How a RM 6 bil company falls into liquidation

 

Serba Dinamik seeking legal advice over winding-up order

https://www.theedgemarkets.com/node/651239

Areas of Opportunity for Value Investors: Investing in Corporate Liquidations

Some troubled companies, lacking viable alternatives, voluntarily liquidate in order to preempt a total wipeout of shareholders' investments. 

Other, more interesting corporate liquidations are motivated by

• tax considerations, 
• persistent stock market undervaluation, or 
• the desire to escape the grasp of a corporate raider. 

A company involved in only one profitable line of business would typically prefer selling out to liquidating because possible double taxation (taxes both at the corporate and shareholder level) would be avoided.

A company operating in diverse business lines, however, might find a liquidation or breakup to be the value-maximizing alternative, particularly if the liquidation process triggers a loss that results in a tax refund. 

Some of the most attractive corporate liquidations in the past decade have involved the breakup of conglomerates and investment companies. 


Most equity investors prefer (or are effectively required) to hold shares in ongoing businesses. Companies in liquidation are the antithesis of the type of investment they want to make.

• Even some risk arbitrageurs (who have been known to buy just about anything) avoid investing in liquidations, believing the process to be too uncertain or protracted. 
• Indeed, investing in liquidations is sometimes disparagingly referred to as cigarbutt investing, whereby an investor picks up someone else's discard with a few puffs left on it and smokes it. 

Needless to say, because other investors disparage and avoid them, corporate liquidations may be particularly attractive opportunities for value investors.

Analyzing Investment Opportunity Begins with an assessment of Business Value

To be a value investor, you must buy at a discount from underlying value.

Analyzing each potential value investment opportunity therefore begins with an assessment of business value.

While a great many methods of business valuation exist, there are only three that I find useful.

1.  Net Present Value
The first is an analysis of going-concern value, known as net present value (NPV) analysis.  NPV is the discounted value of all future cash flows that a business is expected to generate.  A frequently used but flawed short cut method of valuing a going concern is known as private-market value.  This is an investor's assessment of the price that a sophisticated business person would be willing to pay for a business.  Investors using this shortcut, in effect, value business using the multiples paid when comparable businesses were previously bought and sold in their entirety.

2.  Liquidation value.
The second method of business valuation analyzes liquidation value, the expected proceeds if a company were to be dismantled and the assets sold off.  Breakup value, one variant of liquidation analysis, considers each of the components of a business at its highest valuation, whether as part of a going concern or not.

3.  Stock market value.
The third method of valuation, stock market value, is an estimate of the price at which a company, or its subsidiaries consider separately, would trade in the stock market.  Less reliable than the other two, this method is only occasionally useful as a yardstick of value.

Each of these methods of valuation has strengths and weaknesses.

• None of them provide accurate values all the time.
• Unfortunately no better methods of valuation exist.  

Investors have no choice but to consider the values generated by each of them, when they appreciably diverge, investors should generally err on the side of conservatism.


Ref:  Margin of Safety by Seth Klarman

Ways to Limit Opportunity Cost - Most Important is holding Part of your Portfolio in Cash

The most important determinant of whether investors will incur opportunity cost is whether or not part of their portfolios is held in cash.  

• Maintaining moderate cash balances or owning securities that periodically throw off appreciable cash is likely to reduce the number of foregone opportunities. 

Investors can manage portfolio cash flow (defined as the cash flowing into a portfolio minus outflows) by giving preference to some kinds of investments over others.  Portfolio cash flow is greater for securities of shorter duration (weighted average life) than those of longer duration.  Portfolio cash flow is also enhanced by investments with catalysts for the partial or complete realization of underlying value.

• Equity investments in ongoing businesses typically throw off only minimal cash through payment of dividends.  
• The securities of companies in bankruptcy and liquidation, by contrast, can return considerable liquidity to a portfolio within a few years of purchase.  
• Risk-arbitrage investments typically have very short lives, usually turning back into cash, liquid securities, or both in a matter of weeks or months.

An added attraction of investing in risk-arbitrage situations, bankruptcies, and liquidations is that not only is one's initial investment returned to cash, one's profits are as well.

Another way to limit opportunity cost is through hedging. 

• A hedge is an investment that is expected to move in a direction opposite that of another holding so as to cushion any price decline. 
• If the hedge becomes valuable, it can be sold, providing funds to take advantage of newly created opportunities .

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


Related article:

Measure long-term solvency and stability

Assessing indebtedness. How much debt is too much?

Acceptable debt

Debt and Leverage: Financial weapon of mass destruction

Be fearful of excessive leverage and debt

Buying Stocks on the Verge of Bankruptcy

8 Signs Of A Doomed Stock

Red Flags and Pitfalls for Avoiding Financial Fakery

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.

Asset valuation approach in liquidation

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 be ignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.

It doesn’t consider value arising from deploying the resources in combination. It is thus of limited use for valuing businesses as going concerns.


Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary