Short Position - Labour, audited results, KAB's movements


Labour issues

ATA IMS Bhd’s slip into the red serves up some big takeaways. For one, it is a reminder to investors that companies in the red-hot EMS or electronic manufacturing services sector have their risks.

Secondly, it again illustrates the local manufacturing sector’s addiction to cheap foreign labour, an issue that the country has tried to address since 15 years ago with little progress.

ATA IMS saw over RM1bil of its market capitalisation wiped out early this week after it reported a loss of RM11.17mil for its second quarter ended Sept 30, 2021 compared with a net profit of RM52.29mil a year earlier.

The company said the decline in earnings was the direct result of its adherence to the strict standard operating procedures and restrictions of workforce capacity imposed by the government.

Notably, ATA IMS says that it continues to face manpower shortages following the government’s freeze on foreign worker recruitment since the beginning of the Covid-19 pandemic and that local worker recruitment as a replacement has not achieved the desired results.

The company reckons that things would stabilise only when the government opens foreign worker recruitments for the manufacturing sector.

This is a clear indication that companies like ATM IMS are dependent on the foreign worker labour force, driving home the point that our manufacturing sector is still largely hooked on that source of labour.

And as the pandemic has shown, the presence of large foreign labour forces in the country tend to bring about other risks such as the spread of diseases due to their living conditions.

One way out is to raise the standards of those living conditions. But in the longer term, companies need to get out of over-dependence on foreign labour, lest similar hiccups to their operations surface again, as seen in the case today.

Importance of audited results

THE puzzling case of INIX Technologies Holdings Bhd should serve as a reminder to public-listed companies when dealing with the release of financial statements.

Inix released its annual report for the financial year ended June 30, 2021 (FY21) on Nov 8, but later on Nov 11 said that its auditor, Messrs SBY Partners PLT, had not signed off the audited financial statements (AFS).

The company had planned to upload the signed-off version by Nov 12, but missed the deadline as up to that point, the auditor had yet to sign the AFS.

On Monday, Inix explained that it was under the impression from its auditor that it could submit its latest annual report to Bursa Malaysia without having the AFS signed off.

As a result, its shares were suspended, following its failure to keep to its own deadline of Nov 12 to publish the signed-off annual report.

The matter has since been resolved with the AFS signed. The annual report has been released and its shares resumed trading. But it does serve a reminder to listed companies.

In the Inix case, it explained that the reason it uploaded the initial version of the AFS and annual report on Nov 8 was due to a WhatsApp conversation with a partner of its audit firm that the company could proceed to give the accounts to the printers for printing and issuing.

Hence Inix was under the impression that the accounts were good for submission to the stock exchange. And that subsequently, the auditor had provided Inix with the updated version which implied that the listed company could proceed with the uploading of the documents.

However, clearly, the rules stipulate that only audited and signed off accounts can be presented to be filed with the exchange.

The rationale for this rule is because it is about the integrity of financial statements, which in turn allows investors to trust the information they receive about companies in which they invest in.

Sure, investment decisions are not made on the basis of financial statements alone.

Other factors do come into play: such as market conditions, competition in the industry and technological changes.

Nevertheless, when assessing the financial health of the company, the financial statements, the audited ones, remain the best source of information.

Anything less just will not cut it.

KAB’s movements​​

KEJURUTERAAN Asastera Bhd (KAB) has been making headlines since the beginning of last year.

It has announced various contract wins for electrical works for buildings, telecommunication towers as well as solar installations and operations projects.

The company has had board changes and has embarked on a number of corporate exercises.

These entailed share splits, bonus issuances and private placements.

KAB was listed on the ACE Market of Bursa Malaysia back in October 2017 with a market capitalisation of mere RM28mil from the issuance of 112 million shares.

Today, the company has more than 1.7 billion shares and has a massive market capitalisation of RM586.3mil.

The stock trades at a lofty price multiple of 72 times its earnings.

Back in April KAB’s share price had skyrocketed to more than RM1.20 giving the company a market valuation of a whooping RM1.7bil at that time.

It then traded at more than 100 times its earnings. Notably, its market capitalisation has shrunk by a third of that of value in just four-months.

One wonders if this company needs so many shares to be issued in the first place?

It does not yet report huge earnings to support those valuations. And profits still remain lumpy.

Its profits for the financial year ended Dec 31, 2020 almost halved to RM5.43mil from RM10.44mil in FY19.

For the six months ended June 30, 2021, KAB reported a doubling of earnings to RM2.94mil from RM1.55mil in the same period last year.

Perhaps investors are hoping for a significant spike in profits on the back of its partnerships and joint ventures.

Over the last four months, KAB has been piling on new contract wins and partnerships to venture into new businesses.

These include RM55.72mil in contracts for three solar projects in Thailand.

It also signed a memorandum of understanding with a Philippines-based company to build telecommunication towers, a deal KAB estimates will churn out annual revenues of RM15mil.

However, KAB’s share price has declined by some 62% since August to 34 sen each. So what gives?

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Labour , audited results , KAB , short position

   

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