LCL has just announced that it has identified a potential investor, i.e. KHS&S as part of LCL’s plan to regularise its financial condition.
Information on KHS&S:
Founded in 1984, KHS&S is one of the leading theme contractor in the United States of America ("USA") and they have been involved as builder in major theme parks in the world ie Disney Land, Disney World, Universal Studio, Red Rock Casino, Sea World and the Las Vegas MGM Casino just to name a few.
Since its inception, KHS&S has expanded to the Middle East, China and Eastern Asia. It has 11 major offices in the USA and its regional offices include Macau, Hong Kong, Kuala Lumpur, Bangkok and Singapore. They have completed over 3,000 projects worldwide and their profile can be found at www.khss.com
LCL will discuss, deliberate and outline the Regularisation Plan with the representatives from KHS&S on the details of LCL’s Regularisation Plan. LCL will make the necessary announcements to Bursa Securities accordingly in due course.
LCL's Regularization Plan & Hurdles to overcome
Any proposed Regularization Plan would be a tussle between the following:
1) the new shareholder, who would like to make maximum provision to build a buffer against future negative surprises;
2) the existing shareholders, who would like to make minimum provision to protect their investment; and
3) the existing creditors & bankers, who would have to agree to forego some of their debts or loans owing [plus income accrued].
I have appended the abridged Balance Sheet dated 30/9/2009 for our review. Our concern is the fair value of the Current Assets. 83% of the Current Assets consisted of Trade Receivables of RM221 million; Amount owing by Customers for Contract Works of RM154 million; Other Receivables etc of RM26 million; and, mount due from Related Companies of RM42 million. How much of these risky Current Assets can be collected?
A study of the past 4 quarters' results show that LCL has been incurring pre-tax losses totaling RM86 million. LCL attributed the losses to cost overruns and write-downs of amount owing by customers. As some of the contracts are from the Middle East, the chances of further write-downs cannot be discounted. By comparing the Total Equity of RM82 million with the risky Current Assets of RM443 million, you can see that an additional write-downs of 19% of the risky Current Assets would wipe out LCL's equity. This will determine the quantum of any capital reduction that the existing shareholders have to shoulder.
The second serious problem is how to revive many of the projects that may have stalled due to the lack of funds or the cancellation of bank facilities. A quick check in Bursa website will show that in the last two weeks of January this year, Public Bank & AMBank have both withdrawn their banking facilities from LCL.
Finally, LCL's customers from the Middle East may be looking for excuses to terminate their contracts due to the glut of commercial properties being developed in that region. Even if this problem can be overcome, the charges for late delivery can be very substantial.
Table 1: LCL's Balance Sheet as at 30/9/2009
Table 2: LCL's latest 8 quarterly results
Chart 1: LCL's latest 8 quarterly results
Technical Outlook
From the chart below, we can see LCL's immediate horizontal resistance is at RM0.33-36. If it can surpass this resistance level, it may test the RM0.50 horizontal resistance. In my opinion, the chance of LCL going above the RM0.50 level is fairly slim.
Chart 2: LCL's daily chart as at Feb 2, 2010_10.50am (Source: Quickcharts)
Conclusion
Due to the extremely difficult financial position that LCL is in right now, I believe that one should avoid this stock at all cost. Those unfortunate enough to be trapped in this stock should use every available opportunity to reduce your exposure to this stock. To hold onto the stock & pray for the best is not a good option.
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