Muhibah- further thoughts on a trade that went wrong

Looking at Muhibah's detailed Financial Statements for QE31/3/2011, I must admit that there is two glaring items that I have overlooked- the Receivables of RM903.6 million & the Amount Owing by Contract Customers of RM386.6 million. If the latter is offset against the Amount Due to Contract Customers of RM256.6 million, then the total sum owing by Debtors and Contract Customers would be RM1.034 billion. Compared that with the turnover for QE31/3/2011 of RM394.3 million, Muhibah's Debtors' Collection Period is about 239 days. That's a serious problem.

If 20% of the above amount were to turn bad, the loss would be RM207 million. That would reduce Muhibah's Shareholders' Funds to RM372 million and push up its Debts to Equity ratio to 1.2 times. Based on the research note from Kenanga, it seems that the amount to be written off from one customer, APH is about RM370 million. As a result, Muhibah's Shareholders' Funds would be reduced to RM209 million and its Debts to Equity ratio pushed up to 2.1 times. If I paid more attention to these two items, I would not have posted on Muhibah. However, I wish to point out that my post did not end with an unqualified recommendation to buy. To wit:

Although trading at a high PE multiple & having a relatively weak financial position, Muhibah is a stock worth tracking. Its financial performance has improved steadily over the past 4 quarters. More improvement is likely given the activity in the construction and O&G sectors. The main selling point of this stock is the improvement in the technical outlook. The stock is almost at the point of starting its next upleg.

Nevertheless, I would like to apologize for anyone who has gone into this trade because of the post, especially since I failed to highlight the severe Debtors' Collection problem experienced by Muhibah.