Share market is unpredictable. When everything looks good and promising, suddenly things can turn quickly against you.
Previous example is Zhulian, when its revenue and profit plunged substantially without a warning sign.
M-Mode just released its FY13Q4 results, and it caught many by surprise for the wrong reason.
MMode is a company in my watch list. It provides mobile content and data application services in Malaysia and China.
As smartphone is making its way into the scene, MMode should have benefited a lot in this trend and has posted a string of sterling performance since year 2011.
For FY2013 which ends in Dec13, it looks almost certain that MMode will set a record annual net profit after its 9M13 net profit already stands at 85% of its preceding year full year net profit.
However, this mission fails miserably as its FY13Q4 net profit is only 10% of FY13Q3.
Without any surprise, its share price dived the next day.
A positive note to take is that MMode registers an impressive rise in revenue for its latest quarter. So it is very different from Zhulian.
The reasons for this poor profit are:
- lower profit margin - gross margin drops from 40% in FY12 to 33% in FY13Q4
- higher operating cost - rises 45% compared to corresponding period of FY12
- deferred tax worth RM1.856mil in current quarter (FY13Q4)
The income tax expense actually plays an important part in MMode's much lower PAT for this quarter. Without this item, MMode's PBT of RM13.76mil in FY13 is still higher than RM13.17mil in FY12.
As I'm not an accountant, I don't really understand fully what is deferred tax.
A search in Investopedia reveals that deferred tax can be an asset or liability. In MMode's case, it should be a liability, in which there is a difference between company taxable income and income before tax.
Does this mean that MMode will need to pay more tax in the future? Its tax rate is less than 1% in FY11 and FY12 as an MSC status company.
Apart from this, MMode's balance sheet is still strong with RM39.9mil cash and just RM2.3mil of borrowings. It continues to achieve positive operating cash flow and its ROE is still at a good 20%.
MMode declares a final 0.5sen tax-exempt dividend. Together with a special dividend of 1.5sen earlier, it is a total 2sen or 3.3% yield at 60sen per share.
Its latest EPS for FY2013 is 72sen, which means it is currently traded at PE of 8.3x at 60sen.
While the decrease in margin, higher operating expenses and possible higher tax rate do cause some concern, I think MMode is still a company that is worth to watch.
It seems to me that the exceptionally high income tax expense for FY13Q4 will be an one-off event, and the growth of revenue is a good sign.
As long as the smartphone users and shipment continue to grow, it will only benefit MMode like it is benefiting Inari Ametron & Globetronics.
Hopefully someone can explain in more detail about deferred tax.
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roysten
I find that the deferred tax explanation and examples from fool's website to be easiest to understand:
http://www.fool.com/investing/general/2007/01/09/understanding-deferred-tax-assets.aspx
http://www.fool.com/investing/general/2007/01/12/understanding-deferred-tax-liabilities.aspx
Here is an excerpt:
... a deferred tax asset (DTA) is a future tax benefit. We like those. A DTA is created when shareholder income (what the company tells you) is less than taxable income (what Uncle Sam sees). A DTA is kind of like a prepaid tax.
Quick example
What are some events that result in DTAs? Warranties, restructuring charges, net operating losses, and unrealized security losses can create future tax benefits. For example, companies like Circuit City (NYSE: CC ) and Motley Fool Stock Advisor recommendation Best Buy (NYSE: BBY ) sell a ton of electronics that come with multi-year warranties. Every year, these companies make estimates on their future warranty expenses based on how many returns they think they'll get. The company tells you, the shareholder, these estimates, and expenses them, thus decreasing shareholder income (and shareholder taxes). However, Uncle Sam says that warranty expenses cannot be recognized until the actual event occurs, and as a result, shareholder income is lower than taxable income. Thus, Best Buy, until the item return actually occurs, has to report higher income (and pay higher taxes) to Uncle Sam then to you. This results in a deferred tax asset, because Best Buy "prepaid" these warranty taxes and will receive a future benefit (lower taxes) when the warranty event actually occurs.
When companies delay their tax payments, they create deferred tax liability accounts (DTLs) to reflect future tax obligations. The most common reason for DTLs is depreciation. When a company buys property, plant, or equipment (PP&E), it makes assumptions that either depreciate (reduce the value of) this PP&E slowly or quickly. To you, the shareholder it's trying to impress, the company depreciates slowly, showing you higher income. For the taxman, the company accelerates depreciation, which lowers income and tax payments.
As another example, Berkshire Hathaway (NYSE: BRKa ) is sitting on some pretty hefty future capital gains taxes, thanks to astute stock purchases. Berkshire's stake in American Express (NYSE: AXP ) , as of the most recent annual report, had a cost basis of $1.3 billion, but it's currently worth nearly $9 billion. The gain of $7.7 billion is taxable, and if we assume that, upon the sale, Berkshire will have to pay a 35% capital gains tax on its windfall, we'd have to set up a $2.7 billion deferred tax liability to reflect Berkshire's potential future tax payments. However, because Berkshire may never sell, the DTLs on these long-term holdings occupy some sort of netherworld between equity (what Berkshire owns) and liability (what it owes).
2014-02-20 18:36