Friday, December 02, 2005

Crash stock: Informatics 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Informatics surfaced in the news again earlier this week when charges were pressed against its former chairman Wong Tai and CEO Ong Boon Kheng for gross misrepresentation in their company's financial statements, specifically in 1Q-3Q 04, profit inflations which ultimately came to the fore in that fateful month April 2004 when the whole world came crashing down on their stock price with a series of writedowns and provisions in their 4Q04 results.

What a difference a quarter makes. Informatics had been growing steadily since the late 1990s and between 1997 and 2002 it tripled revenue from S$75M to S$200M while maintaining pre-tax profit margins at around 10%. By 2002 it was one of the rising stars among a sea of red (remember it was recession time then) with institutional investors such as Arisaig taking substantial interests. With >50% operations overseas mainly in the Asia-Pacific and Europe, built up through a series of acquisitions, the company was seen as an emerging education proxy play, a reputation much like what Raffles Education enjoys nowadays. The share price surged to a high of $1.60 in 2002.

It would never see that level again. In FY03 the company announced a near-halving of profit from S$21M to S$12M, on halved revenue to S$98M, leading to the share price halving to 80 cents. But the company seemingly recovered its operational execution in FY04 with revenue and profit growth by 9M04.

On hindsight, the FY03 operating performance collapse (halving of profit and revenue: what else can you call it?) should have been the first danger sign, and one should have been more skeptical about the recovery in 2004; earnings momentum is easy to ride but difficult to reverse.

It now appears that in an attempt to provide support for the share price amidst an increasingly competitive environment the top management of Informatics gave in to temptation and began to recognise revenue aggressively in 2004. It is now public knowledge that Informatics recognised revenue as soon as a student registered for a course, even though the course started much later. Some of these international students never actually took the course. Additionally, in certain cases too much revenue from franchises (overseas) was recognised upfront. Obviously such accounting measures boosted the company's topline and bottomline.

One should have noted the quarter in which the problems came to the fore-- the 4th. That's when the auditors come in to audit the full year results; 1Q to 3Q results are typically not audited. One sees the value of auditors in cases like this: they ensure the quality of the financial reports, much like quality control ensure the quality of manufactured products in factories.

Informatics declared provisions for bad and doubtful debts of S$27M in 4Q04, wiping out its gains in 9M04 and then some. Its net losses for the year were first declared to be S$21M but on a later revision (no doubt on probing by its auditors) was doubled to S$41M. It was found that Informatics had also overstated pre-tax profit by $16 million for the earlier three quarters. In May 2004 CAD commenced investigations into the affairs of the company. The stock was suspended prior to its 4Q04 results and collapsed from 80 cents to ~20 cents on lifting of the suspension.

Some hope arrived in the form of Oei Hong Leong and Berjaya Group's Vincent Tan who saw a bargain and took stakes in the company. Oei Hong Leong, savvy investor that he was, exited a year later when he saw that Informatics was still bleeding red ink in its FY05 results, to the tune of S$67M, this time due to impairment of investments overseas, slow franchising operations and general drop in business. Informatics was now in negative equity despite having raised funds through a rights issue to its key shareholders (ie. capital injection) earlier. Its revenue base was substantially lower, having sold off its loss-making and presumably less promising operations in Europe, although its China business, which produced a cumulative ~S$50M bad debt provision in FY04-05, was still under its umbrella (very likely that there were no takers).

Some consumer franchises take a tumble but recover due to implicit consumer trust in its brand equity. But Informatics' brand seemed to have been eroded seeing the way business in even its home country of Singapore had collapsed since the scandal broke; Singapore revenue dropped by two-thirds, even without any major disposals locally. Where integrity and consumer trust are strong elements of a company's business, as in service businesses like Informatics', a loss of these key elements often sound a death knell for the company's operations.

Informatics is today trading at sub-10 cents. Anyone who bought in 2002 at say, $1.50 would have suffered a reverse 15-bagger.

(1) Straits Times Nov 30: Informatics founder, ex-CEO charged over profit statements




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