Investing

Companies must avoid reporting bumpy quarterly profit

From my experience, my advice to all listed companies is that they must avoid reporting bumpy quarterly profit to protect their shareholders. The share price of any company largely depends on the company’s profit. When the company reports increased profit the share price will usually go up and conversely when the company reports reduced profit the share will normally fall because shareholders are afraid that the company will continue to earn less profit. Most investors do not want to own or buy shares without profit growth prospect.

Let me use Gadang Holdings Bhd as an example to explain in greater details.

Gadang reported its 4th quarter ending 30th June 2016 an EPS of 15 sen and totaling 40 sen for the year. As soon as this fantastic result was announced its share price started to shoot up from RM 2.00 to Rm 3.30 a gain of 65% in the last 3 months.

Unfortunately, when shareholders saw its announcement of 5 sen EPS for its 1st quarter ending 30th Sept 2016 for its financial years 2017, they started to dump their shares. The price started dropping by 38 sen on last trading day and it continues to drop while I am writing.

Gadang should know that its 1st quarter for the new financial year would be much less. It should have reported 8 sen instead of 15 sen for its 4th quarter and 12 sen for its 1st quarter.

It is very easy to adjust these figures for reporting. In order to report less profit, Gadang could have increased provision for bad debts, increase depreciation for some construction materials and equipment. All company auditors would be happy to see that the company is conservative.

In the 1st quarter for the new financial year, Gadang should make more profit because it has cheaper materials and equipment. Moreover, it could recover some of the bad debts. With all these advantages it can easily report an EPS of 12 sen for its 1st quarter.

If Gadang did what I said, its share price would still be climbing higher until the implementation of the multiple proposal for bonus share and warrant issues and share split. The chart below shows Gadang’s mistake in reporting the reduced profit for its 1st quarter. As a result, many shareholders are losing money and many punters have margin call.

Basing on its share price of Rm 3.00 the new share gadangprice will Rm 1.20 after the corporate exercise. The share price can easily rise because it is so much cheaper and also there are more shares in the market. Moreover, its convertible warrants will be in great demand. Gadang is an experienced contractor and should be able secure more contract works. The chart below, shows Gadang’s mistake.

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