©The Star
(Used by permission)
By Tee Lin Say
Transmile will need to brace itself for a long, choppy ride before it swings back into favour.
WHAT does air freight carrier Transmile Group Bhd have in common with Malaysia Airlines and UEM Group Bhd? An odd comparison you may say but all three have risen to the stature of investors' heart–tugging sweetheart stocks and later, crashed right into their list of most loathed owing to some hard–to–forgive missteps.
Notably, both the government–linked companies have only recently managed to regain investors' confidence but not without some gut wrenching, painful, and tedious measures and a management overhaul to regain their integrity and reputation.
It took just under ten years to get to where they are today from their fall from grace.
In short, Transmile will need to brace itself for a long, choppy ride before it swings back into favour.
Standard & Poor's in a recent Asian Market Commentary says the “odour of corporate governance issues is likely to permeate the market and raise the risk premium for Malaysian issues.”
Still, it points out that by and large, investors are likely to shrug off the news although there may be some near–term underperformance given the market's out performance thus far this year.
That prognosis appears, so far at least, to be holding up in the current market environment.
The herd instinct
A comparison of the performance of Transmile's stock with the composite index reveals that the former has pretty much outperformed the market's key barometer throughout 2000 (except for 2001) to 2006.
The enthusiasm was palpable as it reached its peak of RM15.20.
Many research houses, both local and foreign, continued to set soaring price targets of up to RM18.40 given its exposure to the burgeoning air cargo industry overseas.
The list of pedigree investors in Transmile namely the Kuok Group and large global fund Capital Group International Inc also posed as another sweetener for investors to scoop up the stocks.
“It's called the unconscious herd instinct. The market essentially reflects the crowd's view.
“When research houses are upbeat on a stock, most others tend to follow suit. And when investors are buying into a counter, others too think it must be a good idea.
“The recent episode of Transmile, however, displays the flaws or dangers of following the herd,” says a seasoned investor.
Caveat emptor, he says, should always be the preferred philosophy.
In stark contrast now however, a quick check with Bloomberg reveals that most analysts have downgraded their recommendation on the counter to “sell” with target prices as low as RM5.
Yet, there are a few contrarians who are maintaining their what–seems–like lofty price targets until the completion of the special audit.
The events unfold
The signs of something afoot began to appear over a month ago.
In early April, the company announced that it has appointed Robert Hyslop as group chief operating officer effective May 2 this year.
End April, Transmile said it had failed to submit its audited financial statements for financial year ended December 2006 within the stipulated time frame as its external auditors Deloitte & Touche were still in the midst of finalising the statements.
Bursa Malaysia had rejected the company's application to extend the timeframe for the submission of the financial statement.
On May 7, trading in the shares of the company was suspended.
It was announced that the board had concerns as to the reliability of the unaudited consolidated results announced in mid–February and that the company's auditors were not able to obtain supporting documents from the management on certain transactions to satisfy themselves on the fairness or validity of those transactions and that the board has commissioned a special audit.
(Deloitte & Touche has been the auditors of Transmile since 2000. Prior to that, in 1999, the auditors were BDO Binder.)
And while the news evidently rattled the market, many pundits opted to wait for the results of the audit to toss their judgement.
That happened on Wednesday when the company revealed the findings of the interim report of the special audit carried out by Moores Rowland Risk Management Sdn Bhd.
The revelation, as JP Morgan put it, confirms the worst fears. The preliminary findings point out that as much as 36% and 30% of Transmile's revenue in FY05 and FY06 were overstated; in the event Transmile fully provides for this overstatement, it could reverse its pre–tax profit of RM 120mil and RM207mil in FY05 and FY06 to a loss of RM77mil and RM126mil respectively.
It needs to be noted however that the special audit has yet to be completed.
The stock was suspended pending the announcement. Investors didn't waste time offloading the shares further when it resumed trading on Friday which sent the counter reeling.
From end–April to date, the stock has lost a market value of a whopping RM1.89bil.
Lessons learnt
A former regulator says that in light of recent cases such as Transmile, GP Ocean, Nasioncom and Ocean Capital Bhd, it may be good to highlight the whistle blowing provisions and urge those who have information to cooperate with the authorities.
Datuk Seri Megat Najmuddin Khas, president of the Federation of Public Listed Companies Bhd and the Malaysian Institute of Corporate Governance (MICG) refers to it as an unfortunate incident and has urged the authorities to act fast.
However, he says, such aberrations could happen in any markets, even in those with the best systems and what is left to do is to have an effective and proper system of implementation and enforcement of laws.
Moulding a new era of integrity also means the penalties imposed on those who flout the law should reflect the crime.
An astute market observers agree. “It is not about putting in place more rules and regulations. We already have all of them. What we need is higher penalties to deter such wrong doings and raise the bar on corporate discipline.
