Submitted to this blog by The BushrangerIn the current issue of Jewellery News Asia, one can find a salubrious blurb about Arafura (Arafura Pearl Holdings LTD) that begins: "The year 2009 is a pivotal year for Arafura ..." and goes on to note that the company is "the second largest [pearl] producer located east of Darwin" and that "it is now the second largest quota holder in Australia." JNA also reports that the company "reported a net profit after taxes of some AUS$10.1 million … 121 percent higher than in the previous year."
"The increased profit was largely the result of significant increases in production shell numbers, which led to a significant increase in the market value of its shell inventory, noted [the company CEO and founding partner]," JNA continued.
And thereby hangs this tale of quite probable statistical finagling that may be poised to erupt on the Australian pearling scene.
Sales revenues for Arafura through June 2008 were reported at AUS$6,514,971, with other revenues of AUS$398,104. Employee expenses during that period were AUS$6,061,428. There were also equipment expenses, lease expenses, travel expenses and fuel expenses, to name but a few. Total Arafura operating expenses were nearly AUS$15,000,000. With all that overhead, how could an after-tax profit of more than AUS$10 million have been made?
For the first half of the following fiscal year, Arafura's total sales revenues were AUS$235,427 and operating expenses totaled AUS$8,107,463. This adds up to a nearly AUS$8 million loss by almost any reasonable calculation. Yet the company reported a before-tax profit of AUS$4 million. So where is that profit coming from?
In June 2008, Arafura's income statement showed an increase in non-current biological assets of AUS$22,325,412. By December 2008, that figure rose again by another AUS$10,351,838 to nearly AUS$52 million.
Last month, auditors finally took the company up on the question of in-house valuations made in the September 2009 Preliminary Final Report. They used the figure of ¥15,000 per momme instead of ¥18,000 per momme as a reasonable sales price, and projected a yen to AUS$ rate for projected future dated sales at 77 in lieu of 70. These calculations turn a net profit from ordinary activities before tax of AUS$5.46 million into a net loss of AUS$9.4 million. They correct the total equity position for the entity from AUS$54.79 million to approximately AUS$44.39 million. Further, what might not be obvious to those not familiar with pearl farming is the fact that the company assumes pearls and sales from their entire quota, something that simply does not happen.
In addition, Arafura is paying an interest rate of 13.9% on a bank loan of AUS$6.5 million, resulting in an annual interest payment of over AUS$900,000. That's against total annual pearl sales of just AUS$857,246.
When interest payments exceed sales and profits are touted, it seems to me something is, as the Japanese are wont to say, kusai (stinky). When you add in the fact that interest rates have recently increased, this situation is bound to get worse if the loan is set at a variable rate. The banks Down Under can no longer afford to turn a blind eye to these statistical shenanigans.
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6 comments:
The situation with the accounting for Agricultural assets held by Arafura make a mockery of the accounting standards that allow this reporting. Is it so difficult for inteligent executives to not just be brutally honest with themselves and the public? We have seen two very large Managed Investment Scheme (MIS) companies in Great Southern and Timber Corp in severe trouble this year because of their debt position and because their house of cards was not strong enough to be supported in the tough times. Arafura have done well to survive in this tough business for so long but will they continue? Lets hope so for the shareholder and MIS investors sake.
It is interesting that the auditors chose JPY15,000 per momme as the price that they would accept as justifiable. Could this have been the level at which the company's net assets did not breach the bank covenant? The company states in their annual report that "it is not in the shareholders interest to have wildly fluctuating profits from year to year based upon inventory valuation assumptions." Let's hope this is not allowable as a defence for not providing shareholders and potential investors with accurate information about the value of the assets of a public listed company. I truely wish the company well but fear that the damage they are doing to themselves and the industry will be long lasting. A bit of self reflection by all who are interested in the long term recovery of the pearling indutry might be sensible.
JPY 15000 / momme. Who is getting that??
JPY 15000 / momme? Who is getting that? If this was the case the last 12 months have been a smokescreen.
Investments in pearling have always been risky. Even Arafura, a public quoted company in Australia, seems to have some problems with transparency and proper disclosure of asset values. The future will tell us how accurately (honestly!) they put their true asset values into their books. I am sure the "Arafura Case" is bound to become a case-study for pearl investors. Several books have now been written about Enron. Wouldn't be surprised if somebody is now sharpening his pencil to write one about Arafura.
The amount of Arafura's gross over calculation of profits is highlighted when you look at the only other Aussie company listed on the ASX- Atlas South Sea Pearl ( ATP ). Their annual accounts to June 30 (Pg.20), show in a far more open, honest and accurate way what the true value of pearls are today. Their value is Y 6,600 per momme, vs. Arafura's Y 18,000. As Adolf Hitler ( or someone ) once said, if you are going to tell a lie, make it a big one. Atlas are very well respected for their highly successful production and sales, particularly over the last 10 years.
As someone else pointed out, Arafura calculations are based on selling everything, wheras they're selling next to nothing. You have to give it to them for balls though. Apparently they have have used these bloated numbers in their next MIS - very, very brave to put such numbers before ASIC for approvals.
So, while their auditors obviously feel their sphincter tightening, they haven't gone far enough in trying to calculate the true value of a very sick Arafura. Maybe they don't have enough red ink in their calculator
Let's hope that for the sake of some uninformed MIS investors that ASIC is tuned in to the Pearl Professor - or some other source for accurate market information. Sometimes the lure of a great tax deduction is greater than the risk of such an investment - until the investment goes tits up and then everyone says "poor investor"! These tax schemes are syphoning hard earned money from unsophisticated pockets - politicians take note.
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