two divisions:

  •    Trading of steel products and all types of construction materials
  •    Manufacturing of panels, purlin and wire and steel products

Par Value (RM)    : 0.50    

PE ratio                          :11.83  

Price (RM)           : 0.22    

Return of equity (%)     : 8.41

NTA (RM)           : 0.56

Div. yield (%)                 : 4.55

From the perspective of PE and D/Y, AYS is pretty attractive even though its ROE is slightly lower. In addition, its current price is lower than par value and NTA. By just looking at these indicators, I believe most of the investors will think that AYS is undervalued.

 

By looking at the quarter result, AYS is a profit making company even though it made losses on FY15Q3. It seems like AYS is doing pretty well on the latest quarter. However, things might not be the same as what we thought. 

 

Why a good profit making company with good indicator is always in downtrend? Three years ago, AYS was once at the price of RM0.60 but now it only RM0.22! 

Firstly, in the last quarter of FY15, AYS’s net profit had taken into account of fair value adjustment of investment properties of RM3.398m! That’s mean after deduct the fair value adjustment, AYS whole year net profit will only left RM3.66m. Its PE will suppose to be 22.93! AYS is actually doing badly compared to FY14; its net profit had reduced 70%! FYI, fair value adjustment is a method of revalue the asset and adjusts its price according. The gain in value of the asset will treat as other income in P&L. If a person just look at the figure without goes through the explanation, he/she will easily fall into trap. 

Secondly, the steel price is the major factors for AYS’s business. The depressed steel price is the main reason why it performed weaker in FY15 compared to FY14. In other words, steel price is directly proportional to AYS net profit if other factors are the same.

 

 

Thirdly,

Year

2013

2014

2015

Net borrowings,RM'000

219,625

216,326

249,344

Free cash flow, RM'000

57,569

51,892

49,040

Net cash, RM’000

(162,056)

(164,434)

(200,304)

One doesn’t need to be expert to analyze a company’s financial statement. We just need to simplify the data into something understand just like the table above. AYS net debt is increasing from year to year and now it was up to RM200m! It was a very huge amount for a company. FYI, AYS’s market capitalization is only around RM85m, which is 2x lesser than its debt! It is very risky to invest in such a high debt company.

Lastly, the company FY15’s net profit is only RM3.66m after deducting fair value adjustment, but AYS’s total director remuneration is RM6.28m. It means that AYS net profit suppose to be RM9.94m before deduct remuneration and 63% of it had been paid up as remuneration.  The Group Managing Director is collecting RM3.35m of remuneration a year! It was hilarious! 

Have a look with the following Managing Director’s remuneration. Any of the company is performing better than AYS and their remuneration is 3x lower than AYS.

HOMERITZ --> RM600,000                                            

HEVEA --> RM750,000

PERSTIM --> RM850,000

TASEK --> RM1,000,000

PADINI --> RM1,200,000

 

So, can I conclude that AYS’s director only care for their own welfare?

For all the reason above, personally I think AYS is not able to attract investor’s attention.

Feel free to comment and correct me if I am wrong, or you can leave me an email at richeho_92@hotmail.com

 

Just for sharing.

http://rhinvest.blogspot.com/2015/08/unfavourable-factors-of-company.html

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Labels: AYS

Related Stocks

Chart Stock Name Last Change Volume 
AYS 0.565 +0.005 (0.89%) 4,130,500 

  13 people like this.
 
kcchongnz Great article. Maybe it is better to have more of this type of article for investor to learn to avoid the pitfalls in investing rather than stock peddling.

Just some comments:

1) It pays to know a little more about financial statement analysis to see that ROE may not be a good measurement of goodness, especially when a company has a lot of debt. ROIC is a better measure. With the inclusion of non-operating income, ROE can straightaway be thrown to the dustbin.
2)P/E ratio may be a little too simplistic to measure price vs value. In this case, the non-recurring income and the heavy debts are not reflected. Clearly enterprise value will show that the stock is not cheap. Low NTA here also doesn't mean it is cheap, as I think the quality of the assets are very poor. Yeah, all packed in inventories and receivables.
3) It appears that the free cash flow mentioned here is not FCF, but cash in the balance sheet. They are different. I doubt, on average, the company has any FCF over the years. Yeah, not even cash flow from operations, forget about FCF.
4) without FCF, the dividend is also paid from borrowed money.
5) Investors will be "rewarded" with rights issues soon judging from the financials.
6) Is that important for the big boss even if the company is not performing? It doesn't seem so with such a fat remuneration.

Instead of just looking at growth in profit and P/E ratio, look for the above first.
20/08/2015 06:01
RicheHo Thanks for your comments, KC! :) I am learning from you! Your articles are great!
20/08/2015 07:26
YiStock Maybe to add a little from my point of view. Looking at the stagnant/ down trending revenue and profit for the past many years, we can immediate "skip" this company and don't waste time to look into this type of company。 坐吃山空type.
20/08/2015 09:33
supernova late wages payment
20/08/2015 09:39
citychew_1886 great article and good sharing...thanks so much Richeho and KC Chong,we really learn a lot from this type of sharing..
20/08/2015 10:58
houdini Very enlightening article. Please keep it up.
20/08/2015 16:29
AC Gan Grow & Share Together ( GST )..! Syabas RicheHo...!
20/08/2015 16:50
RicheHo Thanks everyone! It is a motivation for me! :) Let's learn together!
20/08/2015 19:50
TonyTonyChopper Nice article. Please continue to write. Appreciate it. Thanks.
21/08/2015 08:03
matrix6050 thanks for sharing
06/01/2016 11:34
RicheHo Welcome :)
06/01/2016 11:47


 

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