why Megan under my top hopeless stocks

Why MEGAN? I think many of us listen recommendation to buy Megan. Not only from analysis, many stocks forum like Cari, Sam gang and so on. But why today remain will drop around 60 cent. Standard & Poor just ranking this counter for sales and 12month target price at 60 cent.

Why like that? Standard & Poor estimate 07 & 08 financial year-end net profit at 35 cents per share or equivalent to PE less than 2. Super earning, why still recommend to “SELL”.

Many of us noticed that during FY 2005.Megan making huge Capital investment of RM 5 Billion or equivalent to 73-year equivalent payback period (Not consider the PV).
Wrong expectation of market and profit margin of product (DVD-R) make this company become risks in liquidity (see Table below). Cash crisis for repayment of loan from 2007 to 2012, the company still contractual another RM 110 Million for 2007 to 2008.
· Does anything the management done to reduced the gearing or waiting for liquidity, I am doubt the future ability to paid debt. Over estimated of market and make a big investment.
· Does any risk management and proper feasibility done before such decision? For small cap counter, 5 Billion is huge amounts, any proper record and discussion for BOD before this decision.
· Who protect small investor like us? With incremental profit of 20 m after such big expansion. The pay back period may be as long as 250 year! Some may argue here this is replacement of technology; even we take the yearly net profit at 80 m per year it will take another 62 year of repayment. What the stupid decision.

Is useless to comment on the profitability of single digit PE, What is the % of depreciation and so on. Let review the forecast cashflow as table below :

('000) 2007 2008 2009 2100 2111 2112
Cashflow from operation 110,000 110,000 110,000 110,000 110,000 110,000

Purchase of Fixed assets (55,000) (55,000)

Repayment of loan & HP (16,313) (16,313) (65,250) (65,250) (65,250)
bai adm islam loan (40,000) (40,000) (40,000) (60,000) (60,000) (70,000)

Balance/(Deficit) (1,313) (1,313) 4,750 (15,250) (15,250) 40,000

from the table, you will see the cash deficit for the rest of the period, why they still plan for investment, future uncertainty will make this investment useless, and bank won't borrow money to our gear company. here assume many factor un-quo. so it is dangerous for company to continous expansion.


Propose - Action
As we know that margin of CD or CD-R continuous fall and margin will tight from time to time. They should reduce the outsourcing to sub- con. Start their own in house production. This is similarly in many industries with tight margin. The profit will highly depend on volume and production efficiency. In Megan case, if next 2 year expansion is buy some 2nd hand machine for these lines. I am agreed on that too, but not for those lines with uncertain market condition. To hold all of other investment of RM110 million for other equipment. Try to reduced gearing of the company by 5-year time. Later then consider other investment opportunity. At the mean time by given reasonable dividend to shareholder. High Dividend yield is the trend in equity market. So paid said 5% dividend to shareholder is better than investing in stupid equipment. With this hope will build investor confident on that. Disposal of singapore factory to reduced the gearing, since the company already moving operation to malaysia.


What reason I learn

I am holding Megan from day 1 it listing and continuous average down to 1.2 then I stop. Now with market price 60 cent, I also make a big paper loss on that. It is one of the small caps and makes many criteria in my 15-point mention. What I will do, I will hold it for another 2 Quarter, see any action taken by management. Otherwise I will dispose it permanently due to foreseeable liquidity risks. sad to said this company problem is expansion too fast, then become over gear. now they need to take a break for few year.

I will not able to attend Megan AGM on coming, if any one want attend, I would like to give the proxy to you, just mail to me (limkwongwee@hotmail.com ) . Please help to forward this issued during AGM.