Saturday March 28, 2009

Fall from grace

ALL stocks have good days and bad days. But not many experience glorious runs – lasting months and sometimes years – as favourites among analysts and investors before they abruptly exhaust their appeal. During the good times, the stocks attract “Buy” calls regularly and the analysts sing praises of their prospects. When the tide turns and the businesses struggle to meet the investors’ expectations, the fall from grace defies market and industry trends.

Here is a look at some companies that have enjoyed the ups in the stock market before enduring the downs:

BSA International Bhd

This is a classic reversal of fortunes. An alloy wheel manufacturer, BSA was listed on the second board in May 2002 and transferred to the main board a year later. The stock had some following in its first couple of years because the burgeoning business was export-oriented and innovative in product development. The stock’s initial good run peaked in October 2003 when the share price surpassed RM1.70.

The drop was mainly triggered by its declining earnings. BSA’s margins were squeezed by higher raw material (aluminium ingots) costs, and it had trouble increasing the sales of its higher-margin products. Because of high gearing, its balance sheet was stretched.

It bought a factory in China in February 2005 to make higher-end wheels, but that move took a while to pay off.

In February 2004, BSA proposed a private placement. It did not go down well with analysts and investors, who were concerned that the share issue would dilute earnings per share and net tangible assets per share.

In the chairman’s statement in the company’s annual report 2007, group executive chairman Tan Sri Cam Soh Thiam Hong wrote: “Constraints in working capital and the continuous rise in raw material prices, coupled with intensifying local and global competition, presented the management team with an arduous task of delivering increased sales and profits.”

The task has grown harder. In June last year, BSA defaulted on interest payment for its debts and became a PN17 company. The company has until May 8 to submit its regularisation plan to the relevant authorities for approval.

Cymao Holdings Bhd

The Sabah-based plywood producer made its stock market debut on the main board in March 2004. The stock was steady in the first year or so, but received a pounding in the second half of 2005, following a volley of negative factors such as the ringgit de-pegging, lower selling prices, and the rise in oil and log prices.

It staged a partial recovery a year later. In early 2006, the two research outfits that cover Cymao under the CMDF-Bursa Research Scheme both had “Buy” recommendations, which they maintained until July 2007. The downgrades were due to lower sales, pricier logs and the likelihood of a dividend cut.

The continuing soft demand for plywood in the export markets has been weighing down the company’s numbers, and it has been losing ground against competitors.

The company made a loss in 2007 for the first time since its listing. Its woes continued in 2008. Its unaudited results show that its revenue had come down and its loss had widened.

Equine Capital Bhd

Like it or not, the rise and fall of the property developer is linked to political developments in Malaysia. Equine was listed in place of Kuala Lumpur Industries Holdings Bhd in October 2003, after the completion of the latter’s corporate and debt restructuring scheme.

For a long while, the stock did not make waves. The company’s main development project was on its landbank in Seri Kembangan, Selangor.

But Equine has an ace up its sleeve in the form of its associate Abad Naluri Sdn Bhd, the company given the task of redeveloping the site of the Penang Turf Club. The RM25bil Penang Global City Centre (PGCC) project was touted as a high-impact project to complement the Northern Corridor Economic Region.

In the second quarter of 2007, Equine spiked to as high as RM5 ahead of the launch of the project in September that year.

In a June 2007 research report, UOB Kay Hian said of the land in Penang, “This is the largest contiguous landbank in Penang, which is suitable for large-scale international-quality commercial development. We expect the value of this landbank to surge upon its rezoning for mixed-development use and potential redevelopment into the new Penang City Centre.”

At the launch, Equine executive chairman Datuk Patrick Lim said his company would up its stake in Abad Naluri from 25%. However, the project drew strong criticism from Penang residents and NGOs, and it was feared that it would be delayed or worse, shelved. This spooked investors.

In January last year, the Penang government directed the developer of PGCC to reduce the project’s density and fulfil the required 30% affordable housing quota.

