Shortlist For Shorting Stocks (Updated)

Well this was posted back in June 2011, which in itself was an update from December 2010. Almost 6 months now, KNM is now 97 sen which meant that it lost more than 50% (so how, Simon, where are the back stoppers ... just a shoutout to one of the commentators). Of course if taken with the original posting, the stock would be considered decimated from the RM2.89 level when i first wrote the shorting post.


Green Packet is more resilient. Its now at 59 sen, meaning it lost just 21%.


Would these two still be worth shorting at current level? Even if they were worth shorting, are they still the best stocks to short from the whole of Bursa?



The answers is Yes and Yes. Green Packet is more an Angry Bird stock, you have to keep hitting the walls, and the walls are creaking and moving ... you sometimes have to wait for the egg to explode for the thing to crumble.

Friday, June 03, 2011

I think this was posted last year 29 December. KNM closed yesterday at RM2.01. Green Packet closed at 0.75. GPacket is doing very well price wise, we'll see, we'll see... Anyways, some friends visited a recent exhibition in KL where KNM had a booth. The picture may tell a wonderful story of the company ... (click for larger image to read the inscriptions).

----------------

29 December 2010

Unfortunately, we don't get to short stocks in Malaysia, and in many markets actually. When we think of shorting stocks, it is very easy to pick the highly speculative ones with zero fundamentals. Its a no brainer to lump stocks such as Maxbiz, Compugates or Tejari and the likes to the category of stocks to short. In fact, if you try to short these stocks, they will come back to bite you as they are highly speculative and share prices could double or triple for no reason if they "manage" the stock price well enough.


A genuine stock shorting process involves company that is running on supposedly good fundamentals, but you do not think that that is the case in reality. Some will ask, why even talk about them and make enemies. I think its pathetic to only talk about good stocks. Sometimes its good to have an opinion of stocks you do not like.

However, to save myself, I will not elaborate on why I think they are my favourite stocks to short, but let me assure you that I stand behind my views 100%. I will check back on their respective share prices every 3 months and see how they fare. I think both are excellent stocks to short on a 1-2 year time horizon.

The stocks on my list that no one wants to be in:

KNM ($2.89)

Green Packet ($0.71)

I am sure plenty will differ in their views, and thats what makes a good liquid market place, there are always buyers and sellers. If you go long, please rub it in my nose 3,6,9,12 months down the road if they continue to perform well. I will accept the dressing down gleefully.



NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

KNM's Privatisation? Fairytale Time by The Aesop & Madoff Brothers Grimm

Readers will know that I do not have a bullish view on KNM as I have always not felt comfortable with their figures. Then, out of the blue, BlueFire Capital Group Ltd (Bidco), an entity controlled by Ir Lee Swee Eng (KNM’s Group Managing Director and major shareholder), in collaboration with GS Capital Partners VI Fund L.P. and Mettiz Capital Limited, proposed to acquire the entire business and undertakings of the company, paying an equivalent of RM0.90 per share. This represented a 20% premium over KNM’s share price at that point in time, and 1.8x estimated BVPS as at end-2009.

Here is the funny thing, if somebody is buying at 90 sen, why is the share price still struggling to breach the 80 sen level? Some may say that a number of minority shareholders will not be keen to sell at 90 sen as they see the sector recovering, and maybe they have entered at much higher prices. The next biggest shareholder is EPF with 12.2% - if EPF no like the deal, they no sell now or at 90 sen, ... if EPF likee deal, they sell at 90 sen ... so who is selling now???

My question is, since when are shareholders being asked to state their views on where the sector or company's prospects are headed? You buy, you sell, you keep your mouth shut, ... holding the shares only gives you the right to SELL at 90 sen or don't sell. No matter what your views are, 90 sen is a good price to SELL unless you can find somebody willing to buy at higher prices NOW. People who say that the company is worth a lot more in the future, well, ... so is my ass but nobody is going to write a put option on my ass 5 years down the road. Its JUST YOUR VIEW, and we can probably find similar OPPOSING VIEWS ON YOUR BULLISHNESS. That's the case for minority shareholders. Now got a bone to pick with the consortium. Who the fuck are selling at 80-82 sen when the privatisation is at 90 sen? Why don't you people just go into the marketplace and buy all share right up to 88 sen or 89 sen at least (because you cannot really be buying above 90 sen in the open market, or else you have to up your G.O. to your higher purchase price after announcing the offer).

