Tranmil's accounts for FY2006 may have to be re-stated

Tranmil, one of the darling stocks listed on Bursa, was sold down heavily today on news that its accounts for FY2006 may have to be re-stated. Its auditors, Deloitte & Touche were “unable to obtain relevant supporting documentation from the management on certain transactions relating to the trade receivables and related sales and additions to property, plant and equipment so as to satisfy themselves on the fairness or validity of those transactions.” The company has also commissioned a special audit to examine the reliability of the unaudited consolidated results announced on Feb 15, 2007.

With the accounts statements sidelined, we have to fall back on 2 things, i.e. a business model which many analysts have found to be very profitable and the presence of Robert Kuok as a controlling shareholder in Tranmil (with a stake of 20%). The Robert Kuok factor should not be underestimated. His team must have done a due diligence before investing in Tranmil & has found the business model & the operation to be satisfactory. Having said that, I do not believe the accounting problem to be a minor one. It is likely to be fairly significantly in value for Deloitte & Touche to refuse to sign off the audited accounts.

The big question is whether the current sharp fall is a buying opportunity. Technically speaking, Tranmil's current fall has just broken its long-term uptrend line at RM13.00 (see the weekly chart, Chart 1 below). From the monthly chart (Chart 2 below), we can see that the immediate horizontal support at RM10.80/11.00 has also been broken through & the stock is now resting on its horizontal support of RM9.50. I believe Tranmil share price may be able to hold at the RM9.50 level. If not, then the next horizontal support will be at RM7.00.

The safer course of action is to wait for the dust to settle before buying into this stock. Tranmil, being a funds manager's stock, may see inexhaustible selling as many funds managers (especially the foreign funds managers) are not adverse to dumping a stock which is affected by circumstances such as Tranmil. Over the next few days, we will get a better picture of the problem in Tranmil in order to arrive at a better investment decision. Of course, in the process, the lowest price will never be ours. We have to take comfort in knowing that for every one who managed to buy at or near the lowest price, countless others would have had their hand cut. Let the market tell us when it is safe to buy, before buying.


Chart 1: Tranmil's weekly chart as at May 7 (courtesy of Quickchart)



Chart 2: Tranmil's monthly chart as at May 7 (courtesy of Quickchart)

Note: In this post, I have not examined the company's financial performance nor financial position.