However, the real turning point was the March 8 general election last year, which saw Pakatan Rakyat sweeping into power in Penang. Soon after that, PGCC was indeed scrapped. Last October, Equine sold its Abad Naluri shares to Kiara Ikhtisas Sdn Bhd. Lim resigned as an Equine director in the same month.

Inti Universal Holdings Bhd

The education provider was well-loved by investors once, but was later spurned because it was seen as an underachiever.

Inti shares were quoted on the second board in June 1996 and were transferred to the main board in October 2000. The company gained plenty of admirers in the early part of the decade and the share price surged to its peak in December 2003. It had uninterrupted growth for more than a decade and it was set for better days with its inroads into the China market. However, the spanner in the works was Government policy changes that limited student enrolment at private colleges.

As a result, the company’s results did not meet expectations and investors were quick to move on to other stocks. Many of them never came back. Last year, Laureate Education Inc, touted as “the world’s largest operator of private international universities”, became a major investor in Inti. After a general offer, Inti was taken private in November.

LBS Bina Group Bhd

The property developer was listed in January 2002 after a reverse takeover of the troubled Instangreen Corp Bhd. That exercise also gave LBS its chief attraction, the potential of a property project in China, which it inherited from Instangreen.

The project is a 60:40 joint venture between an Instangreen subsidiary with a China state-owned enterprise to develop homes, a 36-hole golf course and a F3 racing circuit in Zhuhai.

Although LBS’ principal business model was to build mass housing in Malaysia, investors were more interested in the China factor, and they felt that the shares deserve a premium. They held on to that notion for over a year or so, but when it took a long time for the project to progress, investors dropped the stock.

Another factor that dampened the sentiment towards LBS might be the company’s plan, announced in July 2004, to have a rights issue of warrants.

The worry among investors is that the controlling shareholders may sell their LBS shares and rely on the warrants as a cheaper way to retain control of the developer. In November that year, the company decided not to go ahead with the rights issue.

Given the current economic environment, it will be an uphill battle for LBS to grab the attention of investors.

Mieco Chipboard Bhd

The shares of the particleboard manufacturer were at their strongest in 2003 and 2004. At the time, the particleboard market was bullish. Mieco was more than holding its own against its rivals, and it was in the midst of increasing its capacity. In March 2004, JPMorgan included Mieco in its list of nine Malaysia companies it had dubbed “tomorrow’s world beaters”.

The investment bank got that wrong. The particleboard industry shifted and Mieco has not fared well since then. An oversupply situation and stiff competition depressed prices, and that was a huge blow to Mieco’s profitability.

In a March 2006 report, Standard & Poor’s explained: “Its capacity expansion coincides with similar expansion by other regional players, while production costs have been escalating.”

Things have not improved much since then. In the 2007 annual report, the management spoke about pressure on margins due to the strengthening of the ringgit against major currencies and the rising cost of oil.

This was aggravated by the “highly competitive, price-sensitive marketplace, which resisted any efforts on our part to raise prices”.

Mieco reported an unaudited net loss of RM22.9mil for 2008 as compared to a net profit of RM2.3mil the year before.

Xian Leng Holdings Bhd

In the three years after its December 2001 stock market debut, Xian Leng caught the analysts’ attention because of its niche business – it had developed proprietary breeding techniques to produce Arowana fish.

However, the company reached a tipping point in 2005. Severe price competition hit Xian Leng badly, and its sales and profits deteriorated in the following years.

According to the management, the smaller breeders had been aggressively cutting the prices for their products, thus destabilising the overall market.

Says Standard & Poor’s in an April 2006 research note, “Xian Leng had previously expected the price competition to be temporary, given the limited Arowana stocks that the smaller farms were believed to have.

“However, we understand that the weak Arowana pricing continues to persist into the financial year ended January 2007, with limited visibility on pricing which tends to be set in an ad hoc manner from batch to batch. As such, it is difficult to predict when and if prices could recover to their previous levels.”

In the annual report 2008, the company continues to complain about “aggressive price competition”.

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