How to Avoid Investing in Enron II?
By Looking for These Warning Signs
By SARA WEBB
Staff Reporter of THE WALL STREET JOURNAL
How do you spot another Enron -- before it collapses and burns a big hole in your portfolio?
Sure, few analysts suspected much was wrong with Enron until it was way too late, and Enron's shares had already collapsed. However, according to some bankers, stock watchers, credit analysts and accountants, the following factors -- some tangible, others more finger-in-the-wind -- are worth watching: They don't necessarily indicate the imminent demise of the company, but they can flag a decline in its bond or stock price.
Insider selling. Watch whether any of the company's executives and big shareholders, known as "insiders," sell shares in the company. "It's not unusual for directors to unload before the announcement of negative news," such as a profit-warning, unexpected losses, or a management shake-up, says Robert Halili, managing director of Asia Insider Ltd. which tracks such moves in Asia.
It is worth noting that some of Enron's insiders sold millions of dollars in stock in 2001 before the company's share price collapsed. Insider transactions for Hong Kong- and Singapore-listed companies are disclosed on the stock exchange Web sites, and they provide a useful warning that the stock price could be heading lower.
Of course there could be a perfectly legitimate reason why the insider is selling -- he could have a divorce settlement, or tax bill that is due. But Mr. Halili points to Hong Kong's Fairyoung Holdings as a good example of what can be in store for unsuspecting investors.
Ms. Wong Lin Chooi, a director, sold a big block of shares in Fairyoung on Dec. 24, according to the Hong Kong stock exchange Web site. Fairyoung delayed reporting its results for the first half of 2001 until Jan. 30, when it announced a 53% drop in sales and a net loss of 29.5 million Hong Kong dollars ($3.8 million). Fairyoung's share price has fallen heavily since the end of 2001 and is currently suspended. Ms. Wong Lin Chooi is married to Chan Boon Ning, Fairyoung's former chairman and its controlling shareholder. In December, Mr. Chan was jailed for six years for stealing HK$80 million from Pacific Port Co. Ltd., which had been spun off from Fairyoung.
Directors. Do the directors sit on too many boards, limiting the amount of time they can devote to looking after any one company, and are the independent directors truly independent?
The phenomenon of multiple directorships is more common in a relatively small country such as Singapore. Enron's case raises the question of whether independent directors, who are there to keep an eye on the management, are doing their job properly. A key question to ask is whether the independent directors' own employers are beneficiaries of business contracts (for example for consultancy, legal or advisory work) or donations from the company.
The financial statements. A huge topic, but what are the kinds of things that forensic auditors look out for?
With many family-controlled companies, which are common in Asia, the auditors need to keep an eye on related-party transactions to ensure these are done at arm's length and for the benefit of the company, rather than for the family's private interests. Look out for related-party transactions, which lack commercial sense.
Other warning signs include a heavy dependence on a particular customer, creditor or supplier, and if special trade terms are applied to certain customers, such as extended credit. Auditors are also wary if the company has businesses around the world but doesn't use the same auditing firm world-wide. "If you see fragmentation of auditors, you need to ask why," says one forensic auditor. A domineering managing director or Chief Executive Officer can also serve as a red flag.
Debt profile. Rien Huizer, recently-retired managing director and chief risk officer for Asia at ABN Amro in Singapore, says to watch out for companies with a lot of short-term debt , such as bonds and bank loans. That can spell trouble as the company may struggle to repay the principal or get it refinanced. Investors in Asia Pulp & Paper Co., which called a debt standstill a year ago, could have used that as a warning sign back in 2000 as the company had a significant proportion of its debt maturing in the next three years.
Fast Growth. Mr. Huizer says that as a general rule he is wary of companies that grow very fast, and of those with very sophisticated public relations or investor relations departments, "as one has to ask why this is the case," and whether the company has something to hide, he says. Again, this shouldn't automatically be seen as a bad sign, given the increasing emphasis on transparency and the need to communicate with investors. But it goes along with the next warning sign.
The "rent-a-bule" (pronounced boo-lay) syndrome. This is one of the bugbears of Alan Greene, credit analyst at Barclays Capital. Bule is Indonesian slang for a Westerner, and some family-controlled Indonesian companies hired Westerners to handle their investor or public relations, particularly for foreign bankers and investors. Mr. Greene says he wonders whether some of these bules are kept in the loop in such family-run businesses or whether they are there just to provide a reassuring face.
Mr. Greene also says he worries when he sees companies splurging on a brand new headquarters, and particularly flashy annual reports, as signs of lavish spending.
Write to Sara Webb at sara.webb@awsj.com
Updated March 7, 2002 |
