Crash Stock: ACCS 0 comments

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With the admission of guilt of ACCS founder and former CEO Victor Tan to charges of fraud as announced in the papers today, the corporate scandal of ACCS that first erupted in February 2005 and brought the high-flying stock to the pits comes to a close. The company was once a stock market darling worth S$800M in market capitalisation but today trades at less than one-eighth that value.

In early February 2005 ACCS was trading at 85 cents, a trailing PE of 25 times. Since its IPO in 2002, it had displayed stellar performance, showing near doubling of revenues and net profits every year till then. It had the backing of the investors with the Midas touch -- 2G Capital. Its business captured the imagination of investors and traders alike --- its rapidly expanding after-market maintenance services for mobile phones captured two popular themes: the regional outsourcing story and the mobile phone theme. Its subsidiary, DMS (in the business of phone distribution), was on the verge of listing, which would bring its parent exit gains. It is amazing, on retrospect, that within one week the whole world would come crashing down.

On 18 February, the company made a late-night announcement that it was ceasing its AMS (after-market services) for Nokia in several countries, spooking the market despite company assurances ("just pricing issues") and concurring analyst reports ("impact on financials minimal, maintain target prices"). One learns to respect the movement of the market; it behaved in a volatile manner on heavy volume despite these assurances and four days later the bomb dropped --- the Commercial Affairs Department announced that it was launching an investigation into ACCS, which subsequently admitted to overstating revenue in the previous quarter "in relation to one particular contract in Singapore with a customer of the company", and cancelled its listing of DMS. In the wake of CAO and Citiraya the market was sufficiently alarmed to bring it to below 40 cents, or half of its early-February valuation. Even a stellar set of FY04 results announced around the same time, showing another year of revenue and profit doubling, wasn't much help --- investors no longer knew what to trust.

The stock was a journalist's dream in the next few months, for all the wrong reasons. In March it attracted a suitor in Singpost who proposed to take an eventual 30% stake, but this was called off after much publicity about how Singpost's chairman's and director's (Tommie Goh) ACCS holdings presented a conflict of interest. The forced selling of Victor Tan's ACCS stake (ostensibly to meet margin calls) and similar disposals by co-founder Ronnie Poh provided further corroborating signs of the company's troubles. Finally, the second bombshell dropped in May 06 with the results of Price Waterhouse's investigations into the "overstatement of revenue" issue.

The special auditor had uncovered a whole can of worms. The 3Q04 revenue overstatement was not siginificant, but refurbishment revenue and profit had been massively overstated for the whole of FY03 and FY04. The overstatement of the revenue and profit before tax amounted to approximately S$22 million and S$19 million respectively for FY03 and approximately S$60 million and S$54 million respectively for FY04 in relation to the refurbishment business of the group. One look at the figures and one knows that this refurbishment business was dodgy: what kind of business model could for example, let one earn $54M profit on $60M revenue ie. profit margin of 90%?

The net effect of this revelation was that FY03 was just a marginal profit year while FY04 was in fact a loss-incurring year. Which means there was no meaning to the earnings multiple anymore. The company had to make massive provisions to investments and receivables, reducing net asset base to 4 cents per share --- the new base for further share price consolidation.

The entry of Philip Eng, the former CEO of Jardine Cycle and Carriage, as the new ACCS chairman later in the year helped to bring some cheer to the company. There was probably a special reason for bringing him in in addition to prestige: he had been through loss of a key distributorship before at C&C, when they lost the Mercedes-Benz account. The early optimism soon evaporated, as the company continued to make further downward revisions to FY03 and FY04 losses (eventually amounting to >S$35M losses in each year!) while issuing another set of red ink in FY05. In June 05, I had written a Hotstocksnot article against ACCS, which was justified by later events.

The company's former CFO has recently admitted to corporate fraud against Nokia and falsifying financial statements, while Victor Tan has pleaded guilty to collaborating with him in falsifying claims for the repair of Nokia handphones, for faking a "thriving" refurbishment business (using company funds), and for issuing false financial statements. Over 10 others in ACCS have been implicated in this massive fraud.

What signs were there to prevent the investor/trader from entering this stock in the first place? The PE was too high at >20, to begin with. It was the pressure to maintain the phenomenal growth rate expected by the market that might have driven the ACCS management to tamper with their accounts .... the same market pressure that drove CAO's Chen Jiulin to direct speculation in oil derivatives. If one had been in the stock when the loss of the Nokia contract was announced, a cut-loss or selling into strength on the subsequent day might have been adopted hence avoiding the follow-up carnage --- a cockroach on the kitchen floor might hint at many more in the closet. Lastly, never hope ---- just react. As the spate of unfavourable news poured in, one should have known better than hold and hope for the tide to turn. Fundamentals trends are terribly difficult to turn.

References:
(1) Straits Times articles Feb till Aug 2005, covering ACCS (obtained from the Shareinvestor website)