KNM’s Board has granted Bidco a limited exclusivity of up to 22 Mar 2010 to complete a due diligence and satisfy the other conditions of the proposal. While Lee and parties have to fork out RM3.6b immediate cash for the acquisition, he should be able to recover RM738b based on his 20.5% stake in KNM, which could undertake a subsequent capital repayment exercise. Goldman Sachs has been appointed the international advisor. So, maybe the consortium is waiting to act AFTER the due diligence? But you have Mr. Lee in there, don't you?

Hence, the share price is nowhere near 90 sen may be due to any or all or none of the following:
- a lot more sellers than buyers (this useless statement can be appropriately used here to great effect); i.e. a lot more people believing the G.O. may not carry through than those who think they will. This is still an OK development provided the sellers are not "interested parties" to the deal
- they may not get the funding
- the due diligence may be troublesome
- seriously, the funds are not in yet, where got money to buy shares now

There is usually a discount to the G.O. as many may not want to wait for the exercise to be completed to get back their monies, but its usually 2%-3%, not more than 10%. There are numerous stories in the marketplace, that this privatisation is a prelude to a merger with a big private oil & gas company .. and potentially later to relist with better valuations and size. If the consortium has an end buyer after the privatisation, it will be at a price higher than 90 sen, say maybe RM1.20. Seriously folks, if I was the big private O&G owner, would I NOT BE AT LEAST BUYING KNM shares now at way below 90 sen???

Anyway, caveat emptor or to translate the Latin into my everyday English: watch out for the guy who pats you on the back, he could be a friend or he could be asking you to cough up blood



Nightmares & Fairytales Time by The Aesop & Madoff Brothers Grimm: You know what I am afraid of, I am afraid of fairytales, scary financial fairytales ... Let me tell you a story, there was once this company that did a G.O. ... but the share price never rose close to the offered price ... (because somebody has been naughty and selling shares in the open market, naughty boy) ... and true enough, following the due diligence exercise a few weeks later, the G.O. was called off. The share price collapsed further, but guess who managed to offload shares during that period... and guess who can now buy back the shares at 40% or even 50% cheaper. Thats the fabled nightmare ... can you sleep soundly at night?


p/s photos: Carrie Lee


Further announcement to the Companys reply to Bursa Malaysia Securities Berhad's queries dated 5 February 2010 on the Companys announcement dated 4 February 2010 and entitled Proposed Acquisition of the Entire Business and Undertakings of the Company. With reference to KNM Group Berhads (KNM) reply dated 8 February 2010 (reference number: KG-100208-750E6) to Bursa Securities Malaysia Berhads queries, the Company wishes to further clarify the following:-

Question 5 :
The information on GS Capital Partners VI Fund LP and Mettiz Capital Limited together with its role in the Proposed Acquisition
Reply :
Mettiz Capital Limited (Mettiz) (company no. 1412549) was incorporated on 21 June 2007 in the British Virgin Islands, with its registered address at Nerine Chambers, P.O. Box 905, Road Town, Tortola, British Virgin Islands. Mettiz is a special purpose private investment holding company that is beneficially owned by Mr Michael Tang Vee Mun, a Malaysian citizen.

Question 7 :
Whether Bidco has expressed its intention on the listing status of the Company
Reply :
Bidcos proposal is to acquire the assets and undertakings of KNM, which matter is still subject to due diligence and not proposing to acquire the shares of KNM. Therefore, neither Bidco nor the Board of KNM has expressed any intention on the listing status of KNM.

This announcement is dated 9 February 2010.

High Profile Companies & Their Dangers

We all know what high profile companies are, they are always in the press, their CEOs are constantly in the papers giving bullish comments, they are usually highly traded, and usually have a good proportion of institutional funds as investors. Why are some companies keen on this route while some tend to keep quiet?

I welcome companies being media friendly, that they are open to analysts. However, we always remember that the most talked about and most high profile companies failing most dramatically - remember Aokam Perdana, Transmile, Repco... Of course we cannot put all high profile companies into the same basket, ... just to watch out for the dangers.

