The Right Timing

KLSE COMPOSITE INDEX Technical readings Elliott Wave Daily chart: By using a short-term Elliott Wave count, the KLCI continues to unfold the various degrees of the impulsive A-B-C waves of its major corrective wave (B). The KLCI closed at 1,354.38 points last Friday. Weekly chart: The KLCI's weekly wave counts were in line with those of its daily wave counts. Monthly chart: A breach above 1,332 will change the bearish scenario. The KLCI is now shifting into its next bullish phase.
Elliott Oscillator The Elliott Trigger stayed below its zero region while its Elliott Oscillator continued to stay above its zero region.
Other Indicators The weekly and monthly stochastics stayed in their respective overbought levels. Its daily stochastics slipped into its oversold level.
Moving Average Convergence/Divergence (MACD) The monthly fast MACD stayed above its monthly slow MACD. Its daily and weekly fast MACDs stayed below their respective slow MACDs.
Expert Trend Index (ETI) The readings are "neutral" for the short term and "bullish" for the medium and long terms.
Profit Taking Index (PTI) Using the original Elliott wave count, PTI displays high readings of 99 and 80 on its daily and monthly charts respectively.
Displaced Moving Averages (DMA) The KLCI stayed above its monthly and weekly DMA levels of 988 and 1,277 respectively. It stayed below its daily DMA level of 1,364.
Divergence There were positive divergences on its daily MACD, Stochastics and Relative Strength Index to the KLCI's daily chart.
Make Or Break (MOB) The weekly MOB resistance is revised higher to its overhead resistance of 1,370-1,400.
Support The immediate downside support is revised to 1,330-1,360.
Resistance Its immediate overhead resistance is revised to 1,380-1,420.

How Transmile's books were cooked

The absence of banking slips to show that cash of about US$11 million (about RM38 million) had been paid by customers directly to Transmile's suppliers of aircraft parts resulted in the whole scam coming into the open. Auditors Deloitte & Touche led by partner Jimmy Lai became suspicious when all the relevant parties — the supplier of parts, marketing agents acting for customers and the company's accounts department — collaborated to say that the transaction took place but none could furnish documentary evidence. "Even the agents and suppliers came forward and saw the auditors. They verbally verified that their customers had paid directly to suppliers on behalf of Transmile Air Services Sdn Bhd (TAS). But nobody could provide the banking slips," says a source. In normal circumstances, such documents are filed for inspection and are readily available on request by auditors. Considering that no such documents were made available, it did not take long to suspect that suppliers and agents were also part of the whole scheme to cook Transmile's books. In a nutshell, it was a well-designed scheme running for years involving some customers and suppliers and the company's top management. The modus operandi involved the agents, which are mostly RM2 paid-up dormant companies, commissioning TAS to undertake certain "services". TAS issues fictitious invoices for so-called services rendered and these are endorsed. At the same time, TAS also makes purchases from suppliers, where purchase orders are given out. In many of the instances in 2005 and 2004, the transactions were all done in cash. "But the money is taken out after the auditing period. It's as though there is a revolving fund, which provides short-term funds for such purposes. It just goes on and on for years," says the source. But the scam was uncovered when the transactions became bigger and more complex, and showed higher revenues for Transmile. The bigger the transactions, the more difficult it became for the schemers to cover their tracks. In the last two months of 2006, numerous transactions were recorded, as dealings between the company and its suppliers, the company and its agents and between the agents and suppliers. The "so-called amount" that customers owed TAS was