“Most of the time, the transgressors get away with light penalties...,” says an observer.
Number crunching – another awakening
The Transmile issue once again sparks furious discussions on the gospel of honest number crunching – a debate that was triggered not too long ago (or so it seems) in the 90s on the back of an avalanche of accounting scandals involving Enron and Worldcom to name a few.
“There is a wave of accounting issues that need to be sorted out and this latest incident underscores the urgency with which the authorities need to tackle the issue,” says a senior accountant in a major accounting firm.
He adds that generally speaking, auditors may sometimes be pressured by management to complete an audit check within a limited period of time and that too, for a relatively small fee.
In Malaysia, like most other countries, there appears to be a good amount of lowballing in audit pricing. (lowballing is the practice whereby auditors charge initial engagement fees below cost to obtain business. It is largely criticised as it may reduce competition in the audit market as well as impair audit independence).
“The regulators need to put in place a system to deter lowballing and ensure fair audit pricing. The fee needs to commensurate with the scale of work that's required. So much rides on the auditors' words ...,” says a seasoned auditor.
“The auditor's role is to add to a sense of scepticism. Management should still be ultimately accountable,” he adds.
According to Transmile's 2005 annual report, auditors fee totalled RM73,000.
Industry observers point out that it is much lower than the industry average and more so for a company which generated over half a billion ringgit in revenue for that year.
Accountants polled by BizWeek also point out that while auditors should be accountable, it is near impossible for them to go through every single invoice for the entire financial year.
In other words, they're more akin to watchdogs than bloodhounds. As such, it may be unreasonable to expect them to provide a guarantee as to the total reliability and accuracy of the accounts.
Still, the expectation is that auditors are required to provide a true and fair view of the state of affairs in a company.
Another issue that should attract some form of activism, says an observer, is that minority shareholders should start to pay more attention to the appointments and resignation of auditors.
In fact, the frequency of such changes of auditors so far this year is indeed unusual.
While the reasons for such changes may be straight forward, it may also be a result of some differences between management and the external auditors over the company's finalised accounts.
“Some probing on the part of minority shareholders can shed light on the matter and hence, quell suspicion,” says an observer.
The Government's February 1999 Report on Corporate Governance recommended that listed companies be required to circulate to shareholders the auditors' representations in respect of their reasons for resignation or refusal to be re–appointed.
However, the recommendation has yet to be implemented.
How will Kuok rough it out?
The Kuok Group emerged as controlling shareholder in Transmile after acquiring the stake in 2004 via private vehicle Trinity Coral Sdn Bhd. Many viewed the group's involvement in Transmile purely as an investment and, as such, were not surprised that the management of the original team was largely left in tact.
In fact, many who actually run Robert Kuok's businesses are not linked to the family empire but are professional managers.
Transmile fit in perfectly with the group's transportation empire which includes shipping companies Malaysian Bulk Carriers Bhd and Pacific Carriers Ltd and an intra–Asian land logistics operator Kerry Logistics Network Ltd.
Standard & Poor's says that the Kuok Group may have been keen on Transmile to tap the synergies with Kerry Logistics as the former is an airfreight specialist and the latter's strength is in land logistics.
The agency says that the event hurts the Kuok Group image “even if they were not involved and are the ones to have initiated the current investigation.”
To ensure some form of operational smooth sailing under the current rough tide, an executive committee has been formed to assume the authority of the chief executive officer.
The executive committee is chaired by Kuok Khoon Ho and comprises two other members of the board – Tan Sri A. Razak Ramli and Datuk Abu Huraira Abu Yazid.
All three exco members are non–executive directors.
Ong Teng Ping, a director and the group general manager of Chem Quest, a subsidiary of PPB Group Bhd, has been seconded as Transmile’s acting chief financial officer.
The move has led to the belief that the Kuok Group is intent on rebuilding the group's business and image, although there is general consensus that it is in for a long, bumpy ride.
“Re–positioning what is already a very competitive air freight business will be a challenge which we feel will take at least 12–18 months before we some tangible results,” asserts JP Morgan in a recent report.
The foreign research house also says that if the preliminary numbers disclosed by the special audit is a kitchen–sink exercise, then it reflects the Kuok Group's conservative approach as it assesses and takes control over the business: “The Kuok Group ... is now choosing to kitchen sink everything that looks doubtful and then write back legitimate numbers later when they have fully familiarised themselves with the business.”
The research house further points out that it could be in the interest of the Kuok Group to accumulate shares in the market “especially if they still believe in the business and the fact that they own only 17% of the company.”
In a note to Bursa Malaysia, the Kuok Group had stated that it is still committed to the business and that day–to–day operations will still be pursued despite the absence of the CEO and CFO.
Many share the notion that given the fact that there may be a wide gap between Transmile's actual profit situation and what the market believed earlier on, resurrecting the business may appear to be a Herculean task.
