Mistake in YFG

I have made many mistakes in investing and this time around is again due to my carelessness. Buy good companies, not bad ones.

I am hence selling YFG.

My take on YFG's issuance of convertible debt

Here are my take on the redeemable convertible debt issued by YFG. One should read in detail the disclosure provided through Bursa. I should say this issuance is highly complex and one of the more complex notes (debts) that I have encountered. It is definitely issued and negotiated by people whom are experienced and knowledgeable on this topic.

As a start, let me go through the need for YFG to raise this. It definitely needs restructuring of its balance sheet as well as taking care of its growing debt. To go to the banks and get new loans, I think is almost very difficult given the scenario of its balance sheet. It will also face a lot of problem if it is going to the debt market - probably rated as junk.

But one of the reason which I took notice of this company is its ambition. YFG has faced countless challenges taking over a very difficult company. One does not discover just a single cockroach. If one cockroach is found, there are usually more.

With that I would say the RM100 million debt deal is a good option, although not fully ideal. This is because it can now fully concentrate on getting its business dealings moving forward rather than worry over the financing portion besides the very friendly interest rate of 2%. There is however no free lunch - do we think there really is one? Why?

The notes holder are given the option of converting the notes at a sweetheart deal i.e. 80% of the average closing price of the YFG share on any 3 consecutive market days during the 45 days prior to the conversion date - see below or a fixed option as below. (now you know why I said it is a mouthful to comprehend given the complexity and thoughts that are put into the deal). The conversion is however subject to approval from the company and/or shareholders depending on various situations.

Conversion terms of the notes

To control the conversion so that they are not at too low a price, there is a clause for redemption as below. Well you can do the calculation...

What other things to look at? Well, in the event the notes holders (and assuming that the notes are fully subscribed) are given the option to convert the shares and at 80% of its current market price, they would end up with a very significant stake of more than 70% in YFG.

My thoughts - the RM100 million approval needed for shareholders to make the decisions in a single general meeting is way too high as it does not need the amount now.  YFG also need to explain better why it needs shareholders to approve RM100 million. I would recommend to change it to approval for RM50 million with further option for  a further RM50 million in another session.

What are the risks and weaknesses in this deal to shareholders?

• YFG could have raised additional funds but giving too much to the notes holders with an option of a cheap equity entry into the company;
• 5% arranging fee is also quite high;
• YFG is raising funds that it does not need and again giving away too much, hence too much dilution to YFG.

The benefits?

• The 2% coupon rate is low and would not affect its financial cashflow as opposing to being financed through banks;
• Deal would strengthen its balance sheet;
• Funding is almost assured for the medium term.

Sold NTPM and bought YFG

I have just sold NTPM and bought YFG (what a stock to buy???).

I have no particular strong (fundamental) reason to buy YFG except for the recent announcement which causes some quarters grow weary of the company. The par value reduction should not cause drop in share price as there is no negative impact towards the counter.

Don't think there will be a RTO (of course I can be wrong) but I felt that the reason there was a par value reduction is to strengthen the position of the company. I felt that because of the accumulated losses that the company had experienced as well as the discount on shares, it is susceptible to PN17. (Read in what situation it can be in PN17 here)

The one area under PN17 which the company is very susceptible is the less than 25% of the issued and paid up capital of the company. Hence, by them reducing the paid-up capital, the chances of it getting to PN17 should be lower.

The other reason is that it now can raise private placement at below 10 cents as previously with par value of RM0.10 it may need to raise their funds at the minimum par value. Issuing at a discount would be much troublesome. Now the new proposal is for par value reduced to RM0.02.

In any case, there should be no reason for me to buy as there are no fundamentals except that the company has a very low market cap and being a penny stock (hence high volatility).

The other thing is that it does seem to progress with a new Chairman and some Directorship change. Am just wondering what takes them so long??? In any case, the new guy in charge of corporate seems to be better. Now for the real business!!!

I still think it will need to raise funds to strengthen its financials and then move forward.

What happened to YFG?

I blame it on myself to even consider it as this stock is highly risky. Firstly, if you look at the below which was last year's annual report I thought that it is a cheap company with its new management having a view to make things right.

The front page of the Annual Report says, "Engineering Change". Two years before that, it did change most of its management, major shareholders and the way they do business. The past management and owner were parties that are connected to a political party. Hence, in usual cases contracts were signed through that means but with poor management.