Companies taking this route usually have a high debt level, and the controlling owners usually have a smallish stake, usually less than 30% - thats usually because they have used issuance of shares liberally for acquisition or placed out large tract of shares for funds. You have to watch out not to be lured without sufficient information and clarity.

Let's take two high profile companies as examples: AirAsia and KNM. I am not saying they are prone to fail because they are so high profile, but we must be on our guard. They always have to put up an optimistic view of their company to promote their company and sustain interest in their company. The fact that they usually have a high debt level also causes them to always be promoting as they fear their debt levels could be down rated, thus making it more costly to seek out fresh funds or being unable to roll over their debts.

If management is set out to deceive, like Transmile or Fountainview, it is very hard for investors and analysts to be able to uncover them without a thorough audit of their financials. We all can only go via publicly available information. Hence buyers beware. That is why blue chips are called blue chips as they have been around a long time and have shown a substantial track record. Companies that rise up within a few years may be gems but they also have a good chance of being duds. Sometimes the pressure to continually perform in the eyes of the media and investors may entice management to act irresponsibly in order to maintain a good track record.

I have commented many times on KNM, I am not trashing KNM here, I am just asking investors to be cautious because sometimes publicly available information can only give us just so much assurance, not total assurance - don't put all eggs into an uncertain basket.

I am a fan of Air Asia, i love their business model. Investors are shortchanging the company if they view it as a pure budget airline. AirAsia is in inventory management and maximising capacity. They are also the most well known budget airline in Asia Pacific, and has a huge head start in Asia compared to their competitors. The company is a growth company and needs to put down their footprints in new routes to stake their claims. Unfortunately this give rise to huge capex requirements which means huge debt levels. It also leaves a lot of space for mismanagement as too many new routes come online before they are profitable. Longer term, AirAsia would be a wonderful story if all goes accordingly to plan, but the steps leading to that allow little room for mistakes. One can easily imagine if "something goes very wrong", management may be more than tempted to "rework financial figures" to put up a good impression. I am not saying that AirAsia or KNM are doing that, just to know why they may be more at risk.


p/s photo: Throw away all the photos you have seen of Deborah Priya Henry. None of them do justice to how she looks in real-life. I bumped into her at Bangsar Village supermarket and was stopped dead in my tracks. She looks heavenly in real-life. I am tempted to say she is the loveliest looking girl in Malaysia.

Privatisation For KNM?

Sometimes its better to keep your thoughts to yourself. I cannot believe it when the report came out in Bloomberg and New Straits Times on KNM's MD wanting to take the company private. The article kind of confirmed my suspicion that something is not quite right. IF YOU ARE SERIOUSLY CONSIDERING A BUYOUT, THE LAST THING YOU WANT TO DO IS ALERT THE MARKET. If you are alerting the market, you could very well be paying a much higher buyout price in the end. Why would you do that? Smoke and mirrors???.., mainly smoke and baloney really. This tells me things are really not quite right at KNM, don't you think so?

Bloomberg: KNM Group Bhd managing director Lee Swee Eng said he will consider leading a management buyout of the Malaysian oil and gas services provider as long as banks can raise the funds. Investment bankers have approached Lee, who owns 25 per cent of KNM, and suggested he buy the remaining shares, though none has made a proposal that includes financing, he said. KNM has lost 71 per cent in the past six months in Kuala Lumpur trading, cutting its market value to RM1.31 billion (US$354 million).

“We are very undervalued,” Lee, who set up Selangor-based KNM in 1990, said in an interview on March 13. “The opportunity for privatisation is a good opportunity, but it’s the source of funding. There’s no offer on the table.”

Lee, 53, has seen the value of his stake plummet as the global recession, tumbling oil prices and a selloff by foreign investors combined to make KNM the second-worst performer on Malaysia’s benchmark index in 2008. He said he probably needs between RM1 billion and RM2 billion to fund any takeover. KNM was unchanged today at 33 sen at 9:28 am. The shares reached a record RM2.48 in January 2008.

Cashflow at the Selangor-based company would be sufficient to service any borrowings after a buyout and associated cost cuts, Lee said. Annual profit at KNM has climbed every year since 2004.

“With our earnings, we should be able to handle that,” he said. “I don’t think that would be an issue.”

Tighter Credit

Banks worldwide have restricted lending during the financial crisis, and Malaysia’s government last week pledged RM25 billion in guaranteed funds to help businesses obtain credit and raise money on the bond market in the Southeast Asian nation. Even so, Lee said it’s not clear whether banks, foreign or domestic, would be willing to lend funds for a management buyout.

