'Red-flagged' firms hit by investor backlash

a good article for weekend reading and further research

'Red-flagged' firms hit by investor backlash
by Goh Thean Eu

Kuala Lumpur: Companies that were red-flagged by auditors and those that reported stark difference in their audited net earnings, saw their stocks punished by investors yesterday.

The selldown in some of the companies was systematic, as investors were wary of their long-term prospects.

Since Friday, some 16 companies either had their books qualified by external auditors, or had revealed significant variance in their audited net earnings.

From the 16, eight companies saw their share prices fall, while two closed unchanged. Shares in the other six companies were untraded yesterday.

Sumatec Resources Bhd saw its share price fall by as much as 48 per cent to close the trading day 13 sen a share.

The Sumatec warrant, which also one of the top 10 actively traded securities fell by more than 50 per cent to 7 sen.

Sumatec's auditors SJ Grant Thornton was not convinced of the company's ability to secure new contracts.

The auditor highlighted that Sumatec did not impair goodwill on its subsidiary's consolidation and deferred tax assets of RM33.48 million and RM13.15 million respec-tively.

It also added that the company's trade receivables of RM5.91 million have been long outstanding and not impaired."

I think, in most cases, the auditors are just making sure that provisions are being made on uncollectable debts. The rule of thumb today is to make provision for debts that can't be collected in six months," said Jupiter Securities head of research Pong Teng Siew.

Other notable stocks that fell include DBE Gurney Resources Bhd and Alam Maritim Resources Bhd.

DBE's shares fell by more than 5 per cent after it reported an audited net loss of RM3.71 million, more than 17 times of its unaudited net loss of RM202,000.

Meanwhile, Alam Maritim's shares fell by 4 per cent after it announced an audited net loss of RM12.9 million for the financial year ended December 2010, as compared to its unaudited net profit of RM2.2million

According to analysts, these variance between unaudited and audited numbers will, to a certain extent, change investors' long-term view of the companies."

As you can see in today's selldown in some of the stocks, investors do take into account all these. Variations like these will make investors cautious of a company's sustainability and the credibility of its unaudited accounts," OSK Research head of research Chris Eng added.

While most analysts feel that most of these "incidents" are mainly driven by companies' misinterpretation of the new accounting standards, some feel that it could be a sign of more bad news to come."

I think we can't discount the fact that it may be a prelude to bigger adjustments later," said Pong.