Thursday, April 02, 2009

High Profile Companies & Their Dangers

We all know what high profile companies are, they are always in the press, their CEOs are constantly in the papers giving bullish comments, they are usually highly traded, and usually have a good proportion of institutional funds as investors. Why are some companies keen on this route while some tend to keep quiet?

I welcome companies being media friendly, that they are open to analysts. However, we always remember that the most talked about and most high profile companies failing most dramatically - remember Aokam Perdana, Transmile, Repco... Of course we cannot put all high profile companies into the same basket, ... just to watch out for the dangers.

Companies taking this route usually have a high debt level, and the controlling owners usually have a smallish stake, usually less than 30% - thats usually because they have used issuance of shares liberally for acquisition or placed out large tract of shares for funds. You have to watch out not to be lured without sufficient information and clarity.

Let's take two high profile companies as examples: AirAsia and KNM. I am not saying they are prone to fail because they are so high profile, but we must be on our guard. They always have to put up an optimistic view of their company to promote their company and sustain interest in their company. The fact that they usually have a high debt level also causes them to always be promoting as they fear their debt levels could be down rated, thus making it more costly to seek out fresh funds or being unable to roll over their debts.

If management is set out to deceive, like Transmile or Fountainview, it is very hard for investors and analysts to be able to uncover them without a thorough audit of their financials. We all can only go via publicly available information. Hence buyers beware. That is why blue chips are called blue chips as they have been around a long time and have shown a substantial track record. Companies that rise up within a few years may be gems but they also have a good chance of being duds. Sometimes the pressure to continually perform in the eyes of the media and investors may entice management to act irresponsibly in order to maintain a good track record.

I have commented many times on KNM, I am not trashing KNM here, I am just asking investors to be cautious because sometimes publicly available information can only give us just so much assurance, not total assurance - don't put all eggs into an uncertain basket.

I am a fan of Air Asia, i love their business model. Investors are shortchanging the company if they view it as a pure budget airline. AirAsia is in inventory management and maximising capacity. They are also the most well known budget airline in Asia Pacific, and has a huge head start in Asia compared to their competitors. The company is a growth company and needs to put down their footprints in new routes to stake their claims. Unfortunately this give rise to huge capex requirements which means huge debt levels. It also leaves a lot of space for mismanagement as too many new routes come online before they are profitable. Longer term, AirAsia would be a wonderful story if all goes accordingly to plan, but the steps leading to that allow little room for mistakes. One can easily imagine if "something goes very wrong", management may be more than tempted to "rework financial figures" to put up a good impression. I am not saying that AirAsia or KNM are doing that, just to know why they may be more at risk.

p/s photo: Throw away all the photos you have seen of Deborah Priya Henry. None of them do justice to how she looks in real-life. I bumped into her at Bangsar Village supermarket and was stopped dead in my tracks. She looks heavenly in real-life. I am tempted to say she is the loveliest looking girl in Malaysia.


value investing in malaysia said...

Why u not tell her when u met her?? Dont you want to see into her eyes and tell her?? What a chance!

AirAsia always borrowX3 (correctX3),blogged on it, capex is too high. I like AirAsia and travel with it, but am worry that its mushrooming debts will kill it in the long term!

Like Buffett said, "it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners."

Wilson said...

Why did anybody not look at IJM Corp? It's mooted as a darling of M'sian stock market with "top notch" management!!!

How much do we know about it's foray to India (IJM has been there for more than 10 years!) and the middle east? Most if not all M'sian construction companies sustained heavy losses in their overseas operations, especially India, but nothing much was written about IJM's venture in India recently.

With the Satyam case, the previous head of India operation is back in KL and the Indian outfit is practically run by Indian nationals. There are talk among the players in the construction industry that IJM lost about 100 million ringgit in one of their job in New Delhi alone and this job is only 50% completed (more losses to come?)!!! One should include IJM in the list of heavily promoted companies in M'sia. A close relative of IJM i.e. Gamuda had suffered greatly recently due to the sell off of its founder/MD (due to asset planning... bollocks!! More of heavy anticipated losses in Middle East!!)

IJM's CEO has been very successful in branding IJM, selling the success stories. After he retires in another year or two, this whole fairy tale will crumble. With no capable succession at hand (most of the second liners are in their early 50s or late 40s, a bit too old to take over and run the company, as best as a short term stop gap measure), who is there to sell/brand IJM??? Without which the whole fairy tale will crumble, IJM might be counting it days.

Company Profiles And Conferences said...

I Fully agree with your sentence "I am just asking investors to be cautious because sometimes publicly available information can only give us just so much assurance, not total assurance - don't put all eggs into an uncertain basket."

thanks for sharing this post......

Company Profiles and Conferences

Company Profiles And Conferences said...

I fully agree with your post.
thanks for sharing such informative post....

Company Profiles and Conferences