KNM’s business prospects are tied to the price of crude oil because exploration projects, for which producers hire companies such as KNM, become less viable as prices fall. KNM has had to reduce its bids for most of the projects up for tender, Lee said.

The Malaysian company, with an order book of RM3.9 billion, won about RM300 million of orders between December and January, Lee said. The revised value of all the contracts that KNM is seeking is RM18 billion, he said.

“The business has been a bit slow because of the volatility of the price” of oil, Lee said. “We’re expecting the second quarter onwards to be better. Most of the rebidding has taken place. We will sail through this with flying colors.”

Crude oil for April delivery fell as much as 5.2 per cent to US$43.85 a barrel in after-hours electronic trading on the New York Mercantile Exchange after the Organisation of Petroleum Exporting Countries decided against deeper output cuts. Crude, which has slumped 70 per cent from its July record, was at US$44.58 at 10:37 am Singapore time.

Lee said he expects oil and gas producers to proceed with more exploration projects if oil rises beyond US$50 a barrel, or stabilises at a level between US$45 and US$50.

p/s photo: Son Dam Bi

Still Have My Concerns On KNM

After having a few more hours to ponder over KNM's results, I am still uncomfortable. As nice as the figures present itself for KNM, there is still niggling doubts over the "authenticity of foreign earnings". Let's say I am not comfortable yet as the figures seem 'too well-rounded'. The majority of KNM's earnings still come from their overseas operations. If there is even a hint of impropriety it would have to come from that. For the time being, we have no inkling on the auditors working on those components. It may sound petty, but in an environment where earnings have been trashed left, right and center, it would seem prudent to want more information and verification when the majority of earnings are from overseas. I repeat, if there is one area that can be compromised, it would have to be foreign earnings component. Hence, until more clarity is presented, I would still avoid KNM.

The other niggling thing which has been weighing increasingly heavily on my mind was the lack of research coverage by foreign banks. Previously I wrote:
"On more research, I found that the company is not "open and welcoming" enough to foreign research houses. Its only local and Singapore broking research which carry the research. Only Nomura sticks out like a sore thumb. On speaking with some of the analysts, the main issue has been the company's lack of cooperation and appreciation of the need for deeper information. That is surprising considering that foreign shareholders hold a substantial amount of shares in KNM, at times in the 20%-30% range. When you are "not so willing" to be open, you may be perceived as having something to hide. As they say, the silence is deafening. In fact, this issue would trigger a big red alert to me."
Pondering more on that, I came to the conclusion that maybe why the company has not been that welcoming to foreign research houses was the fear that these houses may be able to cross-check and try verifying the foreign operations of the company. It would be "easier" for them to ask their counterparts in other global offices to solicit more information. I could be wrong, but in my view, its a big red flag. We certainly need more assurances.


p/s photo: Fan Bing Bing

KNM Responding Well To Investors' Concerns

If one were to read line by line KNM's latest quarterly and cumulative 12 month results, one should be able to sense an urgency (finally) to try and address the fears and rumours circulating in the markets on KNM's future.

The company makes more money from overseas than locally, thats fine and dandy. KNM should improve the transparency on foreign earnings by making available as much as possible the details from these foreign operations. A reputable international audit firm should be hired to vet the accounts. If there are additional information that KNM can deliver to shareholders on the details of each and every part of these foreign contributors, that would be wonderful. Key figures would be the EBITDA of RM584m. No goodwill was amortised from the Borsig's acquisition which was RM896m. As long as EBITDA stays above the RM350m-RM400m a year, the Borsig's goodwill figure is still OK. The EBITDA figure is still unaudited but that would be petty at this point in time to say those things. The EBITDA/Goodwill figure is reasonable and that ratio should continue to be improved on over the next 12 months, but considering the very difficult operating environment over the last 6 months of 2008, its a decent performance. The sooner the global recovery and more , the recovery in oil and gas prices, the better the comfort level.

0.5 sen tax exempt and 1 sen non-exempt will support KNM's share price almost immediately. Should allow KNM to establish a new trading range from the current 40 sen to above 50 sen over the near term. Nothing untoward in the corresponding rise in receivables. As long as KNM keeps up this level of clarity and information flow, its on the right track to improving investors relations. Now, please do something on the "details on revenue and cost of foreign subsidiaries".

Selling KNM For Now

As the market heads toward the end of February 2009, I would advise to be very cautious on trading KNM. I have put the stock in my recommended portfolio. I have defended the stock. However, I am getting a bit concerned on a few niggling issues which may present itself in the upcoming results announcement. May be wise to avoid holding the stock till tings are cleared up, or maybe management may want to answer the issues I have in detail in order to assuage fears. This is not your grandfather's company, its a listed entity and shareholders and investors all have the same right to information. The most recent quarter's results was announced on 26 November 2008. Technically speaking the upcoming release of results will be between 24-26 February 2009. There is no need to be arrogant, it pays to be open and transparent unless you have things to hide.

The Issues:

a) KNM Group Berhad (“KNM” or “Company”) - Proposed issuance of up to United States of America Dollar (“USD”) 350 million (or its Euro Dollar or Ringgit Malaysia (“RM”) equivalent) bonds, exchangeable into new KNM shares (“Exchangeable Bonds”) (“Proposed Exchangeable Bonds Issue”)We refer to our announcement dated 2 June 2008 where it was announced that the Securities Commission (“SC”) had vide its letter dated 30 May 2008 approved the Proposed Exchangeable Bonds Issue by KNM Capital Sdn Bhd (“KNM Cap”), a wholly-owned subsidiary of KNM.On behalf of the Board of Directors of KNM, Aseambankers Malaysia Berhad (“Aseambankers”) is pleased to announce that the SC had vide its letter dated 1 December 2008, approved an extension of time of twelve (12) months until 29 November 2009 for the implementation of the Proposed Exchangeable Bonds Issue by KNM Cap. This announcement is dated 3 December 2008.

This postponement of fund raising, is it for further M&A or a projected capital requirement, or the need to refinance existing facilities? Need clarification. Will KNM have problems raising funds? Does the extension indicate something?

b) The goodwill attached to the Borsig's acquisition, which I have highlighted before, is RM1.6bn, or 88% of shareholders' funds. I would like to see how much does Borsig brings to the bottom line. If its not as profitable as first thought, KNM may have to write down a substantial amount of goodwill which will bring the stock much lower. If there is a significant write off in goodwill, it will affect its credit rating and make fund raising a lot more difficult. Borsig's profits for FY07 was RM172m. Assuming that industry slowdown has affected it somewhat, as long at the profit for FY08 does not fall below RM140m, KNM is still on track and the goodwill issue will be averted. Borsig supposedly still has an order book of RM1.3bn for FY09 and its annual expenditure is estimated at RM92m - just don't give us any nasty surprises.

c) Being in oil & gas, the company will see some cancellation of orders, or maybe non-payment or delayed payment issues. I would want to wait and see what is revealed and said during the upcoming release before going long on KNM again.

d) On more research, I found that the company is not "open and welcoming" enough to foreign research houses. Its only local and Singapore broking research which carry the research. Only Nomura sticks out like a sore thumb. On speaking with some of the analysts, the main issue has been the company's lack of cooperation and appreciation of the need for deeper information. That is surprising considering that foreign shareholders hold a substantial amount of shares in KNM, at times in the 20%-30% range. When you are "not so willing" to be open, you may be perceived as having something to hide. As they say, the silence is deafening. In fact, this issue would trigger a big red alert to me.

e) My change of heart came from the above issues plus the one big thing, I just can't seem to get a hold on the management's DNA. Crooks or misunderstood managers?


p/s photos: Meisa Kuroki

Some Caveats On KNM

Well, at least The Rock tried to explain his concerns over KNM. This does not represent my view, nor do I agree or disagree with his view as I have no way of ascertaining its validity. Thanks to The Rock. This will serve as a good exercise where a recommendation based on analyst reports and annual reports, and to see whether it can stand up to vicious rumours. I hope the SC will investigate these purported vicious rumours. Investing should never be like this - no one can/should base their investing on "inside gtrack information flow", the general public cannot be disadvantaged by such situations. If we cannot rely on publicly available information, if we cannot rely on analyst reports, if we cannot rely on independent auditors verification, if we cannot rely on them... how else should investors base their investing decisions on? Of course, if management decides to defraud (e.g. Transmile, Enron), it will be difficult to detect. At this point in time, I would still tend to side with my view that KNM is a vicitim of the oil plays being out of favour and that many foreign funds have sold down. All counters have influential substantial shareholders, they backing out is not out of the norm. KNM is also not that political a counter as its business model is acquisition/ EPS accretive strategy.

The Rock has left a new comment on your post "What's Shaking KNM":

I have been following KNM since early 2006. Made some small money. Recently I reviewed it again and asked around - what's happening to the price? Well the inside news is a total shock to me. No analyst or newspaper have a clue to what is really happening in the company or to its financial backers.

While it's probably not going to be a Transmile, but the people[a few of them, not just one] who have dealings with KNM advised me to stay away from the company. One of the worse thing that happened to them was that the promoter's strongest financial backer decided to pull the plug ! That's is when u see the share price started to crash ! It has nothing to do with foreign funds. This is a local guy.

Second is KNM overpaid for Borsig. When a PE firm sells you something you got to ask WHY WHY WHY ? It was done at almost the peak of the oil cycle. Any acquisitions done in 2007 or even 2006 will be costly to the buyers. Look at Rio Tinto now trying to swallow their USD38 bil debt for buying Alcan ! It can actually bring down Rio if they can't get refinancing or the economy gets worse from here.

The 3rd point is I was told KNM is linked to a political figure whose fortune has taken a turn for the worse since the March 8 general election. This point is related to the first point.

Don't ask me to reveal the names of the no.1 and no.3 guys. If you think what I say here is credible - good. If not - it's your problem. I have bought Transmile shares before it crashed and suffered massive losses when the fraud was announced. Lesson learnt : when in doubt - don't touch.

They are so many other clean stocks/companies to buy/invest. Why bother with a stock just because it was the darling of the analysts, whom none have had business dealings with KNM !! My sources are people who actually have had dealings with them. It is not based on newspaper or desktop analysis. You need to have an inside track in the current crisis before you jump in and put your money at risk. The low tide will expose more fraud.

MY advise - wait for a few more months and see if any more funny business surfaces. No point trying to jump in now hoping to catch at the bottom when we just don't know where and when is the bottom ! Just trying to be helpful...caveat emptor.

P/s photo: Amigo Feng

What's Shaking KNM

What could KNM be doing to defraud investors? Fraudulent contracts, artificial jobs, not being paid, raising up debtors as revenue, cancellation of work orders, margin calls on controlling shareholder if any, impairment in the goodwill of Borsig, etc...

KNM has been sold down owing to it being a oil infrastructure play. The stock will see great volatility as the controlling shareholder holds less than 25%, next being EPF with 7.7% on nearly 4bn shares. When a controlling shareholder holds less than 25%, one tends to be suspicious.

However if you look at KNM's business model, it is one built on acquisition and managing growth by integration. Purchases are often funded by issuance of new shares thus the huge free float. Safe to say that when markets tumble, the minority but substantive shareholders (of previously merged smaller companies) will tend to throw their shares. Its part and parcel of investing in KNM.

Fund managers love it and hate it, love it because its business model is scalable, hate it because its a thematic stock. Love it because it has very good free float, hate it because it has very good free float. When oil prices are high, its an excellent proxy, same on the way down.

A fraudulent company can be easily found out in international markets, its only when its a closed door thing like Madoff or the Enron case where only a few people move figures around that can lure many unsuspecting people. When you are international markets, you have to deal with fellow peers and it becomes hard to hide company's strategies and dealings. If you check with its global peers such as FMC Technologies and Cameron International, their stock price movements mirrors that of KNM. The way KNM executes its strategy, via acquisitions, makes it even more cumbersome to do fraudulent things because there's always the "fair valuation exercise", "due diligence exercise", a seperate life before the acquisition, blah blah... you cannot really expect to overpay and do hanky panky without analysts whacking you.

The abortion of the purchase of Ellimetal NV for 20m euros shows good sense in recognising bad timing and recognising when the industry has turned. KNM has instead agreed to market Ellimetal's technology and products to KNM's Southeast Asian client base.

KNM's other aggressive planned expansion into mining for oil sands in Canada has been rightly halted. The tar sands is only profitable is price of oil is more than $85. Even if price of oil improves, a lot more strategic thinking and financial planning needs to be done before venturing into that sub sector.

