The Good, The Bad & The Fugly

Transmile Group Bhd said on Wednesday a special accounting audit had found there may have been an overstatement in its revenue by 30 percent in 2006 and by 36 percent in 2005. In the financial year ended 31 December 2006, invoices were issued and recorded for purported services to 20 companies totalling 333 million ringgit and representing 30 percent of the consolidated revenue stated in the unaudited consolidated results. The special audit also found that in financial year 2005, invoices were issued to 19 firms totalling 197 million ringgit, or 36 percent of Transmile's revenue.

The company said that assuming provisions are made for the estimated overstatements, Transmile will post a pretax loss of 126 million ringgit, from a pretax profit of 207 million ringgit in 2006. Earnings of 120 million ringgit in 2005 would change to a loss of 77 million ringgit.

Reverberations:

a) Much worse than expected because there is a motive to inflate revenues, which means business model might NOT be as sound as it appears. If there was a a mis-statement of assets with no documentation that's not so bad. If it was theft, thats not bad at all. But jacking up of revenue is sinister and eats at the heart of the viability of Transmile's business model.

b) Fall out will drag on, there will be charges filed for knowingly misleading investors. There could be charges filed for misleading the new buyers into Transmile for misrepresentation. The top few guys are headed for some rough waters, and the auditors responsible during that period should be sued as well (we have to make auditors earn their fees, they cannot throw their hands in the air when bad things happen, they cannot have the cake and eat it and not get fat).

c) The losses means PER will be thrown out of the window, which means we will have to look at break up value plus some premium, no point looking at revenues anymore. Hence we can start at RM5.20 - RM6.20 as the bottom fishing levels. Well, if you can't sell Transmile now, you can always sell Pos Malaysia first.

d) The worst thing that can happen is Kuok getting out of the company. A bit unlikely as who will step in to buy? Plus, with new appointees to the company with Kuok's blessing, may indicate a willingness to rough it out. When fear surrounds the stock, must look at the intrinsic value of the company: its a viable business; great landing rights; great partnerships with international courier companies; important link up for Asia Pacific zone especially into China.