External auditors raise red flags at 6 companies

Several accounting firms have raised red flags at six companies yesterday, indicating they could not complete their audits properly.

The companies are Nam Fatt Corp Bhd, Patimas Computers Bhd, Mangotone Group Bhd, Wawasan TKH Holdings Bhd, Luster Industries Bhd and KBB Resources Bhd, based on their announcements to Bursa Malaysia.

Five of them had their accounts qualified, which means that auditors had incomplete information for their work or they may disagree with the company's management on certain assumptions.

However, Luster's auditors, which is Grant Thornton, did not qualify its opinion but pointed out to shareholders that the company's fate rests on an approval by Bursa Malaysia Bhd.

Financially-troubled Luster, a precision plastic parts maker, had submitted its revamp plan on September 18 2009, which was rejected by Bursa on February 11 2010. It appealed on March 4 but Bursa has yet to decide.

Construction group Nam Fatt is also in trouble after it defaulted on some loans and made an operational loss of some RM560 million in the year to December 31 2009.

It has to submit a revamp plan a year from March 15 2010 and it has yet to finalise such a plan.

Accountants from Deloitte & Touche could not find enough audit evidence for doubtful debt provisions while audited accounts of certain subsidiaries were not available.

In this instance, Deloitte said this is in breach of the Companies Act.

In the case of Wawasan TKH, a disposable food packaging maker, its auditors BDO did not agree with the assumptions of its management.

Management thinks that certain assets worth RM83 million should not be impaired, or that the value should not fall, because of assumptions on sales growth of up to 19 per cent and gross profit margins of up to 18 per cent.

"These assumptions by their very nature, are difficult to substantiate given past actual outcomes and are regarded as significant areas of uncertainties," BDO said.

As for Patimas, its auditors do not share the management's optimism that it could recover money from a former subsidiary.

Auditors of Mangotone, which is undergoing a restructuring, could not find enough evidence to support their work while those of KBB were not present during the counting of finished goods at warehouses.

The vermicelli maker did not arrange for the presence of its external auditors during the counting of products worth some RM27 million.

http://www.btimes.com.my/Current_News/BTIMES/articles/redflag/Article/index_html

Related:

8 Signs Of A Doomed Stock

A quick look at Nam Fatt - PN17 (1.5.2010)

Red Flags and Pitfalls for Avoiding Financial Fakery

A quick look at Nam Fatt - PN17 (1.5.2010)

Nam Fatt Corporation Berhad Company

Business Description:
Nam Fatt Corporation Berhad. The Group's principal activities are constructing bridges, heavy concrete foundations, roads, factory complexes and other similar construction activities. Other activities include building, maintaining and operating the Jiangjin Bridge on a built-operate-transfer basis, constructing projects in the oil, gas and petrochemical related industry, steel fabrication, structural steel engineering, manufacturing and trading steel doors and industrial boilers, researching, developing, producing, selling, installing and maintaining metal roofing and wall cladding, manufacturing galvanised iron roofing sheets, property development; owning and developing golf resort and its recreational amenities, property developer and property manager, resort and development, managing a golf resort and recreational clubs and investment holding. The Group operates in Malaysia, Africa and Asia.

Currency: Malaysian Ringgits
Market Cap: 28,763,370
Fiscal Yr Ends: December
Shares Outstanding: 319,593,000
Share Type: Ordinary
Closely Held Shares: 35,229,890 (11%)

16/03/2010
NAMFATT - New admission into PN17

Wright Quality Rating: LCNN Rating Explanations








A quick look at Nam Fatt - PN 17 (1.5.2010)
http://spreadsheets.google.com/pub?key=tAskkNgs3uU8eyk_WrTFcSw&output=html

Some RED FLAGS (hindsight) in the accounts of Nam Fatt at end of 2008 to note are:

Share price 
RM 0.19  or market capitalisation of 34.16 m. (The price rose to RM 0.30 from March 2009 and dropped precipitously to RM 0.09 when the news of the company's financial problem was known.)

Income statement
Negative earnings -14.09 m
Interest expense -18.73 m

Cash flow statement
Negative CFO  -41.27 m
Neglible CFI
Negative FCF  -44.10 m
CFF  -34.11 m (Borrowings increased significantly)

Balance sheet
Total Debt 499.69 m
Account Payables' Days 206.58 days  (This then increased to 714.24 days in end of 2009)
Interest cover 0.66
Total Debt/Equity 0.82
Net Debt to EBITDA 26.64  (Ideally, this should be less than 5.  Bankers do not lend if this ratio exceed this figure.)

Of interest, these commonly used parameters DID NOT raise any red flags at end of 2008:

Equity 607.44 m (What is the actual value?!)
NAV 1.59
Current ratio 1.54
Quick ratio 1.51
Account Payables' Days 82.22 days (Though this subsequently ballooned to 307.08 days in end of 2009)
LTD/Equity 0.34
Dividend 2.08 m


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Asset valuation approach in liquidation

Liquidation value is the net realizable amount that could be generated by selling a company’s assets and discharging all its liabilities.

When valuing a business for liquidation, most assets are marked down and the liabilities treated at face value. 

• Cash and securities are taken at face value.
• Receivables require a small discount (perhaps 15 percent to 25 percent off).
• Inventory a larger discount (perhaps 50 percent to 75 percent off).
• Fixed assets at least as much as inventory.
• Any goodwill should probably be ignored.
• Most intangible assets and prepaid expenses should beignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.