Wednesday, March 22, 2006

Mismanagement and poor judgment cause KPS and KHSB to lose millions

Kumpulan Peransang Selangor Bhd (KPS) and Kumpulan Hartanah Selangor Bhd (KHSB) finally broke their silence 7 days after I blogged “Selangor GLCs lost RM286 million” and emailed to them and the Selangor Menteri Besar respectively. This is a good indication of their efficiency.

Dato Abdul Karim Munisar, executive chairman for both the public listed Selangor government investment arm, only decided to give his side of story when interviewed by the Star as reported today in response to the Star yesterday.

I agree that I had erroneously added up the pre-tax loss of RM97,904,000.00 by KHSB and the pre-tax loss of RM188,780,000.00 by KPS and arrived at the figure of RM286,684,000.00, overlooking the fact which I had clearly stated in the same blog that KHSB was a subsidiary of KPS.

Be it as it may, the undeniable and undisputed fact is that KPS had recorded a pre-tax loss of RM97.9 million and KHSB a pre-tax loss of RM188.78 million in 2005. Further, the profit made by KPS’s other subsidiaries or associated companies could not cover the loss incurred by KHSB.

How much is RM188.78 million? It's still a huge sum. Let’s take the development allocation of RM540 million in the Selangor government budget for 2005 as a reference point. The loss of RM188.78 million is equivalent to approximately one-third of the total development fund, about 1.5 times the fund of RM125 million for building and upgrading roads and bridges, about 3 times the fund for flood mitigation projects and upgrading drainage and irrigation in residential and industrial areas.

Karim had sought to explain that the loss of RM 188.78 by KHSB was a “one-off” prudent stand by writing down the book value of several assets in particular the assets of Brisdale Holdings Bhd and SAP Holdings Bhd, the 2 subsidiaries of KHSB. As far as the public is concerned, we need to know what had actually happened to KHSB.
Let’s have a close look at the full quarterly report of KHSB in particular the income statement, balance sheet and notes (page 1, 3, 6 and 9) as announced in the Bursa Malaysia website.

These are my comments and questions after perusal:-

Firstly, the notes in A4- Individually significant items that contribute to the loss suffered by KHSB, to be written off as stated by Karim. The provision for liquidated damages (LD) of RM55.729 million indicates that there was serious mismanagement of projects by KHSB or its subsidiaries. KHSB should explain to the public how was this huge damages incurred.

Although KHSB explains that there is a change in accounting method whereby the accrual LD has been changed to full provision for LD, this does not change the fact of mismanagement. At a glance, the full provision for LD seems to be a prudent method as suggested by Karim because it means “one-time” clean-up whereby all the estimated damages are included.

However, on second thought, it may not be so because normally only about 30% to 50% of the LD damages would actually be claimed in the property market. If only half of the full provision of RM55.729 million were eventually claimed, there would be a balance of about RM27 million to be written back in the book to contribute to the revenue or profit of KHSB in the subsequent years.

Therefore, it would be better for KHSB to write off the full sum now since it would make no difference either to announce a loss of RM188.78 million or RM30 million lesser for the moment. However, it would help KHSB in the subsequent years when the sum is, almost for sure, written back to contribute to the revenue or profit. The lesser the actual claim of LD, the more revenue or profit will be written back. This is a smart method rather that prudent method. To the layman, this is a magic show.

Secondly, the total sum of RM70.388 million being provision for impairment on property, plant and equipment, land held for development and development properties indicates poor judgment of KHSB in investment. Part of the value of KHSB business assets have to be written off to reflect the true value which could have been avoided if KHSB had been prudent in its judgment for investment earlier on.

Thirdly, the provision of RM20 million outstanding commitment of a subsidiary company of KHSB indicates another failure of its unnamed subsidiary inability to repay loans.

