Posted by: donmihaihai | October 18, 2009

Tell me I am wrong

Of the three statements ie Profit and loss statement, Balance sheet statement and cashflow statement, I find that cashflow statement is the easiest to read among all. Or rather as compare to B/S and P&L, step 1 interpretation can be easily done. Example how much cash went to the taxman or what was the Capex compare to why this amount of expenses or that amount of receivables.

Unless the company expenses away, it doesn’t matter where the company record their journal entries(as someone pointed it out earlier), almost all cash movement is being shown by the cashflow statement, at different section. In fact, cashflow statement is just a reconciliation of mostly b/s movement and if cashflow statement is not being provided, which I believe that was the case last time, reader of financial statement can easily computed by their own.

But reading the financial statement of Ezra is a strange affair. While it ended exacting what I has been expecting, I still keep wondering why it happened. Anyway, I have not done with it and I will be expecting surprise when the Audited statements are out with supporting notes. 4th quarter results is just the beginning. And I am referring to Ezra unaudited 1Q, 2Q, 3Q and 4Q results. Unaudited is bolded because it is common sense that if someone want to game the system, do it while you are not closely watched. Being skeptical when reading unaudited statement is a must.

31st Aug 08, 30th Nov 08(1Q), 28 Feb 09(2Q), 31 May 09(3Q), 31st Aug 09(4Q)(‘000)

Bill payables to bank – 25,753, 59,691, 91,606, 81,096, 50,376

This numbers are taken from B/S. reconciliation can be done with respect to Ezra presentation will be

Repayment of bill payables, net(3mths, 6mths, 9mths and 12 mths) – 1Q +33,938, 2Q +65,853, 3Q +56,153, 4Q + 24,623

But the company came out with total diff changes for 1Q to 3Q with an acceptable 4Q changes.

Repayment of bill payables, net(3mths, 6mths, 9mths and 12 mths) – 1Q – net, 2Q +3,775, 3Q +27,196, 4Q + 24,719

This is a fairly easy movement in cash flow where increase in bill payables mean cash inflow while decrease mean cash outflow. The diff in 4Q is acceptable but for 1Q to 3Q is unexplainable especially with 2Q huge diff of 60,000k. Someone please tell me that I am wrong……..

Now let look at other movements. This time it is more complicated especially without the help of notes to accounting.

31st Aug 08, 30th Nov 08(1Q), 28 Feb 09(2Q), 31 May 09(3Q), 31st Aug 09(4Q)(‘000)

1) Fixed Assets – 185,598, 257,361, 290,276, 252,711, 298,874

2) Depreciation(3mths, 6mths, 9mths and 12 mths) – 1,294, 2,615, 3,943, 5,374

3) Purchase of fixed Assets(3mths, 6mths, 9mths and 12 mths) – 48,788, 58,216, 87,864, 176,717

4) Proceed from termination of shipbuilding contracts- 3Q @ 28,452, 4Q @ 27,575.

5) Loss on termination of shipbuilding contracts – 3Q @7,142, 4Q@ 10,006

6) Assets held for sale @ 31st Aug 08, 37,197 & 31st Aug 09 @ 16,433.

7) Gain plus proceed from sale of fixed assets at 31st Aug 09 – 37,838.

That should be about all except for number accounted in prepayment and post-payment which is not significant in this case as I went thru them. FA at 31st Aug 08 plus 1Q movement from 2) to 7) will roughly get me the amount of FA in 1Q2009. But that is not the case except 4Q2009 which like bill payables beautifully align back. If nothing else, just the movement from 3Q2009 to 4Q2009 is enough to blow my head. Purchase of FA increased by 88,853K while FA increased by 46,163K.

The differences in this case can be trace back to bill payables so no big deal right? If that is the case, then why account them into the book for? Why follow FRS? Why not you use yours standards, I use mine. Maybe I am wrong.. someone please tell me so……

With these and others, FY09 annual report will be a good read, it will tell the story of how aggressive their accounting and watch out for things like movement in FA, interests movement and capitalisation and related to the flow of debts plus bill payables. Of course and not forget about receivables and payables. Spend time wondering why it move in these ways. For example, just by looking at the amount of depreciation, working assets, new builds and operating leases tell a big story of this company.