One house even goes as far as to say that the company may likely never move back to the premium it enjoyed.
So, as Transmile shifts from darling status to governance hawk's corporate punch bag, the question that begs itself – Will seasoned and shrewd entrepreneur and South East Asia's wealthiest individual Robert Kuok be able to turn the tide in favour of the company?
Credibility quagmire
Shareholder Activism
by Abdul Wahab Jaafar Sidek
QUALITY and reliable financial reporting matters. Financial reports demonstrate
a company’s accountability to shareholders. It is not a game of “nods” and
“winks” among directors, auditors, analysts and investors for continued good
fortune of a listed issuer depends on clear, unambiguous financial statements.
For a listed issuer that fails to provide meaningful disclosure to investors
about what goes on inside, a damaging pattern can ensue. The bond between
shareholders and the company is then shaken and the trust that is the bedrock of
our capital market, will be severely tested. Unreliable financial reporting can
create distrust and distortions.
Auditors have the right to stand up against the pressures of wrongful financial
reporting. They have to continue to function as the ultimate guardian of
investor interests and corporate accountability. Investors can rely on directors
to exercise proper stewardship of the company and assure the integrity of
financial reporting.
Transmile Group Bhd's board recently announced the special audit findings by
Moores Rowland Risk Management Sdn Bhd (MRRM) on May 30.
At the time of the board announcement, MRRM reported that for the financial year
ended Dec 31, 2006, invoices were raised for purported services to 20 companies
(comprising the 18 companies identified by Messrs Deloitte & Touche (D&T) and
two additional companies identified by MRRM) totalling RM333mil, representing
30% of the consolidated revenue stated in the unaudited consolidated results
announced on Feb 15. This may result in an over–statement in the consolidated
revenue by RM333mil.
Trade receivables from the 20 companies amounted to RM236mil. The special audit
findings revealed that invoices for the 19 companies including 17 of the 20
(referred to above) amounted to RM197mil, representing 36% of the audited
consolidated revenue of the company for the year ended Dec 31, 2006. This may
result in an overstatement in the consolidated revenue by RM197mil. If the
assumptions for full provisions were adopted relating to the revenue recorded in
the above companies, the adverse financial effects could be as follows:
• The unaudited consolidated profit before taxation is expected to reduce by
RM333mil for the year ended Dec 31, 2006, which would turn the unaudited
consolidated profit before taxation for the year of RM207mil into a loss before
taxation of RM126mil; or
• The audited consolidated profit before taxation is expected to reduce by
RM197mil for the year ended Dec 31, 2006, which would then turn the audited
consolidated profit before taxation for the year of RM120mil into a loss before
taxation of RM77mil.
Transmile has yet to meet its deadline to hold its AGM before June 30. Its
credibility quagmire will pose several questions as it is the key underpinning
investor confidence.
How effective is the audit committee, which is charged with the responsibility
of monitoring financial reporting?
Are the members of audit committee effectively equipped, independent and
competent, with the necessary skills and experience to deal appropriately with
the situation?
How is the board going to clarify to shareholders its failure to meet the
deadline and credibility quagmire?
More questions on stewardship will also be posed such as:
• Why have the independent directors, a majority in the audit committee
not detected this problem of wrongful invoicing?
• Why aren't there effective procedures taken to verify trade receivables
and to identify trade debtors annually especially for the year–end audit?
• Are the internal auditors playing a role in such verification and
identification of trade receivables (or trade debtors)?
• Why was this matter not reported in the company’s monthly management
accounts or was the matter overlooked?
• Are the major aspects of the company’s system of internal control
adequate?
• Has the board taken a tough enough line against person(s) responsible
for this failed oversight?
These are answers that shareholders will want to get from the company. Directors
should do well to make sure that they have ready answers. The answers must be
factual. They need to handle this matter and ensure integrity. What shareholders
need most is a full and appropriate disclosure including that of the 20
companies.
The question is why were they not detected earlier in debtor circulation in the
previous year? Anything short of what shareholders already know in the market
place, could affect their view of the Company and its prospects.
This situation calls for complete openness of the Board. All these are aimed at
restoring investor confidence in financial reporting and related controls by
improving accountability and transparency.
This is also a situation for reflection, not consolation but could be atrophied
the Company’s real worth and shareholder value for investors.
MSWG is of the view that both Transmile Board and auditors need to work hand in
hand in ensuring that the audited financial statements are not only prepared on
time for the Company’s Annual General Meeting (AGM) but reliably in accordance
with approved accounting standards in the best interest of the Company and
stakeholders.
The condition for good corporate governance is nothing less than the Board’s
vigilance to protect the interest of not only shareholders but all other
stakeholders.
• Wahab Jaafar Sidek is the chief executive officer of Minority
Shareholder Watchdog Group