With the takeover, I was thinking that it could have changed fast. It definitely has proven that is not easy to turnaround a company even with the change in management, change in name and changing the way business is done. In fact, they were so adamant to change that they changed to a Big 4 auditor (may not be a good thing). How many sub-RM100 million companies in Bursa has a Big 4 auditor?

With this, I thought since YFG is in a space where there are opportunities, it would have a good chance for growth. But the company's past probably still haunts the company. If you look at the accounts, its biggest challenge is the amount due from contract customers.

I am not so sure whether these were issues that were brought from the old management. If this is, then their due diligence were not done proper. They were probably too keen to rescue the company from collapsing. Just look below.

I am pretty sure that YFG cannot afford the hit totalling that amount of RM20.908 million, as if it does the company will go under PN17. Usually, if it potentially is a bad debt, many parties may opt to take the hit slowly - I think this could be the case for YFG. As YFG has substantial projects in hand, I would think that they would be able to absorb the impact especially where they have stronger major shareholders now.

But it will take a longer time to recovery. And not as fast as I would have envision.

Probably for the company, the fastest way for it to get back on track are just to do these 2 things:

- raise more capital - capital injection via private placements or another rights. It may also consider acquisitions of contracts (but at this traded price, probably not the best thing to do for now);
- write off whatever that is doubtful.

There is no point dragging over these issues as its business continuity is at stake.

And I think the reason for the health reasons for the CFO to retire is a bit coincidental judging from the amount mistakes on this case i.e. underestimating the amount to write off from one of the projects which ran into a change in management, non-ability to address the qualifying statement by KPMG early and the poor cashflow management as well as having to suspend the stock trading due to the company's quantum of impairment.

YFG: If it is a bet on a penny stock, this could be it

Penny stocks have again made some headways. I though am very careful at most of them. Some are really bad stocks with no directions. Some are even worse, as they do not just have no directions, over time, it possibly could be a stock that may be in trouble. Some though are gems and if we do detect them early, they are much to gain from. In this group, these companies have decent businesses, priced cheaply, not in financial trouble and definitely if the company's execution is continuing to be strong, one day investors (or speculators) might just take notice. Opensys is one of them although when I wrote of them, nobody took notice. Another, which has potential and was in trouble until a rescue was made is Silk Holdings which sold its Silk Highway to IJM. I did not write anything about this one though, but really I saw the growth potential in the concession at that time.

There is a new one which I am just taking notice. It is called YFG, formerly known as PJI Holdings. While I am just trying to find a trend, I could not see one except for the followings:

- revenue trend is on the increase;
- it has a changed in management and I believe in some of the people behind it to do the right things;
- it was a poorly run company, linked to a politician whose party is on the decline, hence without the political influences it was of no use to the investors at that time.

Revenue trend at the increase

If one is to look below, YFG had a nice steady climb towards FYE2013 and towards its last 3 quarters, it has made significant progress for FYE2014 - which can be seen in the following 2nd diagram.

Why is then the margin so low? This is for me very hard to understand. There could be more than one reasons to it. Firstly, because of the company was in trouble, it has to slowly write-off some of the bad debts, which one may not be able to notice in the accounts Or, the management themselves do not reveal. DO not ask me why this happens, but let's just say it happens. Even auditors sometimes may close one eye - the largest among them. SHIT happens, OK. This one is not shit though as the balance sheet shows that at this moment it is manageable, hence the auditors may just let it go. (This is something which I am not able to qualify by looking at the accounts for this one)

Secondly, it could be another case of building the momentum towards a better company. When an acquisition takes place, it needs time to adjust and phase off the dead woods. Hence, for the first few years, operational costs may even be higher rather than lower, as the company may just need to have 2 person to do 1 person's job as it is just waiting for the dead wood to resign.

3rd quarter results for FYE2014

Thirdly, it is still a poorly run company. Sometimes, although there is a will and idea, it may not be executed as plan. Look at MAS and many other companies that were rescued time and again.

YFG though, to me may not be that type as it is in a space that is seeing some growth - electrical and mechanical engineering for buildings, civil etc. Over the last few years, Malaysia is seeing lots of activities in this space due to domestic driven initiatives by the government - i.e. MRT, WCE, other rails etc. One can notice that in YFG's revenue as well and it is not stopping at now. YFG as I see it is looking for growth - as can be noticed in its MOA for the small hydro power plant in Indonesia.

And if the management manages to turnaround the company, which I am putting some bets on this, it will not be a RM70 million company, where it is trading at for the moment.