Some concerns focused on the free cash flow and the enormous goodwill. One should look closely at their business model, which is acquisition by minimal cash but a lot of shares issuance, that in itself brings about a certain accounting character to lumpy items. When you do shares issuance acquisition, you want a profitable company with quality, predictable earnings - as the latter will be able to work down on the goodwiil or premium you are paying or else the share issuance program will work negatively thus destroying company value very quickly. In that sense one should appreciate KNM's strategy to buy very secure companies with secure earnings, but they also come with a price, which is usually a lot higher than book NTA, or else why would they sell to you. Its a corporate finance game which KNM plays relatively well. Their swift decisions to abort the oil tar sands and Ellimetal projects tells me that they know the game well, stop doing the acquisition tango when the trend is gone.

Sigh, KNM should hire me to do their corporate PR and institutional strategy relations... but it won't be cheap... and yes, I will take KNM share options ...lol.

Outstanding order in the books stands at RM4.3bn which is still 180% of revenue of the previous financial year. Assuming orders are zero for the next 6 months (while in actuality they are in bidding for over RM22bn of projects), and even if 20% of existing orders get cancelled, KNM is not going down the drain. That's because it has a very manageable net gearing of less than 20%.

The big danger I see is Borsig's RM1.6bn goodwill. KNM will have to ensure that Borsig is continually profitable in order to be able amortise that down over a certain period properly. If Borsig suddenly turns unprofitable, then yes, KNM is in the hell hole as that amounts to 90% of KNM's shareholder funds being wiped out instantly.

Part of KNM's rapid selldown a few months back was due to the forced selling of over 70m shares of Lee Swee Eng (the controlling shareholder) owing to the collapsed in share price and margin calls, and a subsequent selldown by Fidelity. The forced sale basically took out just 2% from Lee's stake, so its not catastrophic.

Its forward PE is at a ridiuclous 3x, even Ramunia has a higher PER. I like KNM because its a volatile stock with very good free float and will be a strong proxy on a recovery in oil prices. There are just less buyers on anything to do with oil stuff now, and KNM still has a relatively high level of foreign shareholders, nearly 30% which will dominate the price trends. I think a subtle recovery in oil will push KNM through this difficult period.

p/s photo: 2r

Risks Spreads To Emerging Markets

Emerging-market sovereign credit spreads came under extreme pressure Wednesday as a sell off in global stock markets intensified due to growing fears of recession.

The spread on J.P. Morgan’s emerging-market bond index, the EMBI+, broke through 700 basis points for the first time since March 2003 and is currently trading at 713 basis points over Treasurys. That’s up a hefty 33 basis points on the day and a massive 84 basis points from Friday’s close of 629 basis points.

“Another day of rising risk aversion that has seen emerging markets come under heavy selling pressure,” said analysts at RBC Capital Markets in a note to clients.

In sovereign credit-derivative markets, Russia and Turkey were among the worst hit, with their credit default swap spreads, a key measure of credit risk, widening significantly, a move that suggests investor sentiment toward them has deteriorated.

Five-year CDS on Russia widened around 64 basis points to 811/831 basis points. The price means it now costs $821,000 a year to insure a notional $10 million of Russian bonds against default for five years, up from $757,000 Tuesday and $517,000 a year ago.

Turkey’s five-year CDS widened to 684 basis points, compared with Tuesday’s close of 624 basis points given by Markit.

Comments: Risks have now spread to emerging markets. Russia and Turkey are first to get whacked. Safe to say that these developments would continue to override sentiment in all emerging markets. While we can argue that countries with healthier balance sheets such as Malaysia, Singapore, Taiwan and the like may be shielded somewhat, the overriding sentiment will tend to ignore such facts. Those with iffy balance sheet will be hurt most. The massive volatility in currency markets will bring forth a few major company "failures" such as Citic Pacific's huge currency linked losses. When currency moved as it did over the last two weeks, we are bound to see massive losses incurred by certain companies, hence brace yourselves for some major bad news affecting sentiment further. On the companies front, the markets will downgrade companies that rely on debt a lot to fund their acquisitions (such as KNM) as rolling over their loans might present a problem. Stay away from companies that are highly geared if you must hold stocks.

p/s photos: Go So Young