Since I am writing about Ezra, there is no harm to talk abit more on their results. I believe the increased in profit excluding exceptional items, GP and revenues will be the talking point rather than the increased in trade receivables. But these 3 are interlocked that in any situation receivables increased significantly more than the increased in revenues and higher GP, one might want to ask if those increment for real, especially for GP margins. Working capital is investments that suck up cash and may or may not reflected in the P&L and it can have many consequences. As for Ezra? I would say for revenues and margins, its fluctuate. While I have not done a horizontal analysis on a spreadsheet, anyone do it will come up with the same conclusion.

Next do a horizontal analysis for receivables, the surge (main reason for negative cashflow) started way about 2 years back. Ezra investment in this area is really huge. Then payables tell another story. Ezra has been very promptly in paying their vendors, being an even better pay master when they are slow at collecting receivables. This is another contributing factor for the negative cashflow but unlikely going forward as it is down to very low level. There are many little tricks to show better cashflow. Drag and pay creditors when the date turned 1st Sep 09 is one of those simple trick. These promptly payments may tell a bigger story than just being a good pay master.

Back to receivables, increased from 87,004K to 182,722K, 110% while revenues increased by 23%. It doesn’t matter how one compute the number of days outstanding, it is a straight forward > 6 mths. So it is the norm for the industry receivables to be outstanding of > 6 mths? Well, Jaya a company having trouble with creditors has outstanding days of just over 1 mth….. Now the management blames it on new segments. While no one will know the exact situation but a quick look into segment revenues tells a different story.

31st Aug 08 : Offshore Support Services – 174,972K, Marine Services – 64,159K, Energy Services – 29,215K

31st Aug 19: Offshore Support Services – 190,509K, Marine Services – 92,703K, Energy Services – 46,225K

Interestingly, the comments on 1Q2009 was Energy segment contributed 39,9million to revenues, 2Q2009 was Energy services contributed 46.3million to revenues, 3Q2009 was Energy Services contributed 46.1 million to revenues and 4Q was Energy Segment contributed additional 17million to revenues.

If I take management words as true, then can I say all Energy segment revenues can be dump into bad debts since bulk of it came from 1Q2009. Even if that is the case, another 140 million of receivables are still outstanding where a big portion is likely come from Offshore support services. Talk about recurring revenues, good charter rate, long term contracts, steady cashflow, core business and usually a place where cash flow in on time. What if it core business is in trouble or heading toward one?

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Responses

  1. buffett says if you don’t understand the accounts of the company, it is better to stay away.

    i don’t like the looks of Ezra and bet that they will be in deep shit in a few years time when the oil price fall.

  2. Ops! Someone have done it again. Spotted a dud company and treat it like a gem.

    For myself, I just had a cursory glance at the balance sheet and the knowledge of the amount of money raised this few years is enough to put me off.

    This already highlights that the company is not an excellent allocator of capital and it is not generating enough free cashflow to cover its operation which is bad bad bad.

    A buffett disciple would never have bought it.

  3. PARDON ME..
    It should be cashflow to cover its operations and free cashflow to pay down debt.
    But I’m sure you get what I mean.

    Free Cash Flow is the Key to everything

  4. good writeup.
    but since the company’s cash flow doesn’t look so good, then what’s the rationale behind it’s high stock price?

    a lot of ppl made money out of this stock. i think tat’s all that matters. doesn’t really matter whether it’s a ‘dud’ or ‘not an excellent allocator of capital’ or ‘not generating enough free cash flow’ as nicknick puts it. the returns from it’s low in mar09 up till now far exceeds the performance of most of the other stocks. i would have regretted not buying this ‘dud’ then.

  5. Si, you are right. It doesn’t matter how you do it as long as you made money πŸ™‚
    Though you should try to understand how you made the money (whether it is thru value investing or thru buying into growth story and trading it) to improve your consistency on making money in the long term.

    His portfolio seems to have been littered with punter’s favourite stocks. Those stocks that always have a nice growth story that gets everyone excited.

    He seem to be in tune with the consensus view of the market. Maybe he should just not fight it and join the dark side. Do you really need to be a value investor to make money? I’m sure he can become a good trader since he behaves like every punter out there. Like you mentioned, Si, does it matter if the company have good balance sheet or cashflow if the trend is up? πŸ™‚

    The important point for him now is to understand who he is and what he is trying to achieve. Someone once said, the worst investor in the rung is the one who doesn’t know he doesn’t know and thinks he knows.


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