Quarterly Financial Reporting - Pros and Cons

Dr Lee Kin Wai, associate professor in Nanyang Business School, presented his findings in an article in Singapore Accountant Jan 2007. I have summarised his conclusions as follows.

Advantages

• Stock prices do react to quarterly earnings announcement.


• He then investigated and concluded on the effect of voluntary disclosure in quarterly financial reporting. He defined "voluntary disclosure" as disclosure released by management over and above the mandatory requirement in the quarterly reporting.


• The more information presented in its voluntary disclosures, the lower its cost of equity capital and debt capital.

Disadvantages

• Investors, market and consequently the management of these companies are geared towards short term focus. For those with some experience in doing business, we are aware of the great difficulties in producing results in 3-month quarterly windows but yet investors and market will measure their performance as such.


• Management may be encouraged to "manage" ie. spread their earnings over the various quarters to generate "quarter-to-quarter growth" and "beat analysts' estimates".


• Dr Lee observed incremental costs to comply in terms of human hours to prepare and approve the accounts.


• The stronger a company's internal controls, the shorter the time to close the accounts. Case for corporate governance to be strengthened.

Ban Joo's woes continue

seeking direction to a better life...

Textile firm Ban Joo & Co, whose financial year-end has been changed to September from June, reported a loss of $15.1 million for the 15 months ended Sept 30, 2007 on Friday last (as compared to net loss of $35.2 million for the 12 months ended June 30, 2006).

The loss was due mainly to provision for impairment of trade debts and losses associated with the discontinuation of operations.

The management of Ban Joo has had a really difficult and busy year given the following series of actions in attempting to improve its fortune.

• A controversial share placement exercise completed in the middle of the year saw an injection of $3.6 million and has boosted the company's cash holdings. [refer to my earlier posting http://investingwithedgar.blogspot.com/2007/06/placement-of-shares-at-discount.html] Cash and cash equivalents stood at $6 million at the end of the period. [With the company incurring a loss of about a million dollars a month, the $6million will not last very long.]
• Somehow the management managed to reduce its bank borrowings and other current liabilities by $5.7 million [ I wonder how much is the total liabilities.]
• The company announced in October that it had completed a debt restructuring agreement with various financial institutions. [I wonder how were the various financial institutions convinced of its viability.]
• Lastly, the management has also changed its year end from June to Sep. [Again I wonder why. Did I miss its explanation for the change in year end date?]

Dear Labroy and SembCorp, may I know which banks advised you on hedging?

Background - Sembcorp Marine

When the news first broke on SembCorp Marine on Oct 23, 2007, it was reported that Jurong Shipyard paid US$83m and facing unrealised loss of another US$165m.

Of course, the figure has balloned way beyond US$300m.

Background - Labroy

Labroy is the other company who caught the forex superbug. It reported forex losses of $167m in its third quarter, but it also disclosed that it had entered into forex contracts running into billions of dollars.

At the time, Labroy said that it had entered into derivative financial transactions to sell euros and purchase US dollars 'for the purpose of hedging against currency exposures in relation to anticipated euro monies coming in the next three years'. These future receipts arise from the contracts for the construction of two heavy lift jack-up vessels that Labroy secured in March 2007, for a total combined contract value of 283.6 million euros (S$567 million).

Is there a severe mismatch in the size of hedging against what Labroy is receiving. So is the company really hedging against a forex exposure or are they involved in currency speculation?

When I was a rookie in the private banking many years ago, we were constantly reminded of "no surprise culture". If we had made a mistake in effecting a client's instruction or when a client's investment has gone awry, we are to inform our superiors as soon as possible. Time is the essence. We should attempt to cut the position asap to limit further exposure.

In reality, there could be people who attempt to sit on a mistake and pray that the market should reverse and move in his favour. The losses would keep piling up and snowball into an avalanche!!!

In summary, solve the problem first when a problem arises. Witch hunting can come later.