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How to Tell Bad News and Make your Share Price Go Up… maybe this is a better title for this article.

I am talking about the 13-Feb Profit Announcement by AMMB Holdings Berhad, Malaysia’s fifth largest banking group by total assets.

In that Announcement, it was obvious that the bank is increasingly negative about the Malaysia economy and its operating landscape.

If I can just digress for a moment, it’s worth extracting what they said about the economy because it more or less sums up the scenario now:

“The full effects of the global economic downturn on Malaysia are yet to be felt to date but are imminent. The export market has slowed down considerably amid weakening demand and falling commodity prices, and this is starting to impact on the unemployment rate. Consumer spending in the last quarter of 2008 remained positive, but will begin to moderate, especially post – festive season in January 2009. Given the scale and momentum of the global economic downturn, the consensus national real GDP forecast for 2009 is projected at 0.5%, with downward bias. Industry lending growth is forecasted to taper off to circa 5% in 2009…. The economic slowdown may not be a short term phenomenon, and any rebound is unlikely until early to mid 2010.”

The economy does look bad. Consider:

• In December 2008, Malaysia’s industrial production contracted by 15.6% yoy as manufacturers cut production to prevent inventory build up.
• Recent data in the Asia region looks ugly. In Taiwan export fell 44.1%. In South Korean exports fell 32.8% yoy in January and China reported a 17.5% drop in exports.
• Many tech companies in Malaysia are believed to be operating at 20-25% capacity and reduced work week. The global contagion is starting to reach us. So if you think that you are paid too little by your boss and deserve much more, do think twice before voicing your demands too loudly!

OK back to AMMB.

Sometime ago it signalled to the investment community that it was setting impressive targets – 20% ROE, 20% Compounded Annual Growth Rate, 40% Cost-Income Ratio etc. You can see the KPIs in my earlier article.

In fact AMMB is so serious about these headline KPIs that they make their top guns sign on a big banner to display in their corporate office. …. A big banner signed by Tan Sri Dato Azman Hashim, Cheah Tek Kuang, Dato James Lim etc.

I saw it myself when I was there. What was I doing there? I was being a busybody actually. Since I have a few shares in AMMB, I wanted to stress test their Investor Relations. I went to see if I can get a hard copy of their 2008 Annual Report. Believe it or not, there was only one copy lying around! And the nice chap wasn’t about to let it go… he was holding on to it like his own precious fixed deposit cert haha! But he was kind enough to give me a CD version – so he should be commended for saving us money

OK sorry… back to my point. From the Profit Announcement, it is clear that management will not make their 20% ROE target for quite a while yet. See what they had to say:

Amidst deteriorating global and domestic economic conditions, operating landscape will become tougher. In order to achieve its medium term aspirations, the Group will continue to de-risk, diversify and focus on differentiated growth within its various businesses. AMMB Group, whilst committed to its medium term aspirations, recognize that achieving these aspirations will now take longer, given the material changes to the macroeconomic conditions.

And guess what happened after the profit announcement?

Yep, their share price went up, up and away!

As I write this, AMMB’s share price is up 12% from the price before its result announcement.

While the broader market is still doing its flatliner act (no pun intended).

Surely there is a lesson here?

Here’s what Rachel Huang of Affin Investment Bank says:

We like the new realistic stance – Unlike previous economic downcycles in 1997-98, 2001 and 2003, we sense that the company is now much more realistic – negative and pessimistic. We like the new tone, and we view this positively as it indicates: (a) a more realistic stance, unlike previous economic cycles where guidance tends to be hopefully optimistic; (b) likely more positive influence from major shareholder ANZ which came on board in 3Q06; and (c) thereby a more vigilant monitoring on its loan book and operations.
Source: Affin Investment Bank, Results Note 16-Feb-09: AMMB Holdings

Personally for me, it always feels good to read AMMB’s quarterly and annual reports (since ANZ came in). It shows the great length to which Management goes to detail their strategies, operating landscape, achievements and so on.

Download a copy for yourself here.

If you compare their press release with that of other companies, you will know what I mean. Truly they are a model for most to follow.

Chances are that AMMB may not achieve 20% ROE by 2012 but before I become too critical, I’ll be the first to admit that my own 15% p.a. investment target is looking like a long shot in this economic climate.

So what I’m looking for is NOT a “Gee Whiz” set of results but rather, an honest evaluation by management of how they are coping in the face of this downtrend.

Let’s look at what went down in AMMB as an example:

AMMB: We made a profit of RM248 million for the quarter ending Dec 2008, up 25.3% from last year.

Larry: Yes but you also said there is a one-off gain of RM95 million from the sale of your insurance business. So actually your profit is more like RM150 million. But that’s OK because it looks like you’ve hiked up your loan loss provision to RM142 million which is probably RM70 million more than what it really is… which means that you will most likely make RM800-850 million for the whole year. And that’s what everyone is expecting.

AMMB: Net loans grew 10.7% yoy to RM56 billion.

Larry: That’s great but qoq, loan growth was only around 1%. It’s pretty obvious that things are slowing down but hey, I think you guys have got it figured out talking about de-risking, improved credit control, recoveries management and so on. It’s all about quality right now, not quantity.

AMMB: We have a strategy to grow our low-cost Deposit base. Besides expanding direct deposits sales team, we will also expand our branch network. We already have 186 commercial bank branches, 551 ATMs and 107 electronic banking centres. 172 ATMs are placed at 7-Eleven stores, and we will put in another 228 machines over the next 2 years.

Larry: Guys all this is music to my ears. Tell me next year how it goes and show me how it has increased profit. After all you’ve been holding back on your dividend payout for so long compared to other banks, I’d like to think the money is invested somewhere useful.

AMMB: Whilst committed to our medium term aspirations (to hit our KPIs), we recognize that achieving these aspirations will now take longer, given the material changes to the macroeconomic conditions.

Larry: That’s OK, even if you need another 3-4 years extra. But I would really be happy if you can increase your Dividend Payout Ratio to 50% of EPS. I’m sure you’ll agree that it’s good for the share price. Just look at your friend Public Bank… they’re not that fantastic really, your big brother ANZ can trump them any day.

AMMB: We’ve done really great. Record Profits. All our strategies are in place. We will weather the economic storm.

Larry: Well done guys, I think you’ve done a commendable job. You guys should be worth the RM7 billion or so that the market is putting on you. I notice too that your Cost-Income ratio is getting closer to your 40% target and has been consistently improving over the last 5 years. This KPI is something that you can’t really blame on the economy so I’ll be watching this figure like a hawk to see if you have done what you said you will do. Hey do you guys have any failures? If so maybe you can share some of it too, would make us humans feel better.

Summary
As Warren Buffett suggests, what needs to be reported is accurate data. That helps financially literate readers answer three key questions:
1) Approximately how much is this company worth?
2) What is the likelihood that it can meet its future obligations?
3) How good a job are its managers doing, given the hand they have been dealt with?

If there’s a problem with Investor Relations and financial reporting for Malaysian companies, it would be that companies always try to make themselves look so good, warts and all. I really haven’t come across anyone who said “We’ve done something wrong, we’re sorry about that, we’ve learned from our mistakes, here’s how we’re gonna do it better next time.”

The CEO who misleads others in public may eventually mislead himself in private.
Warren Buffett, Berkshire Hathaway 1986 Annual Report (page 5)