Crash stock: Acma 5 comments

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Acma is one of the oldest listed companies on the SGX, being listed in the then-SES in the late 1960s. Its original business was in the manufacture and distribution of home electrical equipment such as refrigerators and air-conditioners; when this became unprofitable due to uncompetitive cost structures, it diversified into various businesses and ventured into post-communist Russia in the 1990s. Eventually, its principal activities included various distinct segments including: (i) manufacture, sale and service of home electrical equipment; (ii) distribution of communications equipment; (iii) M&E contracting servies for buildings; (iv) trading. Its glory years were in the mid-1990s, when revenue reached S$500-600M with net profit reaching $50-70M. It reached over $10 at its peak, split and still traded in the region of $4 then; it enjoyed institutional ownership with substantial holders in foreign pension funds and insurance funds (AIA); it was part of the FTSE Singapore Index. It was a semi-blue chip.

The purpose of this writeup is to illustrate firstly, how bad corporate strategies and dilution of corporate energies can lead to the demise of a hitherto sterling corporation; secondly, the perils of doing business in emerging markets; the last issue will be left till the last paragraph.

In retrospect, the hastiness to build a platform for recurrent earnings, combined with bad timing, led to the downfall. Over 1995-97 the company put in an aggregate capital expenditure of >$200m (mainly financed by borrowings), equal to its equity, mostly in expansion in Russia through acquisition of food businesses (it became the sole franchisee for Delifrance, KFC, Pizza Hut, Haagen Daas under its new food segment) and then Russian property (shopping centres etc). Another big expansion project was its development of its plastics and tooling business which it grew by pure acquisitions to 8 factories by 1998 spreading across to Malaysia, China, Latvia, Slovenia and Mexico. The learning curve in so many new industries probably contributed to its eventual troubles, but undoubtedly the key trigger was the Russian sovereign debt default in 1998 and the subsequent devaluation of the rouble by 30-40% within a year. The Russian economy would not recover for the next 4-5 years following the debacle and meanwhile Acma's Russian operations suffered writedowns and business decline. In 1998 alone, the company wrote down ~S$90M in investments, followed by another S$25M the following year. That was about half its equity. As late as FY01 the company had to write off S$20M worth of bad receivables in its badly declining Russian operations.

Then in 2000, the company announced that it would convert itself into an internet company, planning to spin off or close down existing non-internet operations. It had stakes in six Internet sites which it claimed it planned to list within a year or two; these stakes were built up mainly through acquisitions: Russianscientists.com (website for hiring or placement of Russian engineers and scientists), Propertybuyer.com (a joint venture with property giants Far East Organization, FCC and Wing Tai), Acmabooks.com (online bookstore), Conduit (NZ-based online retailer of IT goods), Wiredhub (engineering and communications hub for broadcasting) and Netlearner (online learning). That led to some excitement, but as we all know now, the dot-com collapse happened pretty soon after. It was one hell of a bad timing on the part of management, and a desperate measure to regain market attention, which caused it to tank even further, as well as diluting management focus. Eventually, the company had to make "provisions for costs relating to the rationalization of the Group's internet businesses" (ie. another set of investment writeoffs).

Over 2001 till now, the group has been loss-making. It appears that from a case of extraordinary losses in 1998 (due to the Russian rouble debacle), corporate provisions and writeoffs relating to its various diversified investments had become recurring items on the P&L statement. In Russia, it discontinued its restaurant operations, as well as consumer plastics and car garage operations. In Australia and Singapore it shut down switchboard factories and electronic distribution companies. It also eventually had to scale down its tooling and plastic moulding operations, shutting down plants in Malaysia and Mexico after years of sustained losses with no turnaround in sight. And the last few years were bull years! What is strange is that all the troubles had been originated with the poor decision-making of a long-time management led by Quek Sim Pin, which had helmed the group so well in the 1990s as it became seen as an investment-quality stock.

It appears that the company is still struggling with its high gearing up to this day, even after an astonishing 7:2 rights issue in late 2001 at the then-heavily discounted rights exercise price of 9.5 cents, which contributed to mass investor confusion and anger at having to put out additional funds to recapitalise the company and bail it out from its various imprudent investments.

A look at some figures to get a perspective of the degree of shareholder value destruction: in 1993 the group's market cap was worth S$900M; even when the 1993 super-bull had abated, the group's market cap was still in the region of S$500-600M in the mid-1990s. Today it is worth under S$50M. That's a drop by more than 10 times, proceeds from rights issue notwithstanding.

Now for the last lesson. Acma was one of Oei Hong Leong's investments; OHL is known as the man with the Midas touch and there are many who ape his purchases. But the media tends to publicise his successes (Natsteel, Jurong Engineering), but his investment losses are obviously less newsworthy, thus leading to the public perception of his infallibility. China Strategic, OHL's investment vehicle, bought into Acma in mid-2000 and continued accumulating through the year as the group announced their Internet ventures. By the next year or two China Strategic had sold out at huge losses. Probably it cost him several million dollars. But the proportion of these losses to his overall fortune must have been insignificant, compared to many investors who appear to have bet big-time with him, using him as their confidence shield and averaging-down justification, and lost a big part of their money as a result. Thus it is that we should use "guru buying" as a guide, but never a sole justification, for buying or holding.

References:
(1) Shareinvestor.com archives on Acma