How do you smell a rat? PART 2

This one is much more difficult to spot than my earlier article. Seriously, until now I am not able to be very  sure. Since my article few months ago, Asia Media went downhill further - reporting a first time quarterly loss (if I can remember) and asking from shareholders for money, raising funds via rights. However, if you notice the quarterly loss is due to mainly the taxation which sometimes can only be a P&L item.

If you notice, again on paper it is a healthy company - registering 2 continuous years of profits and revenue trend continue to improve over the period. These numbers will definitely pass through any systems that only checks through revenue and Net Profit.

Asia Media Group's P&L as at 31 Dec 2012

At its today's price of RM0.14, it is trading at RM67 million valuation. Based on the Net Profit 2012 of RM11.7 million - that's around 6x PE we are getting. On the P&L above, notice the growth in Revenue...

The stories does not end there. The balance sheet is not squeaky clean but yet again if we look through there may not be much fault to be identified. Cash was at RM12.5 million while debt was at a manageable RM4.5 million.

Balance Sheet as at 31 Dec 2012

Then, where is the wrong? Nothing much that can pass through a normal investor, unless we look further. Still, I do not like the high PP&E but yet again I invested in Airasia which has an even higher Fixed Assets in proportion.

One of the favorite spot to look at - cashflow and a little bit of intuition i.e. gut feeling. As I have mentioned before, its operating cashflow vs capital expenditure. A growth company will most necessarily be requiring more cash - Asia Media seems to be so. As you can see, it is eating up cash faster than it can churn - capital expenditure for broadcasting equipment? How much does that costs?

Cashflow 31 Dec 2012

Now, I am not implying Asia Media is doing this but do you know that capital expenditure numbers can be boosted up? Say the equipment actually costs RM20 million but an arrangement with supplier can make it looks like RM50 million. Hence, on paper it can look like the PP&E is purchased at RM50 million while that difference in numbers is passed through back into the operational cashflow. That's why free cashflow is very important.

Again, I reiterate I am not saying Asia Media is doing this. The onus to check this is dependent on the auditors - not investor. Hence, as an investor we can only depend on the auditor to pass through the accounts for us to believe in. In an investment, look for a better quality auditor as in the Big 4 or at least the middle tier auditors. Names of auditors that we have never heard of sometimes can be a bigger suspect. One thing though I would like to highlight is the substantial drop in net cashflow from operations but the trade receivables did not increase much. Neither was the cash which was cushioned by the additional raising of cash from new private placements and borrowings during the year. Net total RM11.8 million. This scenario looks like a huge portion of the cashflow from operations in 2011 was even collected upfront. Where is the upfront from? Other payables? I am not sure.

I am looking through the cashflow (unaudited) for Asia Media for 31 December 2012. Notice the ones I box-ed in Orange. If you notice, the capital expenditure paid was most probably for the other payables which was extremely high the year before. Other payables to me was still un-explainable. Why other payables for capital expenditure. Shouldn't it be trade payables. For 2012, there was barely much capital expenditure being spent with a net addition of RM1.3 million. Still, I do not understand the need for broadcasting equipment with today's availability of technology capable of delivering content through the 3G, 4G and whatever not. Asia Media does not need to do live broadcast.

The rights issuance proposed is to beef up the balance sheet of the company for more capital expenditure - I presume (otherwise why?), and I am not so sure one should be confident enough to put in more money into it.

Let me show you what's wrong with Asia Media

Asia Media is a company which I was tracking, but I sensed something wrong with the company way before i.e. during the time when it was listed. But I could not determine the wrong. The financials seems attractive, but again it was too good to be true - to me. If there is a tweak in the accounts, it is a job of a pro. But recently, the company's share price dropped ridiculously. No company drops this way except that they want it to be or there are some bad unwanted news. Of course the majority shareholder sold 9% was the reason, but buyers were just waiting for him to pull the trigger. Look at what happened to the share price.

Private placement as well as the trend for the last 10 months

If you look at the P&L, it seems believable. The first section, let me tell you why. The Profit has a good trend. Its business has good revenue growth as well as Profit growth. It has very good margin as well.

The operating cashflow is very good as well. However, if you notice, the company does not generate free cashflow. It is using up all the operating cashflow that it has generated. See below. On the onset, the capital expenditure seems fine, but there are some of the trend which does not seem so fine.

The above looks like there is nothing wrong? Notice the high net cashflow from operatings against net profit. It is higher by RM30 million, if you noticed. It does not seem right. It is unusual. The net cashflow from operations in fact is higher than revenue if you notice. Very weird. Co-incidentally that one huge number is the increase in other payables. What is the RM30 million about? How is the other payables so high? It was not explained. It was not a P&L item either - which means that it does not affect the profit. Big question here...

Let me show something else as below.

PP&E increased substantially

Asia Media invested RM52.8 million into an item mentioned as capital work-in-progress of which it is a huge  73% of its total PPE. My question is if it is a work in progress and such huge number, why the need to sell by the major shareholder so early? I am sure, the owner would want to wait for the investments to bear fruit first. RM52.8 million invested. The business of Asia Media is in putting up broadcasting equipment, computer monitors for sale of media advertising space. How much do we think these equipment will costs? RM52 million? Nothing is explained here.

A RM500 million investment in the ETP

How long will the capital work in progress continue to be non-depreciable?

Capital Work in Progress - non depreciable

Hence, firstly from the much higher cashflow from operations compared to Net profit and even revenue to very high non-depreciable capital investment which is not explained, this numbers does not seem right. And I do not know where it came from.