Fourthly, although the revenue 2005 is of RM161.037 million, there is a sum of RM148.179 million under the item “Receivable”. If this “Receivable” were directly linked to the revenue, that would mean for every ringgit of revenue in 2005, 92 sen were still in the debtors’ pocket, not in the KHSB pocket, unless otherwise that the “Receivable” comprises of old debts. If the “Receivable” were unfortunately related to the revenue, the worry would be what would happen if the debt were to become bad debt later? It does not reflect truly the financial position of KHSB. This is yet another important item that requires full and frank explanation by KHSB.

Fifthly, there is a substantial amount of interest expenses of RM31.798 million paid by KHSB in 2005. Going by the market rate, the principal loan sum should be in the range of RM300 million to RM400 million. This again raises the doubts on the financial prudence of KHSB.

Sixthly, the total assets of KHSB stand as RM1.7649 billion (non current and current assets) and are supported by shareholders’ equity of RM470 million. The remaining are borrowings by KHSB. This means KHSB is a highly geared company, relying heavily on loans, and required proper skill to manage, otherwise, it can be disastrous. For the losses incurred by KHSB, it is justifiable for the public to doubt the capability of KHSB.

Referring to the loss of KPS, Karim said that if not because of KHSB, KPS would have made a profit of RM58 million after eliminating other inter-company transactions. Well, would Karim separate the KHSB’s account from the KPS’s account if KHSB had made a profit, instead of loss, of RM188.78 million and add it up to show off KPS’s profit?

In any event, there is nothing for KPS to brag about as being the state investment arm it has the advantage of being granted concessionaire contracts and privileged contracts and alienated with state land by the state government. It should have made huge profits and not losses at all. However, the losses in 2005 demonstrate the poor management and misjudgment of KPS and KHSB in the real commercial world.

RM188.788 million is still a big money to lose. It’s time for KPS and KHSB to buck up.


burntck said...

they did not lose... part of it is already in their personal bank account... standard procedure ma...
malaysia boleh!!!

Bangsa: Malaysia. said...

With most GLCs, the focus is not on managing the company first. Every manager will start to look for lubang to make money for himself first. Cronies will try to give ideas to the manager on how to make a fast buck together. Mind you some of these ideas are really creative especially creative accounting to hoodwink the public. I must say some are so creative that when they screw the public, the public does not even realise it and even thank and praise the GLC for bringing 'prosperity' to them. Something like saying thank you for taking the effort to screw me and I like it.

Tell me if you have not heard from your associates, friends, relatives etc that I know so and so in so and so company/state body and I can kau tim for you. Or something like I abang adik with so and so , so I can get you this and that.

With this kind of mentality is it a wonder if most GLC fail big time?

Actually the trick is screw the GLC as quickly as possible while we are here. Let the next bugger take the rap. It is not so bad because the next barger will blame us and after some dilly dally, everyone will lose interest and forget we screwed them. Somemore the new barger will find ways to screw the public again. All it takes is for him to be more creative.

Lastly don't worry about being caught. The track record shows no one is persecuted onelah unless you so stoopid as to go against the government and create trouble.

Bangsa: Malaysia. said...

Hi Teng
I like your detailed analysis of the KPH and KDEB performance. Are you an accountant by qualification?

I do not have too much time to comment but will try to find time reading your blog. Keep up the good work.

Teng Chang Khim said...

Hi bangsa:malaysia,

I am not an accountant by qualifiaction but have some interest in reading financial reports and humble enough to ask around. Thank you for spending time on my blog.

Manilow000 said...

Hi Teng,

Good of you to highlight this matter in the papaers. The state government should publish the accounts for all to see.

For sure there is a story (or scandal) to tell.

Anonymous said...

Dear Mr Teng,

I think it is extremely honourable and heroic for you to 'expose' the so called failures and screw ups of our government for the good of our people and future generations.

My humble question is, when will justice be served in our beloved country? Never?

I'm sure you have more cards up your sleeves. I wish you'll up your game to down more greedy morons in our country.

Our country should be run by people who are honest and with rock solid intergrity. People should be able to question every 'questionable' decision that the government make instead of what we are today.. "ssshhh, ISA-la!", "SSHHHhhh, racial disharmony, ISA!" etc..

My sincere best wishes. Keep up the good work Sir!