Posted by: donmihaihai | February 15, 2009

Shocker! Bring out the bad news first.

A Jaya 2Q2009 result is a shocker.

Good thing 1st. OSV was still the bright spot in shipping up to Dec 2008 as shown by local listed OSV player which include Jaya. Jaya charter income was super with an overall gross profit margin over 50%. Then Jaya also proved every critic wrong by dumping 5 vessels and book a gain of $39.6 millions with total cash inflow of $107.3 millions as it is a tell tail sign of stronger B/S than what being presented. This move also shown that while charter rate and vessel are coming down, it is far from crashing. In a situation where price is dropping like a stone, buyer will restrain from buying and wait.

And the shocker. Jaya booked huge $29.6 million forex transaction losses in 2Q2009 which happened after having already booked $1.1million in 1Q2009. Unlike forex translation losses and MTM losses for hedging derivatives, forex transaction losses is real and pretty much cut away any margin its ship building earns. So what really happened? I don’t know. Part of it may due to bad luck as currencies move in the wrong ways. But there is also potential for sloppy operation and bad decisions made, which is operational problem. Then there is also possible that due to huge ship building program and long lead time for buying equipments, Jaya made the agreements to buy long ago so that ship building program and progress as planned. Whether it was a one-off or not, we will know by next quarter as bad luck won’t continue and no one will still be sleeping after $29.6 million losses while commitment can’t be back out easily if there are still any.

The management isn’t candid with their announcement as they were trying to mix forex transaction losses with MTM. Where are the gain in derivatives that offset the losses if it was hedging? They lied. If they didn’t, they have to explain how much of those $29.6 million come from realised derivative contracts.

Progressive billing for vessel building has slow down which was causing cashflow problem. If it continues, it just reflects that environment is changing, bargaining power is shifting from seller to buyer. If any buyer decided to back out, then it is just plain accounting shifting from work-in-progress to fixed assets. As of now, Jaya can still carry the whole program by itself at the expenses of dividends.

FY2008 was a good year for learning what text book will never teach. 1st we get to see what happened when everyone just buy abit more in the soft commodities. Suddenly, stocks in the pipeline reduced sharply and price surged. Next we see the reverse, everyone suddenly decided to spend little lesser, stocks pile up in the pipeline and supplier running at low utilisation. The reverse situation is also happening to crude oil. So with Crude oil at below $40 and making OSV future not as bright as before, it is not the main killer because we are going to pay of it in the near future with crude oil at this level. The main killer for OSV come from competition in ship building. With every other type of vessel going into situation of oversupply, it is like bee to flower, shipyard moving into OSV and OSV charter rate won’t surge even if crude oil price surge later. There are 2 demand and supply at work here. Competition keeps me awake.

Micro Mech bring out the bad news first

In fact not just bring out the bad news but does it proper with full 8 pages for a company who until recently was just an one trick pony grossing less than $40 million in revenues. But they are doing damn well with that trick while learning a new one. It is very common for listed company is open out, start presenting all kind of data and commentaries while time is good and skip them when entered into a bad patch. That is not Micro Mech.

By 1st putting up details on all kind of costs — fixed, personnel and operating expenses before talking about finding more revenues is good. I believe it is unlikely for successful companies over a long period can do so without knowing their cost of operation, unlike what being said happened due to chances in books called “Fool by the dangerous and randomness black swan”. By knowing cost, then one can know its staying power. Even in the event that monthly sales dropped by 47.5% from Oct to Dec 08. Also building a “muscular personnel structure that is dominated by manufacturing, engineering and quality personnel” with thin layer of operative structure above that is another clear sign that bureaucracy has not entered into this company.

But one has to face the reality. That is near term future is very ugly and it is not impossible for Micro Mech making losses but I doubt they will reach a point of having negative operating cashflow. In 2Q2009, MMH NPAT slumped 93.3% to $0.17million as operating expenses, especially as personnel expenses haven’t adjust itself fast enough with the slump in sales. From the way its report and I think, these expenses will not fall too much as this is the “muscular personnel”.

While MMH operating cashflow for 2Q2009 was $2.2million and half of that was due to reduction of working capital in time where revenues dropped. This is common for company with revenues decreased. If the working capital does not reduce in line with revenues, either the nature of the business requires a mimimum working capital or something is smelly. The reduction in working capital for MMH showed that historical record for tight control was not fake, this is a well-oiled engine.

Other than that, after getting 1 cent dividend, chances are there will be no dividend going forward until it’s stable and recover. Lastly, looking forward to regard MMH as a two tick pony soon.

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Responses

  1. for jaya, do you know how many of their ships that are being built has a confirmed customer order/charter?

  2. I don’t know

  3. Micro-mechanics CMA business don’t seem to be as good as the assembly tools business. There are more competitors in this business unlike the assembly tools.

    Gross margins have been falling for both business even before the latest plunge in sales.

    Nevertheless,mgt is honest and candid,balance sheet is solid and if they can stem the losses at the newly acquired business, when the global economy recovers,they should recover,barring unforseen circumstances like protectionism or new competitors in assembly tools.

  4. Donmihaihai,

    I don’t exactly agree with you that Jaya Management “lied”. So they mix up the losses from forex with MTM losses, but that is their way of presenting the financials and I believe there is no specific format for this. If you are implying that they are trying to hide something then I believe you may be overly suspicious. Let me make myself clear: it’s good to be SKEPTICAL when it comes to number-crunching and reviewing financials of companies you own, but being SUSPICIOUS too often can result in worries and additional stress over numbers which don’t seem to tie, and these numbers will NOT be apparent to someone just reading the financials.

    As I always emphasize, there is a limit which shareholders can analyze the financials as we are NOT management and do not run the company. If you need more details, email the IR or ask the Management during the AGM but do not need to presume that they are deliberately trying to hide something.

    If that’s the case one can say so many companies did not explicitly state their CEO remuneration (e.g. Capitaland CEO getting a huge bonus). So does it mean so many blue chip listed companies are also not transparent and are “trying to hide something” ? I doubt so.

    Cheers,
    Musicwhiz


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