“If you don't lose money, most of the remaining alternatives are good ones.” Joel Greenblatt

A regular contributor of i3investor posted an eye opening post about rosy reports by management of public listed companies in Bursa in the link below. There are lessons to be learned by newbies in stock market investing here.

(Icon8888) Sweet Talks by Public Listed Companies

http://klse.i3investor.com/blogs/icon8888/82223.jsp

The author made some good conclusions as below.

“Still, the lesson is the same - Public Listed Companies sometimes give out some positive signals. Some of them are genuine, some of them will later turn out to be not achievable. Some are downright misleading. 

The only thing I can say is that we need to take those information with a pinch of salt. 

But don't be too cynical also. Not all are meant to fool us. 

We need to be vigilant. But we also need to continue to keep our mind open, or else we miss out real opportunities.”

Yes, welcome to the stock market where wealth is being transferred from the naïve and ignorant retail investors to the syndicates, insiders, and manipulators, most of the time.

I too have encountered many examples as the above, and have fallen into those traps before. I have given some very critical comments on an investment bank’s strong recommendation on London Biscuits here before and I hope newbies can read it. I believe it is also an eye opener for those depending on analyst recommendations to invest in Bursa.

http://klse.i3investor.com/blogs/kcchongnz/60180.jsp

Here, let us examine the annual report instead and discuss how one can identify some of the signals given out by the management in their reports to shareholders and evaluate what those signals may mean in order not to fall into the pitfalls in investing in some of the lemons in the stock market.

London Biscuits 2014 Annual Report

I have written a number of articles on London Biscuits, but why am I so “loso” (Nagging) about this company? This is because of the importance of the opening statement by Joel Greenblatt in this article. Furthermore, in my opinion, this company is an excellent case study in a finance MBA programme to teach about corporate value enhancement/destroying. I actually use it for the case studies of my online courses. It is very important for newbies to know and understand the language of business and the traps in the stock market to avoid losses first, rather than hoping to get tips from the Samaritans to help you to make money in the stock market. Understand this, and understand it well, and believe it, will avoid your continued disappointment investing in the stock market.

 These were the articles written by me and published in i3investor.

http://klse.i3investor.com/blogs/kcchongnz/45373.jsp

http://klse.i3investor.com/blogs/kcchongnz/52002.jsp

http://klse.i3investor.com/blogs/kcchongnz/60180.jsp

http://klse.i3investor.com/blogs/kcchongnz/67199.jsp

http://klse.i3investor.com/blogs/kcchongnz/81916.jsp

The shares of this company is a very dangerous investment which many investors, many long time in the market too, can be easily fooled to put money, and continue to put money to bet on the company due to their “sweet talk” by the management. To be frank, I was fooled too. But that was many years ago when I know very little about investing in the stock market, when the only things I know are things like profit, profit growth and price-earnings ratios, price-to-book ratios. So beware, knowing a little in investing may be even more dangerous than not knowing anything at all.

This is an excerpt from its 2014 Annual Report described by the CEO.

Review of Performance

“Group revenue for the financial year ended 30^th June 2014 went up by a whopping RM70,016,351 to RM359,995,183 which represented an enviable increase of 24.15% of that registered in the preceding year of RM289,978,832. This increase in operating revenue achieved was really beyond our expected target and much welcome in a difficult year. I am most pleased that the Group is not only continuing to achieve progressive increase in operating revenue, year on year but also by leaps and bounds.”

Note the words in italic, whopping (gigantic), enviable (to die for) increase, year on year, leaps and bounds (huge jumps), and all those Ringgit to nearest 1 RM, and the numbers to two decimal places.

What is the truth? The truth is investors put in another RM21m into the company last year, and it made just another RM2m in additional “profit”. The net profit margin decreased further by 7.5% from an already meagre 5.2% to 4.8%. What is worse is the company was, and very few investors could see this “big-head-devil” is it is in a cash deficit (negative free cash flow) of a whopping RM30m last year! It made RM17.5m “profit” but lost RM30m cash. How do you like it as an investor? In fact not only last year, London made “profit” every year for the last 10 years, and at the same time lost cash every year for the last 10 years. Should investors be amused with the “whopping”, “enviable” and “leaps and bounds” increase in its revenue in 2014?

Let us look at another statement by the CEO in 2014 Annual Report and see how he spun his story.

“The value of real properties in the country, for one reason or another, continued its upward trend. The Board felt, we need to keep abreast of the value of our Group properties. Therefore we decided to appoint valuers to undertake another round of professional valuation during the last financial year, to ensure our value of capital employed are in proper direction. This revaluation exercise gave rise to a net revaluation surplus of RM15,815,627, which believe it or not, is almost double that of RM8,711,029 recorded in the previous year, which “add-on” to the current operating profit of RM17,311,670 set out a total comprehensive income of RM33,127,297!. Although this presentation is in compliance with Accounting Standard, the Board, as in previous year, will adopt the consistent stand that revaluation surplus remains as such and do not form part of the operating profit of the Group. Our Basic Earnings Per Share calculation of the Group financial year should only be based on result of operations attributable to the Group (i.e. RM14,49,156),which is 9.71 sen for this financial year under review…….”

