Showing posts with label Antah. Show all posts
Showing posts with label Antah. Show all posts

Friday 6 November 2009

The truth behind impressive headlines and write-ups

The crowds think in images and are impressed by images rather than the facts and figures behind the images. Very often, the images which so impress them are of their own creation. Since a crowd is impressed by images, it can become prey to figures which have very little relation to the fact.

Many corporate movers and doers are aware of this fact. They feed the investors with a steady diet of figures calculated to impress. The most impressive of a possible range of figures is always the published one.

Thus, instead of providing the average per year profit figure, the ten year or even twenty year cumulated profit figure is the one given prominence.

In order to be even more impressive, the gross sales figures for the next ten or twenty years is usually given the banner headline treatment rather than the average annual sales figure.

The typical small investor, who usually finds it difficult to discern the truth behind the impressive headlines and write-ups, is naturally impressed by big numbers: The bigger the number, the more impressed is he.

For example:

Company X would announce that such and such a project would generate $X billion of sales (over the next 20 years in minute print). Company Y, not to be outdone, would announce that its new project would cost $Y billion and would bring in $Z billion of sales over the next fifty years.

The small, non-analytic and emotionally charged investors are so impressed by these billion dollar figures that they can lose total touch with reality.

A very good example of how raw figures can so impress investors such that they lose touch with reality is the case of Antah in connection with the announcement of the Antah-Biwater joint venture.

In 1985, it was announced that Antah-Biwater had won a M$1.4 billion contract to provide water supply to dozens of villages. On the strength of that particular announcement, the price of Antah’s shares rose from M$1.20 to over M$9.00 within a short space of time. To put this price rise into the proper perspective, this price rise had meant that Antah’s total market value had increased from M$60 million to M$460 million. This means that the market had expected Antah to reap a total benefit of M$400 million purely as a result of this project. The ridiculouseness of this particular episode of speculation can only be seen if we analyse the figures carefully.

First, although the whole project is valued at M$1.4 billion, Antah’s share of the project is only 51 per cent. Even if Antah-Biwater were to make 100 percent profit from this project, its total share of the after tax profit would only be M$393 million. This figure is smaller than the increase in market value of Antah as a result of the announcement.

Of course the profit from a civil engineering project can never be 100 per cent. It is more likely to be 10-20 percent and occasionally, even a loss can be sustained. Let us be generous and assume that Antah-Biwater is likely to make a 10 per cent after tax profit (ie 18 per cent pretax profit) from this contract. This means that the total benefit which Antah will reap from this contract would be around M$71 million, which is a mere 18 per cent of the increase in market value. Besides, the life of the whole project is extended over five years and the benefit of the project will accrue only gradually.

Not unexpectedly, Antah’s price fell to below $2.00 again within a year.

How ridiculously over optimistic can the market get! How did those investors who chased its share to over $9.00 feel? Do they blame their bad luck or do they blame themselves for their own lack of judgement?


Ref: Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

Also read:
http://myinvestingnotes.blogspot.com/2009/11/lityan-selling-to-suckers.html