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Saturday, June 9, 2007

CRESBLD: Commentary

I used to trade this stock before, but has since disposed it at a decent profit. Recently, there was an interest in the stock in investssmart chatbox. As I had some time this weekend, it may be worth taking a closer look to see if this is a stock that can be purchased / held from a private business investing perspective.


Quick Observations:
1. Last close $1.12 (with implied market cap of $139M).
2. Q1/07 EPS grew decently from Q1/06 EPS - 0.063 vs 0.045 or 40% growth.

3. P/E = 1.12 / 0.184 = 6.1. Looks low.
4. P/NTA = 1.12 / 1.52 <>
5. A traditional equity analyst may recommend a Buy / Strong Buy, based on the above observations. E.g. Bursa eResearch.


Quick observations:
1. I must admit I am rather worried looking at the Balance Sheet.
2. Amount due from Contract Customers has ballooned by $136M (Q1/07) - $99M (Q1/06) = $37M.
3. Total PBT (Profit Before Tax) over the same period is less than the increase, at $36M. In other words, the entire profit in the last 12 months is smaller than the increase in the Amount due from Contract Customers alone ... so, what is this amount anyway?
3. Receivables increased by $77M (Q1/07) - $55M (Q1/06) = $22M. Hmmnn ... not sure I like the look at this too.
4. Amount due to Contract Customers is very, very small, in comparison to the amounts due from the same class of customers ... again, not sure I like the look of this.
5. Payables increased. Normally, a good sign, but in view of the potential cashflow problems of this company, is this a sign that company is having difficulty paying their debts promptly? ...
6. Long term debts increased ... again not a good sign.
7. Total debts increased ... again, not a good sign, since debt has increased by $143M (Q1/07) - $92M (Q1/06) = $51M, whereas the capacity expansion (say those represented by PPE increase) is much smaller, at $15M. The debts seemed to be needed in order to provide interest free loans to 2. and 3. above, which is not usually a sign of a company with superior business economics.

Amount Due/From Contract Customers

Since this is a large and important item, let's see what the latest Annual Report (2006) has to say about this.

Quick Observations:
1. So, what do you think?
2. For me, I'm afraid I am none the wiser, as to who represents these contract customers, why there is such a significant increase, when can we expect these debts to be fully settled, has there been sufficient provisions set aside for possible bad debts, age of these debts, etc. In other words, I have many question marks about this very large and possibly most important item. Why is a most important item given so little information? Certainly, if one were to consider buying the company in its entirity, one should direct one's due diligence team to investigate in detail what this item is.

Trade Receivables

Quick Observations:
1. According to the company, the maximum trade credit term should be 60 days.
2. According to my simple Receivable / Revenue ratio check, the latest receivable averages at around 87 days, which seems longer than the 60 days ... No explanation given ... hmmnn ...
3. So, what do you think?
4. Personally, I don't like the look of this. I wonder why the company bother to state in its annual report that maximum trade credit term should be 60 days, when it is probably irrelevant here. Is this negligence by the company? Or a deliberate attempt at misleading investors? Either way, I don't like what I'm seeing here.

Liquidation Valuation

I have done 2 scenario. Both scenarios assumes that not all the asset values stated in the balance sheet are worth their stated values. On the other hand, the scenarios assumes that the entire liabilities are real, as stated in the Balance Sheet. The company is likely to disagree with my basis, but the purpose of this valuation is a personal one, to form an opinion as to the degree of "margin of safety" in CRESBLD.

Case 1 assumes 100%, 95%, 75% of Cash, Receivables (including amount due from Contract Customers), Fixed Assets less Intangibles respectively.

Case 2 assumes 100%, 85%, 60% respectively.

The results (the liquidation price per share) is shown in the Balance Sheet above.

Quick observations:
1. Liquidation prices
are well below Net Assets (NA). There are several reasons for this.
  • NA included a large amount of Intangibles ($67M, or $0.54). NA is $1.52, but when one exclude this item, the NTA = $1.52 - 0.54 = $0.98.

  • NA assumes that 100% of the Receivables and Fixed Assets are worth their stated values. Whereas, Case 1 and 2 assumes a smaller % than 100%, to provide a measure of prudence.
2. Liquidation price 1 = $0.35.
3. Liquidation price 2 = $0.06. Oh dear, so small compared to current market price of $1.12 ...
4. Both liquidation prices seemed to be trending south ...
5. I feel rather uncomfortable with the entire picture.


At last close of $1.12, CRESBLD is capitalized at $139M. If a private investor were to purchase the company in its entirity, what would the investor get in return?

Well, what seems certain is that there will be debts of $143M that comes together with the company. I'll be owning assets that I am uncertain about on its value as stated in the Balance Sheets. Worse, the entire business enterprise will be generating Profit Before Taxes that is smaller than the increase in values of certain items such as Amount Due From Contract Customers and Receivables ... Yes, the traditional equity analyst and fundamental ratios such as P/E and P/NTA looks low and compelling. Yes, many equity analyst have called CRESBLD a Buy / Strong Buy, with fairly high Target Prices. However, from a business investing perspective, I am unlikely to "buy and hold" this company, based on the above observations.

Disclaimer: The above merely represents a personal view from a business perspective investing. As a "fusion investor", I have traded stocks before based on non-business perspectives when the odds and the risk/reward ratio favors such a trade. As usual, comments welcomed on the above stock. Always use your own judgement, and invest (buy, hold, sell) at your own risk.

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