by winston » Tue Jul 29, 2008 12:01 am
Not vested.
From Business Times:-
Asiatic does itself disservice
By CHEW XIANG
A COMPANY - with market cap at just S$30 million - says it has won a deal worth up to US$475 million over 99 years, or US$4.8 million a year.
The market barely noticed - trading volume increased slightly, but the share price still hovered around the 13-cent mark.
It's easy to raise an eyebrow at energy and fire protection equipment firm Asiatic Group, the S$30 million company that made such an announcement on June 25. The headline figure is a massive 22 times the company's market cap. Put another way, that's like SingTel saying they've secured a $1.3 trillion contract. (Just to be safe - they haven't.)
How did Asiatic figure their way to that enormous sum? According to management, inflation protection clauses essentially balance the discount factor applied to future revenue flows, which allows them to simply multiply 4.8 by 99, without having to give a heavy discount to money received in later time periods.
But a discount rate involves more than just inflation - it's also an estimate of the uncertainty of future money flows. That means it should include some element of the project's risk - of which there are many.
For one, the contract was secured in Cambodia - a country that only last year received its first credit ratings for its debt. Even then, the string of B2s, Bs and B pluses it got puts it considerably below investment grade. A sum of US$4.8 million a hundred years from now is just US$38,000 today when discounted at 5 per cent per year. Most advisers would put Cambodia's risk at a lot more than 5 per cent.
And second, the deal was to supply power to a special economic zone. But it's hard to think of any zone that can survive 99 years without major change. The power plant that will be built to supply the electricity - an initial five megawatts, moving on to 10 megawatts in its second year of operations - definitely won't be around in the year 2107. It will have to be replaced several times over, and that's assuming no catastrophe or unforeseen events happen in the interim. Recall that less than 30 years ago, Cambodia was mired in war and famine.
So what the company should have done, but didn't, was to have used a much more conservative discount rate to reckon the anticipated revenues from the deal. To be fair, the company said that the deal was 'potentially' worth US$475 million, but that seems no more than a fig leaf to keep the company on the right side of regulators.
Asiatic probably should not have even mentioned such an optimistic figure at all. Perhaps it felt a need to stand out from the crowd. Only last year, Asiatic hired an investor relations firm, Financial PR, to promote its stock, before recently switching to another firm. But despite the professional advice these firms have no doubt given it, the company's press release came with little or no discussion of the many risk factors that must exist in the business. It preferred instead to talk up the positives. For small companies, the temptation is to shout ever louder to attract much-needed attention from analysts, investors and the media.
But by doing so, Asiatic actually does itself a disservice. It sets the company up as an object of disbelief. Worse, it bolsters a cynical attitude towards its corporate announcements. Investors will imagine the worse - or simply ignore the stock.
That may already have happened. The market barely noticed the June 25 announcement - trading volume increased slightly, but the share price still hovered around the 13-cent mark. Recent trading volume has been lacklustre.
That's a pity. Asiatic, going by recent results, is actually a profitable and strongly growing company. For its latest financial year, net profit almost doubled to S$2.7 million and revenue jumped 67 per cent to S$44.6 million, on much stronger contributions from its quickly expanding power generation business in Indochina.
The only caveat appears to be an outstanding convertible bond programme that resembles 'toxic' bonds - bonds that have the tendency to drive a company's share price down. But Asiatic has a strong cash position and its recently announced investment in a hydroelectric power plant in Vietnam appears to hold much promise too.
It's a shame if all this got obscured by the mega million murk.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"