A revaluation surplus of RM15.8m “added on” to the operating profit? “Believe it or not”? Look at the exclamation mark (!) behind “set out a total comprehensive income of RM33,127,297”. What has this done to the profitability for your operations, except pay more professional fees in revaluation of the properties which yields nothing tangible to the operation? Was that even necessary to mention here? How do you look at this management statement? For me, I vomit blood (So damn bloody detested)!

Let us look further to the statement below by the management.

“The Board feel, it is still appropriate for the Group to conserve its financial resources so that we can continue to expend on capital, operating and investing expenditure for improvements and diversification, without having to resort to shareholders for funds for the mentioned purposes.

The Board do not intend to recommend a final dividend in respect of the year under review. However, we are in the midst of working out some corporate proposals as a mean to reward our shareholders by, for all the years of loyalty, their faith and support to the Group. We intend to propose a bonus issue of warrants to make up the loss of dividend. ….For those shareholders, who are in need of cash returns, they can dispose their warrants off at the prevailing market price…..”

Free lunch, free warrants to replace the loss in dividend? What is the truth? “Reward our shareholders by, for all the years of loyalty, their faith and support to the Group” or punish shareholders by paying more money to their friendly investment banks on the corporate exercise? What has this exercise done to improve the business? Yes, the “faith”, the “faith” and the faith that eventually the company will really reward its shareholders.

Not resorting to shareholders for funds? Over the following year in 2015, another RM23m was collected from shareholders as private placement, and additional RM10 from additional debts!

Let us see what the management’s projections for 2015 in the Annual Report of 2014 are.

Outlook and Prospects

“……..The Board and the management believe and fully committed to the test and tried policy of Expansion, Diversification and Branding, which consistently proven to assist us overcome our difficulties in time…..Human resources still remain any operations greatest assets. We had identified and recruited some good new personnels, who will assist us to achieve our aims, to overcome all anticipated hurdles and to return comfortable results for the Group, in the financial year. Our CEO has taken the full responsibility and direct supervision for the opening and servicing of new and target markets and to improve on existing domestic market share. The orders received from especially the third world countries are good and encouraging.”

“…Massive advertising and promotional campaigns over the years are being taken, to keep the public at large and our existing customers in mind of our BRAND of products. ….We associate ourselves with high publicity media event like being major sponsors of Astro Talent Quest 2014 Singapore Mediacorp Star Awards 2014 and Astro Wah Lai Toi TVB Awards on 23^rd November 2014. A much look forward to landmark event, will include forthcoming New Year’s Eve Singapore 2015 Countdown party. A special program in the offering is to sponsor “The Joy Truck” under Mediacorp Singapore…..”

“In line with the promotional campaigns, we participated in the world renowned exhibitions and trade fairs, such as ISM 2015 Cologne Germany, the largest international food Trade Show, Thaifex Bangkok Thailand, Sweets and Snacks Middle East 2014. The Food Hotel Asia Singapore 2014 is worthy of mention. This fair allowed us the opportunity to meet up and network with many of our existing customers to enhance our business corporation.”

The flamboyant CEO definite enjoyed all the publicity in TVs programmes and the Media with all the beautiful girls, models and actresses. What were the results of all these management actions, extensive publicities all over the world?

London Biscuits just released its annual financial results ended on 30^th June 2015. Its revenue recorded another “leaps and bounds” to RM402.5 m from RM360m in 2014. Yes, it never disappoints when growth is concerned. It net profit, however, continues to disappoint, just like all these years, increased by a mere 1% to RM17.5m with 12% increase in sales last year. Net profit margin continues to contract by 10% to just 4.4%. Here is the mother of all evil; there is another whopping deficit of cash, or a cash loss of RM51.6m in cash this year. What do you think of a ‘profit” of RM17.5m, but a loss in cash of RM51.6m, just like every year before?

London Biscuits share price was above RM2.50 10 years ago. It is about 85 sen a year ago. It closed at 75.5 sen on 28^th August 2015. If I have invested in the broad index 10 years ago, I would have made a total return of 134% as at 30^th August 2015, compared to a loss of 70% invested in London Biscuits. To put it into perspective, if I have invested RM10,000 10 years ago in the broad index, my money would have grown to RM23400. But my RM10000 invested in London Biscuits would have shrunk to just RM3000. It is really “want to cry but no tears”.

Another right issues and debt issues soon. You bet!

“You can’t make a good deal with a bad person”: Warren Buffet

This is a good way to qualitatively determining whether a company is good to invest in by reading what the management says in their annual reports and what their following actions are. Quantitatively it is even easier but looking at their past financial performance as described by my last article here.

http://klse.i3investor.com/blogs/kcchongnz/81916.jsp

In investing, I often find it hard to judge if a good company can continue to do well in the future based on their past performance, especially in the short term. This applies to most other investors, whether retail investors, professional analysts and fund managers. But when it comes to identifying the underperformers, I am bold to say I seldom get it wrong. Like what the opening saying by Greenblatt, that is good enough to have reasonable return from your investment in the long-term.

For those who are interested to learn the language of business to avoid the pitfall in investing in the stock market through an online investment course, please contact me at

ckctraining@gmail.com

K C Chong