paid directly from agents to suppliers. In TAS' books, purchases from suppliers were recorded as part of their property, plant and equipment. As many such transactions were done in the last two months, the auditors got suspicious. "It would have fooled anybody. The only thing that gave it away was when the agent, supplier or company could not provide proof of a series of transactions totalling US$11 million," says a source. According to sources, the doubts began to gather momentum when Transmile's management could not provide a logical explanation as to why the marketing agents had paid TAS' suppliers on their behalf, especially since the amounts were big and lacked commercial rationale. The auditors were unconvinced about the reasonableness of the transactions based on the documentation furnished and explanations given. Deloitte asked Transmile to prepare and furnish a movement of accounts with the agents, which never came. It finally led to the audit firm standing by its decision not to sign off the accounts without qualification. This matter came up to the board, which ordered a special audit by Moores Rowland. Nevertheless, based on special audit findings by Moores Rowland, it appears that no money laundering was involved. Instead, it was revealed that Transmile revenues had been overstated by RM622 million over the past three financial years. What was the motive for such an elaborate scheme? If not money laundering, could the motive to falsify accounts have stemmed from the need to paint a rosy picture of Transmile's growth to please shareholders, particularly Kuok Brothers Sdn Bhd? Kuok Brothers bought a 28.9% stake in March 2004 from Transmile's then CEO Gan Boon Aun, reducing his stake to the current 2.8%. Gan recently voluntarily relinquished all executive posts in Transmile but he still remains a company director and has been attending board meetings. However, people familiar with the Transmile fiasco believe it was for the self-interest of certain shareholders of the company, who would benefit from the rising share price. From Dec 31, 2001, when its share was trading at RM1.71, Transmile had skyrocketed to RM14.20 on Dec 31, 2006. It even reached a high of RM15.20 on Jan 25. With investigations and the special audit still ongoing, however, it will be premature to point fingers at any party. To investigate further, Moores Rowland has proposed that a special audit be conducted on Transmile's 37.5% associate company, CEN Sdn Bhd, and its indirect associate company, CEN Worldwide Sdn Bhd. Moores Rowland says there is a possibility of underbilling or non-billing of genuine sales to other customers, including CEN Worldwide, which is Transmile's major client. Total sales to CEN Worldwide from 2004 to 2006 amounted to RM604 million. Searches at the Companies Commission of Malaysia show that CEN Worldwide posted a net loss of RM15.65 million for the financial year ended Dec 31, 2005. Its shareholders' funds were in deficit of RM22.5 million. The total amount owed by CEN Worldwide to Transmile stood at RM103 million. CEN Worldwide had been loss-making and has had negative shareholders' funds since Dec 31, 2004. CEN Worldwide, which is an express distribution and logistics management services provider, was incorporated in March 1997 as a RM2 paid-up company, with Datuk Mirzan Mahathir and Gan as its directors and shareholders. In September 1997, CEN Sdn Bhd emerged as the major shareholder of CEN Worldwide. The paid-up was subsequently increased to RM10 million. In 1999, Mirzan resigned from CEN Worldwide and Transmile. CEN Sdn Bhd is held by Pos Malaysia Services & Holdings Bhd (42.5%), Transmile (37.5%) and Konsortium Logistik Bhd (20%). What's appalling is that despite Pos Malaysia being the largest shareholder, it does not seem to know what's happening at CEN. The same goes for the major shareholders of Transmile. The books were cooked right under their noses but they did not even catch a whiff. It was, as those familiar with the matter describe it, a well-executed scheme involving everyone

Bank Rakyat eyes stake in MBSB

Bank Rakyat is eyeing a stake of up to 30% in Malaysia Building Society Bhd (MBSB), sources say. In a deal which sources say was initiated by the Ministry of Finance, the stake is to be acquired from MBSB's largest shareholder, the Employees Provident Fund (EPF), which has 62% in the building society. It is believed that Bank Rakyat's board has approved the purchase of the stake. "It makes sense. It is a viable combination as it combines MBSB's strength in property financing with Bank Rakyat's retail and personal finance base. MBSB can also tap into Bank Rakyat's branch network," says a source. Bank Rakyat is a cooperative that generates most of its business by giving out personal loans, particularly to civil servants. It is also big in Islamic banking. The plan is for the merged entity to compete more effectively. Even at MBSB's current price of RM1.06, a 30% stake would cost Bank Rakyat RM107.56 million. But the deal is expected to be at a significantly higher price than the current market value. For the financial year ended Dec 31, 2006, Bank Rakyat's cash and short-term funds stood at RM1.5 billion, while its deposits and placements with financial institutions were at RM2.5 billion. Its revenue jumped 24% to RM1.96 billion, while its net profit increased 25% to RM368 million. MBSB's CEO Ahmad Farid Omar, when contacted on the development late last week, declined to comment on the matter. Apart from the EPF, the other major shareholder in MBSB is Permodalan Nasional Bhd, with a 11% stake. After incurring huge losses between 1998 and 2003, MBSB returned to the black in 2004 and has managed to improve its financial performance thus far. For its financial year ended Dec 31, 2006, revenue jumped 28% to RM293.1 million from RM229.5 million in 2005. Its net profit increased 3.6% to RM40.2 million from RM38.8 million in 2005. One reason for the improved results, according to Farid, is MBSB's decision to nurse its non-performing loans (NPLs) instead of selling its bad loans to a special-purpose vehicle (SPV). This strategy seems to have worked well — the group's NPLs have more than halved in the last five years. Farid says the company is already seeing results. "Our NPL ratio has dropped from 60% in 2002 to 25% today. It is a result of nursing," he tells The Edge in an interview that was done earlier in the week. The NPL ratio is the proportion of bad loans over total loans. On average, local banks have NPL ratios of about 5% currently. Initially, MBSB had planned to place its NPLs under a SPV, but decided to change tack. "If we sell to a SPV, it will normally involve a haircut which, I think, is not a good strategy. This is because MBSB's NPLs are all secured by property," says Farid. He adds that some of the building society's delinquent loans are backed by properties in good locations such as Ampang and Sungai Buloh. "The value of land has increased tremendously, especially in Penang, Ipoh, Johor and the Klang Valley," he says. Farid adds that recovering the loans is a matter of holding on to the property and selling it at the right time. "With property, the beauty is that there is always a premium," he explains. "When we manage to settle it [the sale], there is a write-back. It's very seldom that we make a loss on a sale." Settlement, however, takes time. Farid says some bad loans may take up to seven years to resolve. MBSB's NPL issue stems from its legacy loans that were approved in the 1990s. Back in 1994, MBSB diversified from its original core business of taking deposits and providing loans to house buyers. It ventured into property development as well as providing bridging and revolving loans for the sector. After the Asian financial crisis hit in 1997, MBSB found itself in dire straits: it was saddled with delinquent loans. In 2000, the group's net NPL stood at RM2 billion. After implementing its restructuring strategies, the company has managed to reduce this figure to RM850 million currently. Farid notes that none of MBSB's new loans given out since 2003 has turned delinquent. "We are very strict in our credit assessment; we have developed a risk management department to look into the projects' risks," he says. Not only have MBSB's NPL numbers come down, the company has also seen considerable loans growth in the last five years. In 2002, its housing loans stood at RM1.1 billion. This has since tripled to RM3.5 billion. Farid says 9% of MBSB's housing loans were non-performing because of the customer profile, largely buyers of medium to low-cost houses. He notes, however, that more than half of these bad loans are "moving NPLs", which means these borrowers still pay their instalments as and when they can. Depositors also have more faith in MBSB these days. Five years ago, the building society had to pay higher borrowing costs to fund its lending, after its customer deposits shrank considerably. Farid says loans are now largely funded by deposits from both individuals and corporations. "In 2002, our total net loan was RM3.3 billion, of which RM2.5 billion was being funded by bank borrowings. In 2006, our net loan was RM5.2 billion, of which our total borrowings made up only RM500 million while the remaining was funded by deposits," he says. "This indicates that the confidence level of depositors has improved," he points out. In 2002, MBSB had 48 million deposits and the number has jumped to one billion deposits today. Moving forward, Farid says MBSB will continue to focus on property financing as well as develop its retail business. It is also aggressively embarking on Islamic financing. In fact, over half of MBSB's customers apply for its Islamic house financing scheme

What to expect on July 3, 2007

1. Asia-Pacific Audit & Governance Summit at Nikko Hotel, KL at 9am.
2. Datuk Seri Rafidah Aziz attends the 1st Malaysia-Syria Joint Trade Committee Meeting at Level 16, Block 10, MITI, KL at 9.30am.
3. The signing of strategic alliance agreement between Credit Guarantee Corporation Malaysia Bhd and Dun & Bradstreet Malaysia Sdn Bhd at Ballroom 3, Nikko Hotel, KL at 10am. 4. YTL Land & Development Bhd launches Bird Island Green Homes at KL Performing Arts Centre (KLPac), Sentul Park, Jln Strachan, KL at 10am.
5. Sapuracrest Petroleum Bhd AGM and EGM at Ground Flr, Sapura@Mines, No.7 Jln Tasik, The Mines Resort City, Selangor at 10am.
6. Scomi's bus exhibition at Indoor Arena, Bukit Kiara Equestrian & Country Resort, KL at 10.30am.
7. Nakamichi Corporation Bhd EGM at Sheraton Imperial Hotel, KL at 2pm
8. PIKOM 20th anniversary coffee table book launch at Bijan @ 3 Jln Ceylon, KL at 3pm.
9. Naza Kia launches updated new and enhanced Kia Sportage at Naza Kia Puchong Showroom, No.48 Jln Rajawali 2, Puchong Jaya Industrial Park, Selangor at 5pm.
10 Affin holds reception for a special announcement with the presence of Second Finance Minister at Grand Ballroom, Mandarin Oriental Hotel, KL at 6.30pm.