We tend to think that normally people in a particular industry have a deeper insight compare to the rest of us. This might mean that they should be much better informed about the threats and risk in the industry. Yet times and times again, we hear stories about how these insiders got carried away and invest during the peak of the market, ended up with terrible consequences.
The current example of Kinsteel Bhd and Perwaja Holdings Bhd is one of the latest episode of such actions. Both companies are steel manufacturers in Malaysia. Kinsteel Bhd, owned mainly by Tan Sri Pheng Yin Huah, has bought a 51% stake in Perwaja Holdings Bhd back in 2006. Both companies are doing well for a couple of years right up to the global financial crisis back in 2008. However, back in December 2009 when most of the stock markets have rebounded from the bottom of the crisis, Kinsteel and Perwaja both still have a market capitalisation of about RM840 million and RM720 million respectively. Today, the market capitalisation of Kinsteel and Perwaja stand at about RM130 million and RM50 million respectively. The Phang family wealth from these two companies fell close to half a billion ringgit.
Both companies have taken on too much debt during the good years and currently struggling to make interest payment as the market slump. At the current moment, the most likely scenario is that Kinsteel will bring in a new investor to inject more funds into the company to help turnaround the situation. However, this will lead to a huge dilution to the stake of the Phang family.
I believe the story has two important lessons for us as investors. It is important for us to know that even insiders get it wrong sometimes. So an investment by an insider into a particular company or industry does not necessary mean we should follow suit as well. More importantly, this example shows the significance of a strong balance sheet. If both companies have maintained a strong balance sheet, they would not be in such a difficult position now. There is no way anyone can control how the market behave, but if companies choose to maintain a prudent balance sheet, it can most likely ride out any storm can the market can throw at them. As investors, we can both prevent from getting into difficult position ourselves by looking only at companies with strong balance sheet and also preserving a strong balance sheet ourselves.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.