Friday, May 21, 2010

The Ugly: LCL Corporation Bhd

Yes, this company is already in PN17 and yea definitely in The Ugly list. But, what I wanted to write today is the lesson that we could learn from this.

A little background:
LCL involves in interior-fit services which included design, consultancy and construction. They also manufacture generic and customized wood furniture with their in-house manufacturing facilities. They have projects all around the world (yes including that Dubai project)in a variety of industries including hospitality, corporate, commercial, to civil and administration sectors.

Let's take a look at its financial:
  • if you look at their EPS before crisis, it is growing at the compounded rate of 29.6%. That is pretty good. Meaning earnings could double in about 3 years.
  • even during the 2008 crisis which we would normally expect project-based company goes into red, but for LCL, its earnings only drops 29%. Not bad still.

  • even OSK have LCL in their top100 gem list.
  • they have project all over the world and their biggest is the Dubai World project. They must be really good if they are able to beat off so many competitors for the project. And we would expect there'll be lots of bidders for project like this.
  • let's check their liquidity. Their total liabilities/total assets ratio is 0.8 and Quick ratio is 0.73 in FY2008 just before crisis. This should show they'll have no problem paying off their debts.
But what the heck went wrong?
  • let's take a look closer to their balance sheet. Assuming the worst case where all sales are in credit, their receivables turnover takes 12-13 months over the period 2005-2008. Put is this way, a strong and a company with the upper hand in competitiveness does not usually have such huge receivables. Even an average project-based company takes 6 to 9 months Max. Now we see how they are able to win the project.

  • 80% of their earnings reported are from Dubai project so we could assume 80% of that receivables came from Dubai. Well, so much for diversification. So if Dubai defaulted their payment, their quick ratio will turn horrifically 2.3. And that is what got them into so much trouble.
  • Another thing that we should look at is its increasing debt. Their total debts has increased from RM87.3million to RM379.5million from 2005 to 2008. And it is pretty likely the sudden increase in debt (almost 150% increase in total debt) in 2008 is to finance their. project in Dubai. That is pretty ambitious considering their net cash during that period is only RM14.8million.
Some might have consider the once profitable (apparently) company selling at a pretty cheap valuation since its announcement to being listed as a PN17 company. Shares price has drop from ~RM0.70 to ~RM0.17. Well, like I said before such price changes does not tell the "cheapness" of the company. In fact, it requires more than that to value LCL Corp. I did not calculate the valuation of LCL because the main question is, are they able to repay their debts.

Analyst has suggest that lenders (bankers) might give them a lifeline given that it is once profitable business - apparently. But think again, their profits aren't not real cash. It has been accrually reported. And, from where would you think they'll get the cash if Dubai continues to default? We all know that they needs cash in hand for them to do business (buying raw materials, equipments and stuffs) and at the same time, they'll need to repay bankers. I can assume that their business is pretty much dead now and focusing on repaying debts. They do not have valuable assets to sell like TALAM and I have a little doubt that banks would help given that they aren't really generating much cash. So I would suggest a SELL and do not buy again if already sold. It is not worth the risk.
So what do we learn from here? Well, don't ignore the threat of receivables, check their debt levels, recent business activities and more a little bit more research. A general guide would be a receivables turnover of about 3 months is consider good where more than 6 months is alarming. How about in between leh? In between both lo.

No comments: