Saturday, October 9, 2010

SC cautions Mudajaya

The Securities Commission (SC) yesterday issued a “caution and reminder” to Mudajaya Group Bhd and its board to “strictly observe its disclosure obligations” on transactions relating to the company’s investment in an independent power plant (IPP) in India, in particular the transfer of funds between related entities.

In a press statement yesterday, the SC said its review of the transactions had concluded that Mudajaya “failed to make adequate disclosures on pertinent matters”.

But despite such a harsh statement from the SC, some analysts turned positive from a previous negative stance on the construction-cum-IPP player, speculating that the matter could not get any worse.

The statement by the SC was its first on the subject after a local daily reported on July 24 that the regulator was investigating Mudajaya on transactions relating to its India project after being tipped off by an undisclosed party.

In its first response to the news, Mudajaya had on July 26 said it had no knowledge of a direct probe by the SC. However, it later issued a statement on Aug 6 saying that it had met up with the SC (without stating the date) to provide certain clarifications on its India project.

News of the probe and the lack of details had apparently made investors jittery, while some analysts also noted that the company had exceptionally high margins compared with its bigger peers.
The fears prompted a heavy selldown of the stock, which fell from a high of RM5.94 on July 22 to a low of RM3.92 on Aug 5.

An analyst, when contacted yesterday evening, said the SC’s announcement should be viewed positively as it suggested the completion of the probe.

“A lot of people were waiting for an indication from the SC on whether the query (on Mudajaya) is over. This announcement seems to indicate that. It should be one of the reasons why Mudajaya’s share price has rebounded,” he said.

The analyst noted that Mudajaya’s share price had rebounded  lately with a noticeable increase in trading volume.

Yesterday, Mudajaya requested for a suspension of trading in its shares from 11am to 5pm pending an announcement. Prior to the suspension, the counter rose 17 sen to close at RM4.61 with 2.45 million shares traded.

Round tripping
In the course of its probe into Mudajaya, the SC said it had sought a S320 report from the company’s auditor Ernst and Young dated Sept 9, pursuant to the Capital Markets and Services Act 2007.

In its statement, the SC said it noted that the S320 report revealed movement of funds between Mudajaya and related entities pursuant to the India IPP project that was characteristic of the practice known as round tripping.

(Round tripping is defined as a practice of selling an asset to another party while agreeing to buy back the same asset for about the same price, a move that could inflate transaction volumes.)
“The practice of round tripping has been raised as a concern in several jurisdictions. In this regard, the SC will conduct a separate exercise to review the use and disclosures associated with the round-tripping practice,” the SC said.

In a filing with Bursa Malaysia yesterday, Mudajaya said the SC had warned that it would “not hesitate to take appropriate action against the company and its directors if they are found to have breached any provisions of the securities laws or Bursa’s disclosure requirements in future”.

“The SC expects the boards and senior management of public listed companies to observe high standards of corporate governance in discharging their duties and responsibilities,” Mudajaya said, adding that it had complied with the SC’s demands to make additional disclosures on “specific areas” to Bursa Malaysia on Aug 30.

Following the plunge in Mudajaya’s share price in August, CIMB had issued a buy call on the stock in early September, with a RNAV-based target price of RM7.94. It had predicted that the matter was drawing to a close and that a clarification by the SC would be a “bonus” for the stock. 

After the fiasco of the last few months, all eyes will be on how Mudajaya’s stock performs today with investors digesting the SC’s verdict on the company.

This article appeared in The Edge Financial Daily, October 8, 2010.

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